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

F1Q2011 Earnings Conference Call

February 3, 2011 9:00 AM ET

Executives

Davin D’Ambrosio – VP and Treasurer

Mike Dunn – President and CEO

Mike Stivala – CFO

Analysts

Darren Horowitz – Raymond James

Ron Londe – Wells Fargo Securities

Michael Cerasoli – Goldman Sachs

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2011 Results Conference Call for Suburban Propane. 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 partnerships, future business expectations and predictions and financial condition 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 I refer to as cautionary statements and 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 this behalf are especially qualified in their entirety by such cautionary statements. During today’s conference all participants are in a listen-only mode. Later there will be a question and answer session, instructions will be given at that time. (Operator Instructions) And as a reminder today’s conference is being recorded.

I would now like to turn the conference over to our host Mr. Davin D’Ambrosio. Please go ahead.

Davin D’Ambrosio

Thank you Shannon and good morning everyone. Welcome to Suburban’s Fiscal 2011 First Quarter 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, Mike Stivala, our Chief Financial Officer.

Purpose of today’s call is to review our first 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 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 our Partnership’s SEC filings including its Form 10-K for the fiscal year ended September 25, 2010 and our Form 10-Q for the period December 25, 2010 which will be filed by the end of business today.

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 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 through a link on our website at suburbanpropane.com.

At this point, I’d like to get started by turning the call over to Mike Dunn for some opening remarks. Mike?

Mike Dunn

Thank you Davin and thanks everyone for joining us this morning. The first quarter of 2011 presented us with a number of challenges including volumes that were negatively affected by significantly warmer than normal weather during the first six weeks of the quarter. Continued customer conservation attributable to the ongoing weakness in the economy, commodity prices also rose steadily throughout the quarter negatively impacting our risk management activities.

However as weather conditions improved, we ended the quarter strongly with December volumes that were higher than the prior year. In light of the late start to the heating season we are pleased with our earnings for the first quarter as our field personnel did an excellent job managing operating expenses and responding when the weather finally did arrived.

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 first quarter results in more detail. Mike?

Mike Stivala

Thanks Mike, and good morning everyone. As we discussed on our last conference call we anticipated that continued weakness in the economy and potential volatility in the commodity markets would again present operational challenges in terms of managing volumes and margins in the current fiscal year. The first quarter was every bit of challenging as we anticipated.

However our flexible operating structure provides a critical advantage for us as we’ve navigated through the challenging landscape that the industry as a whole continues to experience. Looking at our first quarter in detail, as we discussed our first quarter results to be consistent with previous reporting, I am excluding the impact of a $1.6 million unrealized non-cash loss applicable to FAS 133 accounting, compared to an unrealized non-cash loss of $3.4 million in the prior year first quarter.

Adjusted EBITDA for our first quarter totaled $60.1 million, a decrease of $6.1 million compared to $66.2 million for the first quarter of fiscal 2010. Net income totaled $44.7 million or $1.26 per common unit for the first quarter of fiscal 2011, compared to a net loss of $51.8 million or $1.47 per common unit in the prior year first quarter. Retail propane gallons sold in the first quarter of fiscal 2011 decreased 3.7 million gallons or 4.1% to 86.3 million gallons from 90 million gallons in the prior year quarter. Sales of fuel oil and other refined fuels decreased 1.7 million gallons or 13% to 11.4 million gallons compared to 13.1 million gallons in the prior year.

The primary factor contributing to the volume decline was the unseasonably warm weather during the first six weeks of the quarter and to a lesser extent customer conservation attributable to the economy and the higher priced commodity environment.

For the quarter as whole, average temperatures across our service territories were close to normal and slightly colder than the prior year first quarter. However, during the first six weeks of fiscal 2011, average temperatures were 13% warmer than normal and 18% warmer than the prior year comparable period. In the commodity markets, average posted prices for propane and fuel oil for the quarter increased 15.5% and 18.5% respectively compared to the prior year first quarter. And on a sequential basis, propane prices increased 17.8% over the average prices in the fourth quarter of fiscal 2010.

Today, spot propane is trading at about $1.35 per gallon basis in Mont Belvieu and spot heating oil is trading around $2.75.

Total gross margins of $143.4 million for the first quarter of fiscal 2011 were $11 million or 7.1% lower than the prior year first quarter of $154.4 million. Primarily as a result of the lower volumes as well as from realized losses on derivative instruments used in risk management activities resulting from the steady rise in commodity prices during the quarter. As we’ve discussed in the past, our risk management activities are intended to protect downside price risk on our price to physical inventory. Although our physical inventory benefited from rising commodity prices, sales volumes were such that we did not realized sufficient gains embedded in the lower priced inventory to offset the realized losses during the first quarter of fiscal 2011. Absent to significant retreat in commodity prices, margins could benefit in the second quarter.

