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Suburban Propane Partners LP (NYSE:SPH)

Q3 2011 Earnings Call

November 10, 2011 9:00 am ET

Executives

Mike Dunn – President, Chief Executive Officer

Mike Stivala – Chief Financial Officer

Davin D’Ambrosio – Vice President, Treasurer

Analysts

Darren Horowitz – Raymond James

John Tiesland (phon) -

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Full Year and Fourth Quarter 2011 Financial Results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions given at that time. As a reminder, this conference is being recorded. If you should require assistance during this call, please press star and then zero.

This conference call contains forward-looking statements within the meaning of Section 21(e) 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 the operations. These forward-looking statements certain risks and uncertainties. The Partnership has listed some 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 to persons acting on its behalf are expressly 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, Cathy, and good morning everyone. Welcome to Suburban’s Fourth Quarter and Fiscal 2011 Full Year Results. I’m David 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. The purpose of today’s call is to review our fourth quarter and fiscal 2011 full year 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, 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 the 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-K for fiscal year ended September 24, 2011 which will be filed on or about November 23, 2011. 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 which was furnished to the SEC this morning. Form 8-K will be available through a link on our website at suburbanpropane.com.

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

Mike Dunn

Thanks, Davin, and thanks everyone for joining us this morning. Fiscal 2011 proved to be every bit as challenging as we expected. The weak economy combined with persistent high commodity prices continue to put pressure on both volumes and margins. As we’ve proven in the past, and this year is no different, we have the ability to adapt our systems and operational model to effectively manage our cost structure and drive efficiencies. Specifically, the steps we took this past spring to realign our operating model will not only have an influence on our overall cost structure but more importantly place our operating personnel in the best position to focus on quality customer service and customer growth.

With this quarter’s $2 million improvement in adjusted EBITDA compared to the prior year fourth quarter, we have already started to realize some of the operational and financial benefits that we anticipated from our realignment efforts. A little later, I will provide some closing remarks, including thoughts for the coming year; however, at this point I will turn it over to Mike Stivala to discuss our full year and fourth quarter results in more detail.

Mike Stivala

Thanks, Mike, and good morning everyone. I’ll start by focusing on our full year results and then give a little color on the fourth quarter toward the end of my remarks. To be consistent with previous reporting, I’m excluding the impact of a $1.4 million unrealized non-cash gain applicable to FAS 133 accounting that compares to an unrealized loss of 5.4 million in fiscal 2010.

Net income totaled 113.5 million or $3.20 per common unit for fiscal 2011 compared to net income of $120.7 million or $3.41 per common unit in the prior year. Fiscal 2011 results included a $2 million charge for severance costs associated with the realignment efforts during our second quarter as well as a non-cash charge of $2.9 million within depreciation expense to accelerate depreciation on assets taken out of service. By comparison, net income and EBITDA for fiscal 2010 included a loss on debt extinguishment of $9.5 million associated with the refinancing of our senior notes, a $2.8 million non-cash pension settlement charge, as well as a non-cash charge of 1.8 million within depreciation expense. Therefore, excluding the effects of these items from both years, adjusted EBITDA was $179.4 million for fiscal 2011, a decrease of $13 million of 6.8% compared to adjusted EBITDA of $192.4 million in the prior year.

Retail propane gallons sold in fiscal 2011 of 298.8 million gallons decreased 19 million gallons or 6% compared to 317.9 million gallons in the prior year. Sales of fuel oil and other refined fuels decreased 6 million gallons or 13.9% to 37.2 million gallons compared to 43.2 million gallons in the prior year.

As Mike mentioned, the ongoing weakness in the economy coupled with high commodity prices continued to negatively affect the buying habits of both residential consumers as well as commercial industrial accounts. To a much lesser extent, a slow start to the heating season with significantly lower than normal temperatures during the first six weeks of the fiscal year also contributed to the volume decline. Overall, average temperatures for the year were 1% warmer than normal, which compares to 4% warmer than normal in the prior year.

In the commodities markets, base commodity prices trended higher throughout much of the fiscal year, and in particular propane prices continue to rise even as crude oil prices abated a bit toward the end of the summer. Spot propane was trading about $1.51 per gallon basis (inaudible) at the end of September 2011 which compares to $1.20 a year earlier. For the year, average posted prices for propane and fuel oil increased 26.7% and 36.6% respectively compared to the prior year.

Total gross margins of $510.4 million for fiscal 2011 were 33.2 million or 6.1% lower than the prior year of $543.6 million. Lower margins were attributable to the lower volumes sold and to a lesser extent lower unit margins.

