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

F3Q 2011 Earnings Call

August 4, 2011 9:00 AM ET

Executives

Davin D’Ambrosio – VP and Treasurer

Michael Dunn – President and CEO

Michael Stivala – COO

Analysts

Ronald Londe – Wells Fargo Advisors LLC

Michael Cerasoli – Goldman Sachs & Co.

Darren Horowitz – Raymond James

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Suburban Propane Third Quarter 2011 Results Conference Call.

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 and predictions, and financial condition, and results of operation. 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 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.

At this time, all participants are in a listen-only mode. (Operator Instructions) 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, sir.

Davin D’Ambrosio

Thank you, Brad, and good morning. Welcome to Suburban’s Fiscal 2011 Third Quarter Results Conference Call. I’m Davin D’Ambrosio, Vice President and Treasurer at Suburban. Joining 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 third quarter financial results, along with our current outlook for the business. As usual, once we 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 the Partnership’s SEC filings, including its Form 10-K for fiscal year ended September 25, 2010, and its Form 10-Q for the period ended June 25, 2011, 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 why those measures, as well as a discussion of why we believe this information will be useful in our Form 8-K which was furnished with 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 will turn the call over to Mike Dunn for some opening remarks. Mike?

Michael Dunn

Thanks, Davin, and thanks, everyone, for joining us this morning. We are pleased with the results that were announced this morning, a 13% increase in adjusted EBITDA over the prior year third quarter, our earnings of $10.3 million.

Despite the ongoing challenges facing the industry from persistent high commodity prices, customer conservation, and the lack of any real growth in the economy, our people, systems and operating platform are well positioned to effectively compete and to focus on growing our customer base.

Additionally, we continue to proactively manage our operating cost structure and our focus on customer service. In fact, with the regional alignment announced in our second quarter earnings release, we are already beginning to see some of the incremental benefits from our new operating structure. Our platform thus intended to put our people in the best position to grow our business.

Finally, our balance sheet remains fundamentally sound as we ended the quarter with more than $161 million in cash on hand. We continue to maintain a very low leverage profile. 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 third quarter results in more detail. Mike?

Michael Stivala

Thanks, Mike, and good morning, everyone. As I discuss our third quarter results, to be consistent with previous reporting, I am excluding the impact of a $313,000 unrealized non-cash loss applicable to FAS 133 accounting that compares to an unrealized non-cash gain of $281,000 in the prior year third quarter.

As Mike mentioned, adjusted EBITDA for our fiscal 2011 third quarter totaled $10.3 million. That’s an increase of $1.2 million compared to $9.1 million for the third quarter of fiscal 2010. Our seasonal net loss totaled $6.5 million or $0.18 per common unit for the third quarter of fiscal 2011 compared to a net loss of $6.9 million or $0.19 per common unit in the prior year third quarter.

Retail propane gallons sold in the third quarter of fiscal 2011 decreased 1.4 million gallons or 2.5% to 54.6 million gallons from 56 million gallons in the prior year third quarter. Sales of fuel oil and other refined fuels decreased 1 million gallons to 5.6 million gallons.

Although weather during the third quarter has considerably less of an influence on our volumes than it does during the heating season, volumes in the fiscal 2011 third quarter did benefit somewhat by a colder start to this year’s third quarter as average temperatures across our service territories in the month of April 2011 were approximately 5% colder than normal compared to 22% warmer than normal in April of 2010.

Of particular note as it relates to volumes, the vast majority of the volume shortfall year-over-year in the Propane segment was experienced in the non-residential sector. And within this refined fuel segment, our heating oil volumes were flat compared to the prior year third quarter.

Therefore, the entire volume shortfall in the Refined Fuel segment was in the low-margin Gasoline and Diesel businesses.

In the commodity markets, commodity prices remained volatile during the third quarter of fiscal 2011 as crude oil rose to $114 a barrel in April before declining to $91 a barrel at the end of June, representing a 20% intra-quarter swing in prices.

Average posted prices for propane and fuel oil for the third quarter of fiscal 2011 increased 38% and 45%, respectively, compared to prior year third quarter. The high commodity price environment has continued to have a negative effect on volumes and margins.

Total gross margins of $91.7 million for the third quarter of fiscal 2011 were $0.5 million higher than prior year third quarter of $91.2 million. Lower overall volumes were offset somewhat by a slight improvement in margins resulting from the turnover of lower priced inventory carried over from the prior quarter.

Combined operating and G&A expenses of $81.4 million was $600,000 lower than the prior year third quarter, primarily due to lower payroll and benefit related expenses attributable to lower head count as well as efficiencies at both the field and corporate level, offset partially by higher vehicle fuel costs and higher bad debt expenses associated with generally higher average selling prices.

Overall, our bad debt expense as a percentage of revenue has remained within historical levels, and our aging profile continues to improve.

Interest expense for the third quarter remained essentially flat at $6.9 million. Capital spending for the quarter was $5.8 million, which included $2.2 million of maintenance capital.

