Suburban Propane's CEO Discusses F3Q12 Results - Earnings Call Transcript

Aug. 2.12 | About: Suburban Propane (SPH)

Suburban Propane Partners LP (NYSE:SPH)

F3Q12 Earnings Conference Call

August 02, 2012 10:00 AM ET


A. Davin D’Ambrosio – Vice President and Treasurer

Michael J. Dunn, Jr. – President and CEO

Michael A. Stivala – Chief Financial Officer


Gabriel Moreen – Bank of America Merrill Lynch

Ron Londe - Wells Fargo Securities


Ladies and gentlemen, thank you for holding. Welcome to the Third Quarter 2012 Results Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions)

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 operations.

These forward-looking statements involve certain risks and uncertainties; 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. As a reminder, this conference is being recorded.

I’d now like to turn the conference over to our host, Mr. Davin D'Ambrosio. Please go ahead, sir.

Davin D'Ambrosio

Thank you, and good morning. Welcome to Suburban’s fiscal 2012 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. The purpose of today’s call is to review our third quarter financial results, along with our current outlook for the business, including an update on the Inergy Propane acquisition. 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 the Partnership’s SEC filings, including its Form 10-K for the fiscal year ended September 24, 2011, and its Form 10-Q for the period ended June 23, 2012, 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 the discussion why we believe this information to be useful in our Form 8-K furnished to the SEC this morning. Form 8-K can be accessed through a link on our website at

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

Michael J. Dunn, Jr.

Thanks, Davin, and thanks to everyone for joining us this morning. Before I turn the call over to Mike Stivala to take you through our third quarter results, let me start with a few comments on our announcement this morning regarding the closing of the acquisition of Inergy’s Retail Propane assets and operations. This transaction was first announced on April the 26th, and we have now had a little over three months to refine our integration and communication plans. We are extremely pleased to welcome the more than 2,000 Inergy employees and over 600,000 customers into Suburban. We are excited about the benefits of this combination which effectively doubles the size of Suburban and enhances our growth prospects and cash flow profile as we seek to achieve $50 million in synergies once fully integrated.

Over the past several years, Suburban has primarily focused internally to generate increased cash flow and reduce leverage by streamlining our cost structure, improving our customer service and becoming more efficient operators. This approach has served us well. We all three have built a reputation as solid operators in a well-established industry.

As with any acquisition of this size there will be no shorted of challenges as we work together combining operations and cultures. However, as a result of our investments over the years in people and technology, we are well positioned to now begin the execution of our integration plans.

In a moment, I will provide some additional comments on the completion of this transforming transaction. However, at this point I’d like to turn the call over to Mike Stivala, to discuss our third quarter results and some of the financing related to the acquisition. Mike?

Michael A. Stivala

Thanks, Mike. Good morning everyone. As reported this morning the lingering warm weather patterns continue to have a meaningful impact on our volumes and earnings in the third quarter. In fact, April 2012 was reported as the third warmest April on record. However, on a positive note, putting the more weather sensitive volumes and April aside, our earnings for the remainder of the quarter were slightly ahead of the prior year comparable period. As is typical for this time of the year, we generally generate a seasonal loss.

As we discuss our third quarter results to be consistent with previous reporting, I am excluding the impact of an $8.2 million unrealized non-cash gain applicable to FAS 133 accounting, compared to a non-unrealized non cash loss of $313,000 in the prior year third quarter. Additionally, during the third quarter of fiscal 2012, we had incurred acquisition related costs of approximately $6 million, which are also excluded from adjusted EBITDA.

Adjusted EBITDA for our fiscal 2012 third quarter totaled $3.5 million, a decrease of $6.8 million compared to a $10.3 million for the third quarter of fiscal 2011. Our seasonal net loss for the third quarter of fiscal 2012 excluding the acquisition related costs totaled $11.6 million or $0.33 per common unit. Compared to a net loss of $6.5 million or $0.18 per common unit in the prior year third quarter.

Retail Propane gallons sold in the third quarter of fiscal 2012 decreased 5.6 million gallons or 10.3% to 49 million gallons, from 54.6 million gallons in the prior year’s third quarter. Sales of fuel oil and other refined fuels decreased 1.3 million gallons or 23.2% to 4.3 million gallons compared to 5.6 million gallons in the prior year.

Although weather during the third quarter has considerably less influence on our volumes than it does during the heating season, volumes in the fiscal 2012 third quarter were negatively affected by the continued warm weather pattern experienced throughout this past heating season, and specifically in the month of April. For the quarter, heating degree days were 16% warmer than both normal and the prior year third quarter.

In the commodity markets, we’ve seen a decline in Wholesale Propane prices during the third quarter. Average posted prices for Propane and fuel oil for the third quarter of fiscal 2012 decrease 34.8% and 5% respectively compared to the prior year’s third quarter. And on a sequential basis, average posted Propane prices were 22.5% lower than the average prices in the second quarter of fiscal 2012.

Lower commodity price environment has benefited the unit margins to a degree. And margins and volumes could benefit from sustained lower wholesale prices in the coming months. Total gross margins of $82.6 million for the third quarter of fiscal 2012 were $9.1 million lower than the prior year third quarter of $91.7 million, primarily as a result of the lower volume sold.

