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Executives

Davin D'Ambrosio - VP and Treasurer

Mike Dunn - President and CEO

Michael Stivala - CFO

Analysts

Darren Horowitz

Ron Londe

Suburban Propane Partners LP (SPH) F2Q10 (Qtr End 03/27/10) Earnings Call May 6, 2010 9:00 AM ET

Operator

Ladies and gentlemen, thank you very much for standing by and welcome to the Second Quarter 2010 Result Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session; instructions will given to you at that time. (Operator Instructions). And also as a reminder this conference is being recorded. This conference call contains forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended relating to the Partnership’s Future business expectation and prediction of financial conditions and results of operation.

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 I refer to as cautionary statements and its earnings press release which can be viewed on the company’s website on subsequent, written and oral forward looking statements attributable to the partnership or person active on this behalf are especially qualified in their entirety by such cautionary statements.

I would now like to turn the conference over to your host, Mr. Davin D'Ambrosio. Please go ahead.

Davin D'Ambrosio

Thank you Perky and good morning everyone. Welcome to Suburban’s fiscal 2010 second quarter results conference call. I'm Davin D’Ambrosio, Vice President, Treasurer at Suburban. With me this morning is Mike Dunn, President and Chief Executive Officer and Mike Stivala, our Chief Financial Officer.

Purpose of today’s call is to review our second quarter financial results along with our current outlook for the business. As usual, once we’ve concluded our prepared remarks, we will open the session to questions. Before getting started, I would like to re-emphasis 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 partnerships SEC filings.

Including its Form 10-K for the fiscal year ended September 26, 2009 and its Form 10-Q for the period ended March 27, 2010 which will be filed by the end of business today.

Copy to these filings maybe obtained by contacting a partnership for the SEC. Certain non-GAAP measures will be discussed on this call; we provided a description of those measures as well as a discussion of why we believe this information to be useful in our Form 8-K furnished to the SEC this morning. The Form 8-K can be accessed or linked on our website at suburbanpropane.com.

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

Mike Dunn

Thanks, Davin and thanks everyone for joining us this morning. The operating environment in second quarter continued to present several challenges in managing volumes and margins. Our volumes were negatively affected by the economy and a variant consistent weather pattern throughout our service territories, while at the same time commodity price volatility had an impact on our overall gross margins.

Nonetheless, we remained well positioned to respond to the ongoing challenges with our efficient operating platform, flexible cost structure and strong balance sheet. With, that being said as announced this morning we are very pleased to deliver adjusted EBITDA of a $123.7 million, which was ahead of our expectations for the quarter. Additionally during the quarter we took proactive steps to further strengthen our balance sheet by successfully accessing the capital markets and extending the maturity on all of our $250 million of senior debt until March 2020 at a very attractive way.

In a moment I will comment on our outlook for the remainder of the fiscal year, however at this point I’d like to turn the call over to Mike Stivala to discuss our second quarter results in more detail, Mike?

Michael Stivala

Thanks Mike and good morning everyone. As Mike indicated, our results for the quarter exceeded our expectations, despite an operating environment that can be characterized as one of the more challenging that we have seen in quite sometime. Our field and central support employees should be commanded for their efforts in managing through the challenges in the current economy and delivering these solid operating results.

As we discussed our second quarter results to be consistent with previous reporting, I am excluding the impact of a $1.7 million, unrealized non-cash loss applicable to FAS 133 accounting compared to an unrealized non-cash loss of $9.7 million in the prior year second quarter.

Additionally, and arriving at adjusted EBITDA, I am excluding a charge of $9.5 million reported as a loss on debt extinguishment from the senior debt refinancing completed during March 2010. Therefore exempted EBITDA for our fiscal 2010 second quarter totaled $123.7 million, a decrease of $18.3 million, compared to $142 million for the second quarter of fiscal 2009.

Net income totaled $100.1 million or $2.83 per common unit for the second quarter of fiscal 2010, compared to net income of $124.6 million or $3.79 per common unit in the prior year second quarter.

Excluding the impact from the loss on debt extinguishment, net income for the fiscal 2010 second quarter would be $109.6 million or $3.10 per common unit.

Retail propane gallons sold in the second quarter of fiscal 2010 decreased 10 million gallons or 7.4% to 124.5 million gallons from 134.5 million gallons in the prior year quarter.

Sales of fuel oil and other refined fuels decreased 5.7 million gallons or 23.7% to 18.4 million gallons compared to 24.1 gallons in the prior year. The key driver to the volume decline continued to be the adverse effects of the economic, particularly on our non residential customer base to a lesser extent ongoing conservation.