Turning to the balance sheet, cash on hand at the end of the quarter was $161.4 million and we continued to fund all of our short-term working capital requirements through internally generated cash. As a remainder, we do not have any upcoming maturities under our revolver until it matures in June of ‘13. Our leverage profile remains low, particularly in relation to our peers at two times EBITDA or 1.1 times EBITDA when you consider the $161 million of cash.

And overall, the operating results for the quarter were slightly better than our expectations, despite the challenging economic environment and volatile commodity marketplace.

Mike, back to you.

Michael Dunn

Thanks, Mike. As announced in our July 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 it will trade at 0.9% compared to the third quarter of fiscal 2010. This quarterly distribution will be paid on August the 9th to our unitholders of record as of August the 2nd.

Our distribution coverage at the end of the third quarter fiscal 2011 remained solid at 1.13 times. Looking ahead to the remainder of fiscal 2011 and into fiscal 2012, we anticipate that the current challenges will continue with regards to a slowly recovering economy and continued volatility in the commodity markets. These factors may continue to put pressure on both volumes and margins.

However, we are confident that our operating model, talented management at all levels of the organization and systems platform will continue to provide us the ability to navigate these obstacles and be opportunistic along the way.

Our focus remains on what we can control, specifically driving operational efficiencies, providing exceptional customer service to our existing customers and growing our customer base. Furthermore, with the strength of our balance sheet, we’re well-positioned to entertain acquisition opportunities as they may present themselves.

In closing, I’d like to again take this opportunity to thank the employees of Suburban for the way in which they manage their respective operations, maintaining a focus on safety, delivering a superior level of service to our customers and being an active member in the communities we serve. As always, we appreciate your support and attention this morning. And we’d now like to open the call up for questions.

Brad, can you help us?

Question-and-Answer Session

Operator

Yes. (Operator Instructions) We do have a question from the line of Ron Londe, Wells Fargo Securities. Please go ahead.

Ronald Londe – Wells Fargo Advisors LLC

Thank you. Could you give us some more insight into just regional alignment and what kind of dollar amounts you might expect in savings going forward?

Michael Dunn

Hey, Ron, we’ve gone basically from 10 regions – with region management staffing 10 to five. The exercise was quite frankly more an effort to get us closer to our customer base by eliminating some of the levels and creating a broader geography for some of our talented general managers to oversee.

The cost savings, there will be some, obviously when you eliminate five regional staffs and work to improve the routing vis-à-vis a bigger geography and so forth. The savings, difficult to define at this particular point in time, but then again, that wasn’t the key driver in the change.

Ronald Londe – Wells Fargo Advisors LLC

Okay. When you look at the residential performance for the quarter with gallon down 2.5% on which you said was flat customer base, is the difference basically conservation?

Michael Dunn

Well, I don’t think you heard correctly. The residential gallons were flat to last year.

Ronald Londe – Wells Fargo Advisors LLC

Okay.

Michael Dunn

Okay and which leaves the commercial side of things and I think the economy speaks for itself.

Ronald Londe – Wells Fargo Advisors LLC

Okay. Looking to next year, you commented briefly on your ability to hold margins. Can you give us some perspective on that?

Michael Dunn

I don’t think we said that.

Ronald Londe – Wells Fargo Advisors LLC

Well, what did you say?

Michael Dunn

Well, we basically said that we expect volumes and margins to be – continue to be under some stress with respect to the slow recovery of the economy.

Ronald Londe – Wells Fargo Advisors LLC

Okay. So can you put that into a broader context, a more defined context?

Michael Dunn

Well, I think it’s a little difficult to speak specifically about margins when you really don’t know where the commodity’s going to trade at.

Ronald Londe – Wells Fargo Advisors LLC

Okay. But you would expect commodities to remain fairly – or would you expect commodities to remain fairly high going forward?

Michael Dunn

I would expect commodities to remain fairly volatile going forward.

Ronald Londe – Wells Fargo Advisors LLC

Yes.

Michael Dunn

Okay, so I think you will see, again a reasonably broad range and that will create the challenges with respect to be able to maintain a satisfactory margin profile.

Michael Stivala

I think what you’re also seeing with us, Ron, as we’ve said in the past is we continue to focus on the things that we can control, driving the efficiency, the steps that we took that Mike just explained with respect to the realignment, it’s all intended to put our people in the best position to focus on growing the customer base and that may not necessarily translate into direct higher volumes.

But as you’ve been with us for quite a while, there are people – and we focus on is cash flow and not volume for volume’s sake. So, as we high grade our customer base, which we’ve been doing gradually over the past few years, you can see a slight improvement in margins just by the mere fact of mix.

But really, it’s – the things that excite us about going forward, despite all the headwinds of the economy, the high commodity price environment, high unemployment rate, lack of any new construction, which was a big driver for new users over the past several years before the significant downturn here, we’re focused internally on things that can help us continue to drive efficiencies, continue to put cash on the balance sheet and put our people in the best position to be the most opportunistic in the marketplace.

Ronald Londe – Wells Fargo Advisors LLC

Okay.

Michael Dunn

Okay, Ron, does that answer your question?

Ronald Londe – Wells Fargo Advisors LLC

Yes. That’s excellent...

Michael Dunn

With that said, if we’re going to be opportunistic, growth could come at small a price.

