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

F4Q 2013 Earnings Conference Call

November 14, 2013 9:00 AM ET

Executives

Davin D'Ambrosio – Vice President and Treasurer

Michael J. Dunn, Jr. – President and Chief Executive Officer

Michael A. Stivala – Chief Financial Officer

Analysts

Schneur Gershuni – UBS Securities

Darren Horowitz – Raymond James

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Suburban Propane's Full-Year and Fourth-Quarter 2013 Financial Results. For the conference all participants are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. As a reminder, today’s call 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, predictions, financial conditions 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 in the 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.

With that being said, I’ll turn the conference now to Mr. Davin D’Ambrosio. Please go ahead.

A. Davin D’Ambrosio

Thank you John and good morning everyone. Welcome to Suburban’s fourth quarter and fiscal 2013 full year results conference call. I’m Davin D’Ambrosio, Vice President and Treasurer at Suburban. Joining me this morning is Mike Dunn, our President and Chief Executive Officer; and Mike Stivala, our Chief Financial Officer.

Purpose of today’s call is to review our fourth quarter and fiscal 2013 full year results, along with the current outlook for the business, including an update on the status of our integration efforts whit regards to the Inergy Propane acquisition that was completed on August 1, 2012. As usual, once we’ve concluded our prepared remarks, we will open the session to questions.

Before getting started however, 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 28, 2013, which will filed on or about November 27, 2013. 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 the discussion why we believe this information to be useful in our Form 8-K furnished to the SEC this morning. The Form 8-K will be available through a link in our Investor Relations section on our website at www.suburbanpropane.com.

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

Michael J. Dunn, Jr.

Thanks, Davin, and thanks to everyone for joining us this morning. With our first full year of operations inclusive of the Inergy Propane business under our belt, we’re very pleased with the results of the combined business, particularly in a year in which we experienced unseasonably warm temperatures during the most critical months of a heating season. When colder than normal weather arrived later in the season, our employees and operations responded.

In addition, we are extremely proud of the efforts of all of our employees to remain focused on providing superior service to our customer base, while at the same time, making significant strides towards executing our integration plans. We have made notable progress not only in our integration efforts, but also in executing our strategic financing initiatives, all of which have better positioned us operationally and financially to continue to pursue further growth opportunities.

To highlight a few key accomplishments for fiscal year 2013, key regional management positions where to put in place to oversee the combined operations prior to the start of the heating season, regular and on going communication was established with the entire Inergy Propane customer base, as well as the combined employee base in order to manage change, we defined our local operating footprint and identified management teams across the entire platform. Substantial progress was made on our retail system conversions that support our new operating footprint.

We achieved our targeted year one synergies at $15 million, we reduce our overall average by $157 million through a combination of net proceeds from a successful issuance of common units, as well as cash on hand, we funded all of our working capital needs, capital expenditures and integration efforts without the need to borrow under our revolving credit facility for the seventh consecutive year and we ended the year with more than $107 million of cash. We increased the annualized distribution rate by $0.09 per common unit to an annualized rate of $3.50 per common unit, a growth rate of 2.6%. All in all fiscal 2013 was a very successful year for Suburban.

As we begin a new fiscal year, our operating platform is well positioned to continue to focus on customer growth initiatives and driving operational efficiencies. Our balance sheet remains well positioned and we have more than adequate liquidity to fund our ongoing operations and integration efforts. A little later I’ll provide some closing remarks; however, at this point I will turn the call over to Michael Stivala, to discuss our full year and fourth-quarter results in more detail.

Michael A. Stivala

Thanks Mike and good morning everyone. Let me start by focusing on our full-year results and give a little color on the fourth-quarter toward the end of my remarks.

As we’ve now completed our first full year since the purchase of Inergy Propane, the majority of the year-over-year variances for fiscal 2013 were attributable to the inclusion of Inergy Propane, as well as to a lesser extent improvements in the Suburban legacy operations. In order to provide a more meaningful comparison of year-over-year operating performance, for certainty metrics I will like I have the past few quarters provide a comparison of the actual fiscal 2013 results versus the prior year results on a pro forma combined basis, since the Inergy Propane acquisition had occurred at the beginning of fiscal 2012.