Combined operating and G&A expenses of $83.3 million were $4.9 million or 5.6% lower than the prior year, primarily due to lower variable compensation attributable to the lower earnings as well as continued savings and payroll and benefit related expenses and lower vehicle costs. As per 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 while our aging profile continues has improved.

Depreciation and amortization expense for the quarter of $8.2 million, increased $1.1 million compared to the prior year first quarter as a result of assets acquired in the prior year. Net interest expense of $6.8 million for the first quarter of fiscal 2011 was $400,000 lower than the first quarter of the prior year, a benefit from the debt restructuring that was completed late in fiscal 2009 and into the first quarter of fiscal 2010. Total capital spending for the quarter was $5.8 million which included $2.5 million of maintenance capital.

Turning to our balance sheet, we continue to fund all working capital requirements with cash on hand and as we move through our historically high period of seasonal working capital needs, which were typically peak in the January, February timeframe, we once again have not accessed our bank revolver, and in fact we ended the quarter with a $115.6 million of cash on hand. Our financial position remains very strong with leverage of 1.85 times at the end of the quarter, and as a reminder we have no immediate debt maturities to address as all of our senior notes mature in 2020 and our credit revolver matures in June 2013.

Mike back to you.

Mike Dunn

As announced – thanks Mike. As announced in our January 20 press release we were pleased to declare a 19th consecutive increase in our quarterly distribution which equates to an annualized rate of $3.41 per common unit, which will be paid on February the 8th to our unit holders of record as of February 1. This represents a 2.1% growth over the prior year first quarter and our distribution coverage, at the end of this quarter was 1.25 times.

Looking ahead to the remainder of the fiscal 2011, as Mike stated earlier we anticipated that fiscal 2011 would present a more difficult environment in terms of managing our volumes and margins. And through January this has proven to be the case. The favorable change in the weather pattern which began in late November and has extended throughout January has provided some positive momentum heading into the second quarter. However it is still too early into heating season to fully gage the impact of the favorable weather pattern.

As always we remained focused on the things we can control by operating in a safe and efficient manner and providing exceptional customer service. Additionally, with our financial strength we continue to focus on achieving our growth initiatives. In fact, during this past quarter, we closed in our fifth bolt-on acquisition in the past 12 months, located in the North Carolina market which will complement our existing presence there. We continue to look for small to mid-sized businesses that can add value to our existing operating footprint and we remain optimistic that the challenges facing the industry will present us with more growth opportunities during the year.

In closing, I would like to take this opportunity to acknowledge the ongoing efforts of all of our dedicated employees who remained focused on driving efficiencies in all aspects of our business during these challenging times. And as always, we appreciate your support and attention this morning, and would now like to open the call up for questions. Shannon, could you help us with that?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen we will now begin the question and answer session. (Operator Instructions) The first question is from the line of Darren Horowitz. Please go ahead.

Darren Horowitz – Raymond James

Good morning guys, how are you?

Mike Dunn

Hi Darren.

Mike Stivala

How are you?

Darren Horowitz – Raymond James

Good, thanks. Mike, my first question goes back to a point that you had mentioned in your prepared commentary when you’re talking about the favorable weather as we progress here through the fiscal second quarter, I am curious as to how much of an impact you think the higher propane part prices will act to somewhat offset that positive weather driven benefit to volumes as we’re now through January and into February?

Mike Dunn

I think certainly as we saw in the first quarter, the high priced environment continues to drive customer conservation. The weather has certainly had the benefit of offsetting some of that, although to some degree it’s also presents challenges for us to get our trucks on the road and in other ways the weather affects our ability to deliver. So I think as we progress through the second quarter, we’ll get a better sense of the impact of that weather, but clearly the high price environment is affecting customer behavior.

Darren Horowitz – Raymond James

Sure. Switching gears over to the acquisition front, two questions, your first if you include all five of these bolt-on acquisitions that you’ve announced, how much volume does that represent annually?

Mike Stivala

It’s about 7.5 million, maybe 8 million gallons Darren.

Darren Horowitz – Raymond James

Okay. And then just from a big picture perspective, last quarter we had talked about you guys studying four or five potential acquisitions at that point in time, and I want to imagine that this North Carolina acquisition is one of them but as you look at the landscape for acquiring volumes, what stands out to you, I mean are there still kind of four or five key targets, has there been any shift in thought process as it relates to geographic positioning and building on volumes maybe in a different way?