Non residential customers accounted for approximately 63% of the overall volume shortfall in the propane segment compared to the prior year second quarter. From the weather perspective average temperatures across the partnership service territories in the second quarter of fiscal 2010 was 3% warmer than both normal temperatures and the prior year second quarter.

The bulk of the favorable weather was experienced in our Southeast operations. We’ve experienced a very erratic and inconsistent weather pattern in our northeast and western operations. Average temperature in both of those areas of the country were approximately 6% warmer than both normal and the prior year. And in fact in the month of March 2010 the northeast experienced virtually no weather as average temperature were 17% warmer than normal.

In the commodity markets, propane prices have risen steadily since the summer of 2009 peaking in early February 2010 at about $1.40 per gallon. Prices began to retreat some during the remainder of the quarter. For the quarter though average posted prices for propane and fuel oil for the second quarter of fiscal quarter 2010 increased 84.4% and 52.3% respectively compared to the prior second quarter. Today propane is trading at about $1.13 per gallon basis Mount Bellevue and spot heating oil is trading at about $1.92.

Total gross margins of $222.4 million for the second quarter of fiscal 2010, were $24.3 million or 9.9% lower than the prior year of $246.7 million. The lower gross margins were triggered due to lower volumes, and as we previously discussed the first six months of the prior year benefited from a rapid and dramatic decline in wholesale propane prices, that resulted in increased margins which we did not expect to be sustainable on the first and second quarters of the current year.

Combined operating and G&A expenses of $98.8 million or $5.8 million were 5.5% lower than the prior year, primarily due to lower variable compensation [suitable] for the lower earnings, as well as continuous savings in insurance costs and vehicle expenses.

As for bad debts, we remain diligent about managing our receivables especially considering the current economic environment. Our overall bad debt expense as a percentage of revenues has remained consistent with historical levels, and our ageing profile continues to improve.

Interest expense for the second quarter of fiscal 2010 of $6.6 million was $2.89 million or nearly 30% lower than the second quarter of the prior year. As a result of the overall reduction of $183 million in total debt, during the second half of fiscal 2009. Total capital spending for the quarter was $4.9 million, which included $2.8 million of maintenance capital.

Turning to our balance sheet, despite the increased commodity price environment, we continue to fund all of our seasonal working capital needs with cash on hand. In fact, even after using approximately $15 million of cash to fund the costs associated with the debt refinancing in March 2010, we ended the second quarter of fiscal 2010, we ended the second quarter of fiscal 2010 with more than a $140 million of cash on the balance sheet.

Finally, as Mike stated earlier we just completed the refinancing of our $250 million of senior notes that were due to mature in December 2013. We were successful in raising 250 million of new senior notes with a coupon rate of [738] that will mature in March 2020.

The new issuance was well over subscribed and we appreciate the interest and continuous support of our investors. With the completion of this refinancing, we did not have any debt maturities until our revolver matures in June of 2013.

Our financial position remains very strong and in fact our leverage profile at the end of the quarter was 1.7 times. We remained confident that we are well positioned to navigate the challenging operating environment that we foresee ahead of us. Back to you Mike.

Mike Dunn

Thanks Mike. On the strength of these earnings and cash flows as announced on April 22, we were pleased to deliver our 16th consecutive increase in our quarterly distribution rate to an annualized rate of $3.36. Per common unit which will be paid on May 11, to our unit holders of record as of May 4, this represents a 3.1% growth over the prior year second quarter. Our distribution coverage at the end of this quarter was 1.31 times.

Looking ahead to the remainder of fiscal 2010, as the peak hitting season is now behind us, our mix of business shift to our higher concentration of non residential volumes which is we have discussed with several quarters now has been the most negatively impacted by the current economy. Therefore we expect that volumes will continue to be under pressure and the margin environment to be influenced by competitive factors as well as a direction of the commodity price.

Our customer base has remained largely intact and we are hopeful that is the overall economy strengthens, we will see a return to more historic volume levels in our commercial and industrial business.

Again, we remain confident that our flexible cost structure and the strength of our financial position will enable us to respond positively to the continuing challenges. In the meantime, as we have indicated in previous conference calls, we have begun a focused effort to expand our existing operation for mid size bolt on acquisition opportunities.

During this fiscal year we have completed two such acquisitions in strategic markets to expand our customer base and take advantage of our efficient operating platform. While we do not forecast external growth targets, we are seeing opportunities among the small to mid sized propane operators that can compliment our existing footprint. Opportunities that we are actively pursuing.

At this point, I would like to take this opportunity to acknowledge the ongoing efforts of all of our dedicated employees who continue to provide outstanding customer service and remained focused on driving the efficiencies in all aspects of our business. As always, we appreciate your support and attention this morning. I would now like to open the call up for questions. Perky?