Furthermore, let me point out that fiscal 2013 included 52 weeks of operations, compared to 53 weeks in the prior year. To be consistent with previous reporting, I’m excluding the impact of a $4.3 million unrealized non-cash loss applicable to FAS 133 accounting in fiscal 2013, compared to an unrealized gain of $4.6 million in fiscal 2012. For fiscal 2013, we reported net income of $83.1 million or $1.42 per common unit, compared to a net loss of $4 million or $0.10 per common unit in the prior year.

Fiscal 2013 included several items that had a negative impact on earnings, specifically we incurred $10.6 million of integration related costs, a $7 million charge for the voluntary withdrawal from multi-employer pension plans covering certain employees acquired in the Inergy Propane acquisition; and a loss on debt extinguishment of $2.1 million associated with the $157 million debt reduction that Mike referenced in his opening remarks.

This compares to the following items recorded in fiscal 2012. We incurred acquisition related costs of $17.9 million, or $4.5 million charge associated with a legal settlement reached during the fourth quarter of fiscal 2012, a loss on debt extinguishment of $2.2 million and a $2.1 million non-cash charge from a loss on disposal on asset in our natural gas and electricity segment.

Therefore excluding the effects of these items as well as the unrealized mark-to-market adjustments on derivative instruments under FAS 133 in both years, net income for fiscal 2013 would have been $102.8 million, or $1.76 per common unit. Adjusted EBITDA was $329.3 million for fiscal 2013, compared to $108.5 million for fiscal 2012.

On a pro forma combined basis, adjusted EBITDA in the prior year would have been $233.1 million. Therefore, the adjusted EBITDA for fiscal 2013 was approximately $96 million, or 41% higher than the prior year pro forma combined adjusted EBITDA.

Retail propane gallons sold in fiscal 2013 of 534.6 million gallons increased 250.8 million gallons or 88.4%, compared to 283.8 million gallons in the prior year. Again for compared purposes, propane volume sold during fiscal 2013, were 17.2 million gallons or 3.3% higher than the prior year on a pro forma combined basis.

Sales of fuel oil and other refined fuels increase 25.2 million gallons to 53.7 million gallons that compares to 28.5 million gallons reported last year. Compared to the pro forma combined refined fuel gallons in the prior year, the 53.7 million gallons sold in fiscal 2013, were 1.9 million gallons lower which difference was attributable to lower gasoline and diesel volumes as our heating oil volumes were slightly higher in fiscal 2013.

The increase in reported volume sold was primarily attributable to the inclusion of Inergy Propane for a full year, as well as increases in the partnership’s legacy operations resulting from average temperatures that were closer to normal, compared to the prior year’s near record warm temperatures.

According to NOAA, average temperatures during fiscal 2013 were 4% warmer than normal that compares to average temperatures in fiscal 2012 that were 14% warmer than normal. While the average temperatures for the year were just 4% warmer, average temperatures during the critical heating months from December 2012 through February 2013 were 9% warmer than normal.

In the commodities markets propane prices tended down throughout much of the fiscal year, before a steep rise that began in August 2013 and continued through the end of fiscal year. For the year, average posted prices for propane were approximately 20% lower than prior year.

However, at the end of September 2013 spot propane was trading around $1.05 per gallon basis Mont Belvieu and that compares to $0.91 a year earlier. Average fuel oil prices for the year were essentially flat, compared to the prior year. Total gross margins of $846 million for fiscal 2013 were $386.2 million higher than the prior year of $459.8 million, primarily from the addition of Inergy Propane, as well as higher volumes in our legacy operations.

Combined operating and G&A expenses of $534.3 million, or $176.5 million or 49.3% higher than the prior year as a result of the inclusion of Inergy Propane operations, compared to the prior year on a pro forma combined basis and adjusting for those items that I referenced earlier, combined operating in G&A expenses were approximately $36 million, or about 6% lower in fiscal 2013.

Capital spending for the year totaled $27.8 million, which included $8.3 million of maintenance capital. Looking specifically at the fourth quarter results, fourth quarter of fiscal 2013 included 13 weeks of operations, compared to 14 weeks in the prior year fourth quarter.