Ronald Londe – Wells Fargo Advisors LLC

Okay. Thanks.

Operator

And we have a question from the line of Michael Cerasoli, Goldman Sachs. Please go ahead.

Michael Cerasoli – Goldman Sachs & Co.

Morning. As you mentioned in your opening comments, commercial volumes continue to be weak. Is there something beyond the economic environment that continues to wham on the sub segment, or I guess another way to ask it is, are there any specific areas within the sub segment that are particularly weak? I think I just heard you mention a little bit about construction, but if you give us some more detail, that’d be great.

Michael Dunn

Well, the construction side really affects the residential opportunities with respect to new customers. But the commercial side I think is – to be broad, would be a factor resulting from the economy.

Michael Cerasoli – Goldman Sachs & Co.

Okay.

Michael Dunn

I mean there really isn’t much more we can say. I mean we said – and I guess what I struggle with is how everybody has got this bewildered look on their face when they see that the – when the government comes out with those statistics on GDP and so forth and so on. I mean, I don’t know where people thought that the economy was in a recovery mode six months or even a year ago, quite frankly.

But – and that’s what makes us very, very proud of the accomplishments that we’ve been able to achieve with respect to our business and the fact that we don’t stand still and we continue to try to find ways to grow our customer base, while at the same time driving efficiencies and taking advantage of our systems. So quite frankly, I’m somewhat optimistic as the economy continues to kind of drag along at a pretty slow pace, as silly as that may sound.

Michael Cerasoli – Goldman Sachs & Co.

That’s actually a good segue into my next question about asset acquisitions and just love to hear your updated thoughts. Seems to me like bid ask price continues to stay stubbornly wide, and just curious as to any information you can give us.

Michael Dunn

Well, again we continue to look for acquisitions in our more dominant markets. And we’ve looked at close to a dozen I guess over the course of this fiscal year. And in most cases, we’ve elected to not get in a – either a bidding or we found the peculiarities about that business that turned us off.

So yes, we continue to look and more hopeful. I think that we’re hopeful that as time goes on and people kind of forget their numbers of two years ago and think that they should sell their business basis two year ago – two-year old numbers, perhaps the activity – at least our activity will pick up some.

Michael Cerasoli – Goldman Sachs & Co.

That’s very helpful. Thanks for taking my questions.

Michael Dunn

Thank you, Mike.

Michael Stivala

Thanks, Mike.

Operator

And we do have a question from the line of Darren Horowitz, Raymond James. Please go ahead.

Darren Horowitz Raymond James

Good morning, guys. How are you.

Michael Dunn

Good, Dan, how are you?

Darren Horowitz Raymond James

Good. Thank you. Just a couple of quick questions, kind of dovetailing with Michael’s question, and I know that you guys don’t press release for every small acquisition that you do. But I recall that you had completed a small scale acquisition of a North Carolina distributor and I was just wondering if anything else happened in this past quarter.

Michael Dunn

No.

Michael Stivala

No, Dan. That was in the first quarter and that’s only one we’ve done this fiscal year.

Darren Horowitz Raymond James

Okay. And then kind of – Mike on the heels of what you just said, taking things I think to a bigger of a perspective, outside of the challenges that the propane industry is facing from an operational prospective, if you start to look at some of the smaller mom-and-pops either as it relates to these guys’ needing greater economies of scale or possibly a better balance sheet to survive, have any additional opportunities come on the radar screen that you think could be more attractive, if not now, at some future point in time as this continues?

Michael Dunn

Yes, I think we actually have a couple in mind for the future. The principal reason why we passed on the few that we’ve looked at so far this fiscal year were that the business is – the financial performance of the businesses couldn’t be proven. And as I said, people were looking at numbers of two years ago and trying to go under a price based on that -those historic numbers.

Darren Horowitz Raymond James

Yes.

Michael Dunn

And in some cases, you just find poorly operated businesses where you have safety issues that were a little beyond the scope of what we would be interested in taking over.

Darren Horowitz Raymond James

Makes sense. I’m just thinking that if the current ripples and the volatility in the credit markets actually get exacerbated, there got to be smaller guys that are going to be – they’re going to have a tough time coming up to try and renew existing term offerings, which could be right down your fair way.

Michael Dunn

You’re 100% correct. And then we are – I think we’re positioned certainly to take advantage of those opportunities.

Darren Horowitz Raymond James

Yes. Thanks for the color. I appreciate it.

Michael Dunn

Yes. Thank you.

Operator

(Operator Instructions) And at this time, it does appear there are no further questions from the phone lines.

Michael Dunn

Okay. Again, everyone, I want to thank you and we’ll see you again at the end of the fourth quarter. Thanks. Enjoy the rest of your Summer. Thank you, Brad.

Operator

Thank you. And ladies and gentlemen, today’s conference will be available for replay any time today after 11:00 am Eastern through midnight on August 5. You may access the AT&T replay system at any time by dialing 1-800-475-6701, entering the access code 209692. International participants may dial 320-365-3844. And again, those numbers are 800-475-6701, and 320-365-3844, again entering the access code of 209692.

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

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