Combined operating and G&A expenses of $331 million were 20.2 million or 5.8% lower than the prior year of $351.2 million. Savings were attributable to lower variable compensation from the lower earnings, lower payroll and medical costs as a result of lower headcount, and lower insurance costs partially offset by higher fuel costs to operate our fleet.

Capital spending for the year totaled $22.3 million which included 10.1 million of maintenance capital.

Turning to our balance sheet, we ended the year with approximately 150 million of cash on hand and a leverage ratio of just 1.98x. As has been the case since April 2006, we funded all working capital needs along with our capital expenditures from internal cash without the need to borrow on our revolver.

Looking specifically at the fourth quarter results, consistent with the seasonal nature of the business, we typically report losses for our fiscal fourth quarter. As I discuss the results for the quarter, I’m excluding the impact of an $800,000 unrealized non-cash loss from our current quarter results applicable to FAS 133 accounting compared to a $500,000 unrealized non-cash loss in the prior year quarter, as well as the $2.8 million non-cash pension settlement charge that I referenced in the full-year comparison, which we reported in the prior year fourth quarter.

We reported a net loss of $20.9 million or $0.59 per common unit for the fourth quarter of fiscal 2011 compared to a net loss of 21.5 million or $0.61 per common unit in the prior year quarter. Adjusted EBITDA for the fiscal 2011 fourth quarter improved by $2 million to a loss of $4.6 million compared to a loss of 6.6 million in the prior year quarter.

Retail propane gallons sold in the fiscal 2011 fourth quarter amounted to 44 million gallons, a decrease of 3.4 million gallons compared to 47.4 million gallons in the prior year fourth quarter. Sales of fuel oil and other refined fuels decreased 1.1 million gallons to 4 million gallons in the fiscal 2011 fourth quarter. Total gross margins of $75.2 million for the fiscal 2011 fourth quarter were slightly below the prior year fourth quarter of $75.6 million.

Combined operating and G&A expenses decreased $2.5 million or 3% to $79.7 million compared to the prior year fourth quarter due to lower variable compensation and continued savings in payroll, benefits and field-related expenses.

Overall, we ended the year with two consecutive quarters of improvement and year-over-year adjusted EBITDA, and we believe we are well positioned to effectively operate through the continued challenges facing the industry.

Back to you, Mike.

Mike Dunn

Thanks, Mike. As announced in our October 20 press release, our Board supervisors declared our quarterly distribution of $0.8525 per common unit, which equates to an annualized rate of $3.41 per common unit. Quarterly distribution was paid this past Tuesday, November 8 to our unitholders of record as of November 1.

Looking ahead, with the absence of any real growth in the economy, stubbornly high unemployment and persistent high commodity prices, we fully expect the pressure on volumes and margins to continue throughout fiscal 2012. In particular, as these macro factors persists, consumers are becoming more and more mindful of their overall household budgets, thus driving the potential for added energy conservation. Nonetheless, with the steps we’ve taken this past spring along with our proven track record of effectively managing our cost structure, we believe that we’ll be well positioned to navigate through the challenging environment while at the same time being opportunistic in the marketplace.

Additionally, our field personnel will remain focused on providing exceptional service to our existing customer base, developing programs to help our customers manage their energy bills, and continuing to execute on our customer growth initiatives. Finally, as Mike stated earlier, our balance sheet and distribution coverage remains strong. With nearly $150 million in cash and a low leverage profile, we are in a good position to respond to opportunities that may arise and to provide our valued unitholders with the added comfort relative to stability of their distributions.

Lastly, I would again like to acknowledge the continued efforts of our employees in making fiscal 2011 a success in the face of some significant headwinds. We have a dedicated workforce focused on driving efficiencies while at the same time delivering quality customer service. And as always, we appreciate your support and attention this morning and would now like to open the call up for questions.

Cathy, can you help us with that?

Question and Answer Session

Operator

Ladies and gentlemen, if you wish to ask a question, please press star then one on your touchtone phone. You will hear a tone indicating you’ve been placed in the queue. You may remove yourself from the queue at any time by pressing the pound key. If you are using a speakerphone, please pick up the handset before dialing the number. Once again, if you have a question, press star, one.

The first question comes from Darren Horowitz. Go ahead, please.

Darren Horowitz – Raymond James

Good morning, guys.

Mike Dunn

Morning, Darren.

Mike Stivala

Hey, Darren.

Darren Horowitz – Raymond James

Mike, a couple questions for you. First, wanted to go back to something you just mentioned in your closing remarks, and I recognize it’s difficult to do; but as you guys are looking at the forward fiscal year, is there any way at this point to quantify what you think the magnitude of economic pressures and customer conservation is going to have on next year’s volumes or margins?