Additionally, keep in mind the prior year fourth quarter included the results of operations for Inergy Propane for the remaining two months of the year from August 1, 2012. As I discuss the quarterly results I’m excluding the impact of the $2 million unrealized non-cash gain from our current quarter results applicable to FAS 133 accounting and that compares to $2.5 million unrealized non-cash loss in the prior year fourth-quarter.

Consistent with the seasonal nature of our business we typically report losses for our fiscal fourth quarter. We reported a next loss of $65.1 million or $1.08 per common unit for the fourth quarter of fiscal 2013, compared to a net loss of $60.3 million or $1.26 per common unit in the prior year quarter. Adjusted EBITDA for the fiscal 2013 fourth quarter improved to $1.9 million from $100,000 reported in the prior year quarter.

Retail propane gallon sold in the fiscal 2013 fourth quarter amounted to 78.3 million gallons, an increase of 7.7 million gallons, compared to 70.6 million gallons in the prior year fourth quarter. Sales of fuel oil and other refined fuels increased 354,000 gallons to 6.3 million gallons in the fiscal 2013 fourth quarter. Total gross margins of $120 million for the fiscal 2013 fourth quarter, were $9.4 million higher than the prior year fourth quarter of $110.6 million primarily from the addition of Inergy Propane.

Combined operating and G&A expenses increased $8.7 million to $123.7 million primarily due to the addition of Inergy Propane and associated integration costs, along with an increase in variable compensation attributable for the higher earnings.

Turning to our balance sheet, we ended the year with $107.2 million on cash on hand, that has been the case for the past seven years we have funded all working capital needs along with our capital expenditures, from internal cash without the need to borrow on a revolving credit facility.

And finally, as Mike indicated, we took proactive steps during the third quarter of this year to further strengthen our balance sheet by repaying $157.3 million of our 2021 Senior Notes, with the net proceeds of $143.4 million from the issuance of $3.1 million, common units, as well as from cash on hand. These steps had a significant positive impact on our overall leverage statistics and were inline with the financing strategy that we have set for ourselves following the acquisition of Inergy Propane in order to bring our metrics more inline with our target leverage. Back to you Mike.

Michael J. Dunn, Jr.

Thanks Mike. Just a brief comment on our quarterly distribution, as announced in our October 24 press release our Board of Supervisors declared our quarterly distribution of the $87.5 per common unit, in respect of the third quarter – fourth quarter of fiscal 2013, which equates to an annualized rate of $3.50 per common unit. This represents a growth rate of 2.6% over the previous year. Quarterly distribution was paid on November 12 to our unit holders of record as of November 5.

As for the status of our ongoing integration of Inergy Propane, as I outlined earlier, we have made tremendous progress during the fiscal year, this past fiscal year and remain on or ahead of schedule. Our detailed integration tasks for 2013 have been successfully completed and we were able to achieve our synergy target of $15 million for the year. With the start of fiscal 2014 already upon us, we will take a pause from our field integration efforts over the next few months, in order to maintain our operating focus on serving our customers throughout the upcoming heating season.

We will resume our field integration and system conversion efforts in the March timeframe. By this time next year we expect a fully converted all of Inergy Propane’s legacy operating systems to as single system platform and to have made substantial progress on adopting our operating model throughout the entire footprint. Throughout the integration process, we will continue to refine or operating approach, drive our operational excellence and remain focused on the overall cost structure. All things if you have become accustomed to observing from Suburban.

We have all along indicated that we fully expect to realize synergies of approximately $50 million over the first three years following the acquisition and we remain confident that we can achieve the target. Again, let me remind you that our concept of being fully integrated is that of having one common operating platform, one common operating system and one culture. I would be remission not acknowledging the efforts of all of our employees at all levels of the organization who have worked tirelessly throughout the year to successfully achieve our goals, while maintaining their focus on providing quality customer service, these accomplishments where a true testament to the level of commitment and talent of our employee base.