Question-and-Answer session

Operator

(Operator Instructions). And our first question come from Michael (inaudible), please go ahead.

Unidentified Analyst

Just given the challenging environment, do you expect the market for third party asset to tying because if I remember correctly last winter when it was a little bit colder, I think the spreads had widened a bit

Mike Dunn

Repeat your question Mike.

Unidentified Analyst

On third party assets the acquisition market?

Mike Dunn

Yeah I mean it’s actually more familiar that has been in the last two years. So opportunities should as I said. Opportunities should certainly present themselves.

Unidentified Analyst

I mean but is the bidder [aspect] tightening because if I remember correctly last year.

Mike Dunn

Spread is almost irrelevant as far as we are concerned we are looking at the synergy opportunities that we can drive out of the business, so we are not going into it with a particular entrance multiple in mind. We are focusing more an exit multiple, so we are looking to pay a fair price for the business and obviously generate synergies that will support the split price.

Unidentified Analyst

That’s fair. On the non-residential you spoke about in the press release about the weak economy is impacting non-residential customer base is the trend for those customers improving. Is it continuing to deteriorate or is just simply stable.

Mike Dunn

It’s slowing down some but it’s still a factor of our business.

Operator

Thank you and our next question comes from Darren Horowitz please go ahead.

Darren Horowitz

Couple of quick questions, Mike you had mentioned that you expect volumes to remain under pressure and as you know we try and get our arms around you know the economic Malaysia is impact on those volumes. Can you give us some help in trying to quantify say that impact could be on third quarter volumes?

Mike Dunn

I would expect the commercial industrial sector to be you know fairly consistent with the second quarter, but you know when you start forecasting where you are going to come out of this thing you either look good or you look bad. You know at this particular point in time with the emphasis that we put on credit and with the weather pattern the way it’s been. Quite frankly you could see a repeat on the second quarter with respect to a 10% volume decline

Darren Horowitz

Do you get any sense when you are conducting your channel checks as to where the pricing sensitivity is for a lot of these non-residential consumers? I mean when you look at the price at Mount Bellevue propane per gallon is it merely a situation where if prices were 5% or 10% lower than you could see in incremental pick up and consumption or can you give us any sort of insight as to the sensitivity.

Mike Dunn

Unfortunately, I don’t think price has anything to do with it, its actual neat. What’s happening down is you are losing small business folks. There were typically used propane in their business for a variety of reasons those businesses are either shutting down or merging with another business or whatever have you and I can say that confidently because in a particular geography and our footprint, we actually went out and tested to see if price could induce people to use more propane and in fact we were actually disappointed with the outcome.

Operator

Thank you and our next question comes from Ron Londe. Please go ahead.

Ron Londe

Could you give us some insight into your interest cost going forward on an annualized basis given the refinancing you have done?

Michael Stivala

Yeah Ron, I think when you blend out the cost of the revolver we have 100 million outstanding on the revolver that is LIBOR plus base and we did fix LIBOR at 3.1% so that blend out at about 6.5 and we have 250 million at 738s, so when you blend all that out you are going to look at about 25 million - 26 million of annualized interest expense.

Ron Londe

And in the second quarter the interest savings of about $2.8 million, that’s equivalent to about $0.08 per unit. Any thought about passing along those just those savings on the interest expense side to unit holders is distribution increases?

Mike Dunn

There was a momentary thought and we elected not to do anything with it.

Ron Londe

Okay, I’m talking about going forward.

Mike Dunn

I understand.

Michael Stivala

I think Ron, when you look at what we have done in the past two quarters; well the fourth quarter of ‘09 and the second quarter of ‘10 here, the pay down of debt was funded partially by equity issuance. So, the net savings of all that was about $4 million and then we just added about $1 million to our interest requirement for this last week financing. So, our net basis annualized interest impact is only about $2.5 million, but it is very positive obviously to the bottom-line.

Ron Londe

I mean that's still around $0.07 or $0.08 a unit. Okay. Thank you.

Operator

(Operators Instructions). And allowing a few moments there are no questions in queue. Please continue.

Davin D'Ambrosio

Perky and everyone on the phone, thank you for joining us today. We look forward to speaking to you with the end of next quarter. Thank you.

Operator

Thank you ladies and gentleman. This conference will be available for replay starting today at 11 a.m. and will run until May 7 at midnight. You may access the replay service by dialing 1-800-475-6701 and entering the access code of 153999. Those numbers again are 1-800-475-6701 and entering the access code of 153999. That does conclude your conference for today. Thank you very much for your participation and for using the AT&T executive Tele Conference. You may now disconnect.

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Source: Suburban Propane Partners LP F2Q10 (Qtr End 03/27/10) Earnings Call Transcript
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