Mike Dunn

No, you’re right – it’s difficult, I think, at this stage, but I would probably put the volume decline potentially in the 3 to 7% range. It’s pretty broad – it’s a guess, obviously, but we manage our receivables pretty well, and that’s the part that’s pretty tough to put a number on.

Darren Horowitz – Raymond James

Sure. As you guys are starting to see the benefit on the cost side regarding a lot of those realignment and efficiency initiatives that you enacted a couple quarters ago, how are you thinking that’s going to progress into the next fiscal year? Is there any way to quantify how much more incremental benefit you expect on the OPEX line?

Mike Dunn

I mean, there will be, I think, as we continue to drive the efficiencies. What we said last quarter—the principal purpose for changing that was to remove a layer of management, but not necessarily the people that were part of that layer; and we’ve created a broader geography and put it in the hands of five of our regional type people. It’s the benefits of having them manage a broader geography that should create some synergies.

Darren Horowitz – Raymond James

Right. And then last question for me, and I’m sure that you expected to get this, but I’m just curious as to your thoughts on how you think the competitive landscape changes with AmeriGas’ acquisition of Heritage. Is your focus still on more of the smaller fragmented mom-and-pops, or now are you thinking possibly something larger where you could gain greater economies of scale and cost efficiencies?

Mike Dunn

You know, we’re looking—we always obviously look at everything. I think from a competitive perspective, I don’t really see too, too much changing. After all, they were already in the marketplaces. I think it will be interesting to watch the integration process, and I think based on the success of that, we’ll determine the real value that they created for their unitholders. But as far as we’re concerned, we continue to look at the mom-and-pops, and obviously it’s an encouraging first step to see two of the majors get together, and one would think that that might prompt another one.

Darren Horowitz – Raymond James

I appreciate it, guys. Thanks.

Mike Dunn

You’re welcome.

Operator

Next question comes from John Tiesland. Go ahead, please.

Mike Dunn

Good morning, John.

John Tiesland

Hi guys, good morning. Can you talk about what you expect or how you’re positioned to deal with the regulations that are requiring low sulfur heating oil that will be phased in over the next several years in the northeast? Does that mean that there’s a—are you seeing customers switch propane, or are they switching to something else? And how do you deal with that as a distributor?

Mike Dunn

Well, we’ve been dealing with low sulfur heating oil for a couple years now and we haven’t seen that as an issue. I mean, from a customer attrition perspective, obviously most of your heating oil activities in the northeast, you do have people switching to natural gas wherever it’s a possibility, and we have converted some people from heating oil to propane. However, there’s a cost attached to that for the customer, and in today’s economy their decision-making process has been slowed somewhat.

John Tiesland

Is that a common trend to go from the heating oil to the propane as this regulation comes in? Do you think that accelerates over the next couple years?

Mike Dunn

It’s going to be propane or natural gas. I mean, the reality is, John – and you know it, and I think we’ve talked about it – heating oil is probably the least environmentally friendly energy source. So over time – and I can’t tell you what that time will be – but when you look at the other heating oil companies and you see their volume decline, ours is not a surprise, keeping in mind, however, that the biggest percentage of our volume decline is in the refined fuels area, not the heating oil area.

John Tiesland

Got it. And then lastly if you look at year-to-date, or I guess quarter-to-date or October’s data, that is the weekly data for the EIA, looking at wholesale and retail propane numbers, it looks like margins are up year-over-year nicely. Is this a trend that you’ve seen, and do you expect to try and hold that line at all over the next—

Mike Dunn

Well, I think you’ve got to look at it in two ways, John. Your margins on the dollar cents per gallon basis are flat to higher, slightly higher; but if you look at it as a percentage of growth margin percent, it’s significantly lower. So even though margins are higher, the price structure is not keeping up with the cost base.

John Tiesland

Okay.

Mike Dunn

You see, one of the things – I’ll throw this out there – one of the things I think the propane industry is fighting as well is the correlation in price of propane to natural gas as long as propane continues to resemble a relationship to crude oil. Okay? So on a BTU basis, it’s a head-scratcher. At some point in time, I certainly would hope with all the production particularly coming in on the northeast with the Marcellus Shale that propane wholesale prices will become a little bit more representative of natural gas, which is your real competition.

John Tiesland

Understood. All right. Thanks, guys.

Mike Dunn

You’re welcome.

Operator

There are no further questions at this time.

Mike Dunn

Okay. Again, everyone have a good holiday and we look forward to catching back up with you again next year. Thank you.

Operator

Ladies and gentlemen, the conference will be available for replay after 11:00 today through 11:59 pm November 11, 2011. You may access the AT&T Teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 221812. Again, that number is 1-800-475-6701 using access code 221812.

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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