Lastly, I’m sure by now that you have also had a chance to review the other press release that we issued this morning, announcing my intention to retire at the end of this fiscal year effective September 27, 2014. As part of the management succession plan approved by our Board of Supervisors, I’m very pleased to announce that Michael Stivala, our current CFO will be promoted to President, effective April 1, 2014.

Mike and I will work closely over the next ten months to ensure a smooth transition of the leadership of the organization. This is a very exciting period for Suburban and I’m confident that Mike and the rest of the management team have the depth and experience to continue to drive the operational and growth initiatives that have made us successful in creating value for our unit holders.

As always we appreciate your support and attention this morning. I would now like to open the call up for questions. John can you help us?

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). And we’ll first go to the line of Shneur Gershuni with UBS. Please go ahead.

Schneur Gershuni – UBS Securities

Hi good morning everyone.

Michael A. Stivala

Good morning.

Michael J. Dunn, Jr.

Good morning Schneur.

Schneur Gershuni – UBS Securities

And first and foremost, I would like to wish both of you congratulations on the retirement and on the promotion as well too.

Michael J. Dunn, Jr.

Thank you. Thank you very much.

Schneur Gershuni – UBS Securities

No problem. Just a couple of quick questions here. We got a lot closer to normal weather last year than we were the previous year. I’m sure we could get a little closer. How are you thinking about volumes for fiscal 2014? Should we try to be thinking of it kind of similar to how it was over the last year, plus or minus a percent or so, has any of the synergies that you have sort of putting the assets together place you in a position where we could see a little bit more volume growth? I was wondering if you could sort of give us a little bit of flavor on how to think about that for 2014.

Michael A. Stivala

I think the way that the weather pattern occurred in fiscal 2013 is an important thing to keep in mind when you think about 2014. The most critical months for the heating seasons really is, December, January, February and when you look at those months, the heating degree days were significantly warmer than the overall average for the year would otherwise indicate.

So I think if you look versus last year, I think as long as the weather cooperates a little bit more when you like to get it more, I would expect to see the volumes pick up in those months. We did get a nice pop in March and April, so it would temper some of the overall volume improvement if we get volume or weather in December, January, but otherwise if we get weather in those months this year I would expect to see an improvement.

Schneur Gershuni – UBS Securities

Okay, and would there be any organic growth that we should be thinking about with the synergies or it would be really mostly relying on getting a normal weather pattern in the proper months?

Michael A. Stivala

I think you are going to get more of an impact of weather, frankly. And I think the synergy efforts that we’re doing is more focused on the cost side right now. I expect that our growth initiatives will also help us out, but I think weather is going to be the…

Schneur Gershuni – UBS Securities

The primary driver.

Michael A. Stivala

Would drive factor, yes.

Schneur Gershuni – UBS Securities

Okay. And just as a follow-up, there has been a lot of talk about propane exports out of the United States. You have got a lot closer to heating value or you have closed the gap with heating value with natural gas over the last – a little bit from a propane pricing perspective. But should we see exports, we would expect that pricing for propane would go up.

I’m not sure, and maybe you have some better color on this, but I don’t believe it will really change conservation patterns really that much if that were to happen. But I do wonder if there would be a margin impact. There has been some pretty healthy margins over the last couple of quarters, would we see more of a normalization of that if we were to see propane prices average up 10%, 15% from where they are or relative to where they have been on the comparison with the heating value of natural gas?

Michael A. Stivala

Schneur I think a sort of the export situation of NGLs probably has more of an impact on the logistic side. So you are going to see, I think, in certain markets higher prices than you would ordinarily expect, so that could have some of an impact. However, I don’t foresee anything dramatically changing in the price structure, from where we are today. We’ve – with crude oil being reasonably flat, the ratio of propane to crude oil has inched its way back up to the 52%, 53% from below to mid-40s and relative to the natural gas it’s a little bit closer as well. So I’m not so sure that you’re going to see this sort of margin experience that – you margin expansion experience that you had over the course of last few months before fiscal year ended, but I don’t think they are going to be dramatically reduced either.

Schneur Gershuni – UBS Securities

Okay great. Thank you very much guys.

Michael J. Dunn, Jr.

Thank you.

Michael A. Stivala

Thank you.