Mike Dunn

No, not at this stage, I mean last quarter we did have four that we were studying. We ended up closing on one. We’re still working on two others in addition to a couple of others that have popped up over the course of the last few weeks. At this particular point in time, our inclination and our opportunity to create the most value is to stick with our existing footprint.

Darren Horowitz – Raymond James

Okay, thanks for the time guys. I appreciate it.

Mike Dunn

You’re welcome.

Mike Stivala

Thanks Darren.

Operator

The next question is from the line of Ron Londe. Please go ahead.

Ron Londe – Wells Fargo Securities

Yes, could you characterize the margins per gallon in the first quarter versus what you’ve experienced in January so far, better, worse?

Mike Dunn

About the same Ron.

Ron Londe – Wells Fargo Securities

About the same?

Mike Dunn

Yes.

Ron Londe – Wells Fargo Securities

Do you expect that to be carried through the first quarter – second quarter, pardon me?

Mike Dunn

Pretty much, I mean there maybe a little bit of an uptick as replacement costs gets higher, but for the most part we are not anticipating anything extraordinary.

Ron Londe – Wells Fargo Securities

From the commercial side of the business, what are you seeing there from a standpoint of improvement, any significant new customers? Can you characterize what’s going on in that part of the business?

Mike Dunn

Well if you want to business for nothing you could probably generate pretty aggressive volumes, okay. However if you want to get a return on your investment, you are seeing some improvement in the commercial area with respect to our business opportunities.

Ron Londe – Wells Fargo Securities

What’s your choice?

Mike Dunn

We prefer making money, Ron.

Ron Londe – Wells Fargo Securities

Okay.

Mike Dunn

We look for some…

Ron Londe – Wells Fargo Securities

So do your investors.

Mike Dunn

I just thought, it was important to indicate that because anybody who things that this economy is on the right track back is smoking something funny.

Ron Londe – Wells Fargo Securities

Okay, thank you.

Mike Dunn

You’re welcome.

Mike Stivala

Thank you, Ron.

Operator

The next question is from the line of Michael Cerasoli. Please go ahead.

Michael Cerasoli – Goldman Sachs

Hi good morning guys.

Mike Dunn

Hi Mike.

Mike Stivala

Good morning, Mike.

Michael Cerasoli – Goldman Sachs

Just a couple of follow-up questions on those little acquisitions you guys executed on. Can you give us some system insight as to the multiples or a range of multiples on these little acquisitions and also is that representative of the market right now?

Mike Dunn

We stick to looking for opportunities within our footprint. We believe the multiple range will stay reasonably stagnant. And we’re looking on an exit basis somewhere in the five to six times range.

Michael Cerasoli – Goldman Sachs

Okay. And then I mean are you seeing a lot of these little opportunities out there enough to kind of may be lump, I don’t know if you want to quantify how many that you can do on an annual basis, I mean you want to put yourself into that corner, or just curios. Do you see, I guess frequent opportunities for these little acquisitions?

Mike Dunn

We end up turning away more than we do, simply because when we look at them, a lot of them are not quality acquisitions. They’ve either built their business on extremely low margins. They’re price driven businesses or they’re not very safe.

Michael Cerasoli – Goldman Sachs

Okay. Just sorry, just kind of switching gears to the fuel oil, just – I guess the DOE is going to be selling a whole bunch of heating oil into the market. And I was wondering how that would impact here? I guess they’re replacing it with the ultra-low sulfur distillate fuel oil. I am just wondering how that may impact your operations, your fuel oil operations.

Mike Dunn

It shouldn’t have any real impact. This is not something that’s new to us, we’ve moving ultra-low sulfur fuel oil for the last two years.

Michael Cerasoli – Goldman Sachs

Okay.

Mike Dunn

But keep in mind it’s a will call business. So taken into consideration the economy, people are managing their household budgets a lot closer than they have in the past.

Michael Cerasoli – Goldman Sachs

Great, that’s it for me. Thanks.

Mike Dunn

You’re welcome.

Operator

(Operator Instructions). Please continue sir, there are no further questions.

Mike Dunn

Shannon, thank you. And again thank you all for participating in our call. Needless to say if you get a follow-up question, feel free to give anyone of us a phone call. We’ll be happy to answer your questions. Thank you.

Operator

Ladies and gentlemen this conference will be available for replay beginning today at 11:00 A.M Eastern, running through Friday February 4th at midnight Eastern Time. You may access the AT&T playback service by dialing 800-475-6701 and entering the access code of 189494. Again this conference will be available for playback beginning today at 11:00 A.M. Eastern running through Friday February 4th at midnight Eastern Time. You may access the AT&T playback service by dialing 800-475-6701 and entering the access code of 189494. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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