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Suburban Propane Partners LP (NYSE:SPH)

F2Q11 (Qtr End 03/26/2011) Earnings Call

May 03, 2011 9:00 am ET

Executives

Michael Stivala - CFO

Mike Dunn - President and CEO

Analysts

Operator

Welcome to the second quarter 2011 results conference call.

This conference call contains forward-looking statements within the meaning of the Section 21E of the Securities Exchange Act of 1934 as amended relating to the partnerships, 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 I refer to as cautionary statements, on 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 especially qualified in their entirety by such cautionary statements.

(Operator Instructions) I'd now like to turn the conference over to your host, Mr. Michael Stivala.

Michael Stivala

Thank you and good morning everyone. Welcome to Suburban Propane's fiscal 2011 second quarter results conference call. I'm Mike Stivala, Chief Financial Officer here at Suburban. Joining me this morning is Mike Dunn, our President and Chief Executive Officer.

The 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 conclude our prepared remarks, we will open the session to questions.

Before I get started, I'd like to reemphasize what the operator just said 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 25, 2010, and our Form 10-Q for the period ended March 26, 2011. The 10-Q 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 the call. We have provided a description of those measures as well as a discussion of why we believe the information to be useful in our Form 8-K which was furnished to the SEC this morning. The Form 8-K can be accessed through a link on our website at www.suburbanpropane.com.

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

Mike Dunn

Thanks, Mike, and thanks everyone for joining us this morning. Many of the challenges that have plagued this industry for the past few years have continued throughout this year's heating season.

In particular, ongoing weakness in the economy coupled with a well-publicized inflationary commodity price environment have certainly affected customer buying habits, which in turn have put pressure on volumes and margins.

With that said, our ability to continue to identify operating efficiencies and reduced costs along with the strength of our balance sheet are all factors that have put us in a good position to navigate through this difficult operating environment.

Additionally, as mentioned in our press release this morning, we have recently implemented an internal realignment of our operating footprint in response to the persistent and foreseeable challenges affecting the industry as a whole. The steps taken are made possible as a result of our technology infrastructure and the talent within Suburban.

The organizational changes are intended to put our people in the best position to focus on driving customer base growth, leveraging our systems for further operating efficiencies and to further reduce our overall cost base. These changes, which primarily focus on realigning our field management and consolidating certain support functions, will enable us to be in even stronger position to continue to meet the ongoing challenges.

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.

Michael Stivala

Thanks, Mike. As we discuss our second quarter results to be consistent with previous reporting, I am excluding the impact of the $4.1 million unrealized non-cash gain applicable to FAS 133 accounting compared to an unrealized loss of $1.7 million in the prior year's second quarter.

Additionally, for comparability purposes, I am excluding a $9.5 million loss on debt extinguishment in the prior year's second quarter associated with the refinancing of our senior notes which was completed during March 2010.

Adjusted EBITDA for our fiscal 2011 second quarter totaled $111.6 million. That's a decrease of $12.1 million compared to $123.7 million for the second quarter of fiscal 2010.

Net income totaled $96.2 million or $2.71 per Common Unit for the second quarter of fiscal 2011 compared to net income of $109.6 million or $3.10 per Common Unit in the prior year's second quarter. The fiscal 2011 second quarter results include a $2 million severance charge associated with the recent organization that Mike just mentioned.

Retail propane gallons sold in the second quarter of fiscal 2011 decreased 10.5 million gallons or 8.4% to 114 million gallons from 124.5 million gallons in the prior year's second quarter.

Sales of fuel oil and other refined fuels decreased 2.2 million gallons or 12% to 16.2 million gallons compared to 18.4 million gallons in the prior year second quarter. The primary factor contributing to the volumes decline was customer conservation attributable to the ongoing effects of the economy coupled with rise in commodity prices. The negative effects of the economy and commodity prices on volumes were somewhat offset by generally colder average temperatures across much of our service territories.

For the quarter, average temperatures were 1% colder than normal compared to 3% warmer than normal in the prior year second quarter even though weather in our Southeast operations was approximately 21% warmer year-over-year.

In the commodity markets, average posted prices for propane and fuel oil for the second quarter of fiscal 2011 increased 11.8% and 37.3% respectively compared with the prior year second quarter. And on a sequential basis, propane prices increased 10.8% over the average prices in the first quarter of fiscal 2011.

Total gross margins of $200.1 million for the second quarter of fiscal 2011 were $22.3 million or 10% lower than the prior year second quarter of $222.1 million primarily as a result of the lower volumes as well as from the steady rise in commodity prices during the quarter, which put pressure on our overall unit margins as we were limited in our ability to pass along the higher commodity prices.

Combined operating and G&A expenses of $86.6 million were $12.2 million or 12.3% lower than the prior year primarily due to lower variable compensation attributable to the lower earnings as well as continued savings in payroll and benefit-related expenses, offset to an extent by higher fuel costs to operate our fleet.

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 and our aging profile have remained relatively consistent with historical levels.

Depreciation and amortization expense for the quarter of $8.5 million increased $1.4 million compared to the prior year second quarter, resulting from the impact of prior-year acquisitions. Net interest expense of $6.8 million for the second quarter of fiscal 2011 was $200,000 higher than the second quarter of the prior year. Overall, our debt levels have remained consistent, and our leverage is below two times.

Total capital spending for the quarter was $5.6 million, which included $2.7 million of maintenance capital.

Turing to our balance sheet, despite the increased commodity price environment, we continue to fund all working capital requirements from cash on hand. As we've now move through our historically high period of seasonal working capital needs, which peak in early February, we once again did not access our bank revolver. And in fact, we ended the quarter with approximately $137 million of cash on the balance sheet.

Back to you, Mike.

Mike Dunn

Thanks, Mike. As announced at our April 21 press release, we were pleased to declare our quarterly distribution of $0.8525 per Common Unit, which equates to an annualized rate of $3.41 per Common Unit and a growth rate of 1.5% compared to the second quarter of fiscal 2010. This quarterly distribution will be paid on May 10 to our Unitholders of record as of May 3.

Looking ahead to the remainder of fiscal 2011, we expect that volumes and margins will remain under pressure for the remainder of the year given the lack of a real turnaround in the economy and the expectation of a continued high commodity price environment. Nonetheless, we remain confident that our flexible cost structure and operating platform will once again enable us to respond to these challenges.

Additionally, as Mike indicated earlier, our balance sheet distribution coverage remains strong. We are focused on growth opportunity. And although we did not close on any acquisitions this quarter, we are very active in our pursuit.

In these challenging times, what matters the most is having an operation structure that is nimble and a management team that is focused on operational excellence and driving customer base growth through exceptional customer service and distinguishing ourselves from the competition.

As I indicated earlier, we are embarking on our next evolution of change here at Suburban which will leverage our strength as an organization to our people and technology to best position us to respond to the ongoing challenges that we believe are ahead of us and the industry as a whole.

In closing, I would like to take this opportunity to acknowledge the ongoing efforts as a whole of our dedicated employees in how they continue to effectively manage the business through these challenging times while providing exceptional service to all of our customers.

As always, we appreciate your support and attention this morning. I would now like to open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Mr. Stivala, no questions in queue at this time, sir.

Michael Stivala

Okay. Again, we want to thank everyone for joining us on the call today.

Operator

Ladies and gentlemen, this conference will be available for replay after 11:00 am today until Friday, May 6, 2011. You may access the AT&T Executive Playback Service at anytime by dialing 1800-475-6701 and entering the access code of 199225. International participants may dial 1320-365-3844.

That does conclude the call today. Thank you for your participation and for using AT&T Executive Teleconference Services. You may now disconnect.

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