Operator

We will next go to Darren Horowitz with Raymond James. Please go ahead.

Darren Horowitz – Raymond James

Good morning guys.

Michael J. Dunn, Jr.

Good morning Darren.

Michael A. Stivala

Hi, Darren.

Darren Horowitz – Raymond James

Mike, also on behalf of Raymond James, congratulations on the announcement. We certainly wish you the best in your future endeavors and Mike Stivala, congratulations on the opportunity.

Michael J. Dunn, Jr.

Thank you.

Michael A. Stivala

Thank you.

Darren Horowitz – Raymond James

Sure, so a couple quick questions for you. First, Mike, heading into the heating season across your customer base, where do you think tank fills are relative to last year? And this kind of dovetails with the previous question. Just thinking about this LPG export bid and the tailwind behind propane prices I'm just trying to get a sense for how much incremental volume you think might be in addition to what is already in customer tanks.

Michael J. Dunn, Jr.

It’s really hard for us to say where customer inventory positions are, but I would try to kind of back into what Michael Stivala had said a little bit earlier with respect to the weather pattern kicking of last year. And in our opinion we believe people entered last winter in light of the warm year we had in 2012 with low inventories. And I think that’s one of the reasons why our business really, really and the industry experienced a real good pop in February and March, because inventories were low. I would expect quite frankly people’s positions to be at the same or near the same level today. And we’re hoping that pop is a little but more even spread, than it was last year.

Darren Horowitz – Raymond James

Okay. With the seemingly structural shift across the entire propane pricing market, has that opened any additional opportunities for you as it relates to consolidation with maybe some mom and pops who don't quite have the economies of scale or the leverage in order to achieve price?

Michael J. Dunn, Jr.

Here it goes, I mean, we’re seeing more people, I think, it’s fair to say more people interested in selling their business. However, their value expectations are little bizarre. And I think the reason for that is, that you had a period where some of the older line mom and pops don’t have someone to pass the business on to. However, they are not sure what they would do with the money they got from the sale of their business. So it’s kind of like choose, I’d like to sell only if I get this ridiculous price kind of thing. And that’s kind of what we’re seeing in the markets that we would have been most interest in.

Darren Horowitz – Raymond James

Okay. And then just finally two quick housekeeping questions, the first, Mike, back to what you said about the integration efforts and obviously recognizing you are taking a break for the heating season here and you've still got about $35 million in synergies remaining. So is the goal at this point to have the bulk of that done by fall 2014 or are you thinking maybe that fiscal 2014 might look a lot like fiscal 2013, or you can knock down $15 million of synergies and then the remaining $20 million or $25 million happens in fiscal 2015?

Michael J. Dunn, Jr.

I think the latter Dan.

Darren Horowitz – Raymond James

Okay. And then last question again on the housekeeping side, with that $4.6 million integration-related expense that materialized in the fiscal fourth quarter, that looked to track about double which you had been recording in the prior two fiscal quarters. And I’m assuming that you are going to anticipate similar type expenses in fiscal 2014 once you pick back up the integration efforts. So, from a modeling perspective both in terms of timing and magnitude, should fiscal 2014 at least on that item look like fiscal 2013?

Michael J. Dunn, Jr.

I think from a timing perspective, yes. I don’t expect the second year of integration. We really did accomplish a lot this year relative to our system conversion activities. And we probably have about a third left of what we did this year from a system conversion perspective. So I would expect the cost to be somewhat less than this past year.

Darren Horowitz – Raymond James

Okay Thank you.

Michael J. Dunn, Jr.

Thank you.

Operator

(Operator Instructions). And to the presenters there are no further questions coming in.

Michael J. Dunn, Jr.

Okay John thank you for your help and for everyone that’s on the call I want to wish you all you a very happy holiday. And we’ll talk to you again in the next year. Thank you.

Operator

Ladies and gentlemen this conference is available for replay it starts today at 11 am Eastern, will last until tomorrow, November 15 at midnight. You may access the replay at any time by dialing 800-475-6701, entering the access code 306909. That number again 800-475-6701 and the access code 306909. That does conclude your conference for today. Thank you for your participation you may now disconnect.

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