Combined operating and G&A expenses of $79.1 million were $2.3 million lower than the prior year’s third quarter, primarily due to lower compensation attributable to the lower earnings, as well as continued savings in payroll and benefit related expenses and insurance costs.

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

Interest expense of $6.5 million for the third quarter of fiscal 2012 was approximately $400,000 lower than the prior year third quarter as a result of lower interest rates on our revolver from the amendment completed in January 2012.

Total capital spending for quarter was $5 million, which included $2.6 million of maintenance capital.

Turning to our balance sheet. Cash on hand at the end of the quarter was $115.8 million and we continue to fund all of our short term working capital requirements through internally generated cash, without the need to borrow on our revolver.

As of June 23, 2012 our leveraged profile remained low particularly in relation to our peers at 3.3 times debt to EBITDA or 2.2 times after considering the nearly $160 million of cash.

Now, let me recap some of the financing activities related to yesterday’s closing of the Inergy Propane acquisition. The total consideration of $1.8 billion was financed with an aggregate of $1billion of new Suburban senior notes, which were issued in two series with maturities in 2018 and 2021. We issued 613 million of new Suburban common units to Inergy or 14.2 million units in total. All but 142,000 of which will be distributed by Inergy to its unit holders based on a record date to be determined by Inergy. And finally we paid approximately $185 million in cash consideration to the Inergy note holders that tendered their bonds.

At closing, we borrowed $225 million under our 364 day term loan facility provided by our bank group, which together with $36.5 million received from Inergy at closing pursuant to the contribution agreement and approximately $41 million of cash on hand was used to fund the $185 million cash consideration for the Inergy note holders as well as to fund the consent see and all costs and expenses associated with the bond exchange and the transaction related cost and expenses. Borrowings under the 364 day facility are expected to be short term and will be repaid with equity proceeds in the future. Timing will be subject to market conditions.

At this time I’d like to take the opportunity to acknowledge the support we received by our bank group in not only lining up this short term financing, but also for their commitments to consent to this transaction and to approve certain other amendments to our credit agreements to accommodate the larger business. We thank you for that. This included expanded the capacity under our revolving credit facility from $250 million to $400 million to enhance our liquidity position. Therefore on a pro forma basis, we will have an aggregate of $1.25 billion of senior notes outstanding that mature between 2018 and 2021. We’ll have $100 million outstanding on our revolver and the $225 million borrowed on the 364 day facility. Additionally, our cash position remains strong even after funding the portion of transaction related cost from cash on hand and we will have incremental capacity under our amended credit agreement of approximately $250 million after considering outstanding letters of credit.

Finally, to comment a bit on our strategy relative to our balance sheet metrics. Obviously the strength of our balance sheet that played a big part in putting us in the position to act on this strategic opportunity. With the negative effect on the EBITDA of both companies from the record warm temperatures during this year’s heating season, initially our leverage will look high on a pro forma basis. However, we will continue to remain focused on our balance sheet as we have in the past through debt reduction initiatives, achievement of operating synergies and a return to more normal winter weather.

Back to you, Mike.

Michael J. Dunn, Jr.

Thanks, Mike. As announced in our July 18 press release, we were pleased to declare our quarterly distribution of the $0.8525 per common unit which equates to an annualized rate of $3.41 per common unit. This quarterly distribution will be paid on August the 7th to our unit holders of record as of July 31st. As a reminder, the connection with the closing of the Inergy Propane acquisition, our board of supervisors previously approved an increase in our annualized distribution rate to $3.50 per common unit which represents an increase of $0.09 per common unit or 2.6% compared to our current annualized distribution rate. This distribution at this increased rate will be effective for the quarterly distribution paid in respect of the first quarter of fiscal 2013 ending December 29 2012.

With the closing of the transaction behind us, we can focus our attention on executing our integration plans and begin combining the best aspects of both companies to achieve a common goal of provide exceptional customer service and delivering sustainable profitable growth to all of our stakeholders. In fact, we can already say that we’re well underway with certain key accomplishments such as all Inergy employees have been enrolled in our benefit plans and will be on Suburban’s payroll with the first cycle. Our new regional structure is set and key operational leadership positions are filled and identified. Customer welcome letters are drafted and are ready to be mailed and we have bridged the essential operating and financial systems as well as internet websites just to name a few.

Overall, our integration plans are expected to be fully implemented over the next two to three years and as I stated earlier we expect to realize approximately $50 million in synergy once fully combined.

Again, I would like to welcome the employees of Inergy to the Suburban family and look forward to accomplishing great things for our customers, our unit holders and all of our stakeholders. Additionally, I would like to thank all of the Suburban employees, old and new, who have worked so tirelessly over the past few months to prepare for this historic day.

As always, we appreciate your support and attention this morning and we’d now like to open the call up for questions. Lola, can you help us?

Question-and-Answer Session


(Operator instructions). And first we’ll go to the line of Gabe Moreen, Bank of America Merrill Lynch. Please go ahead.

Gabriel Moreen – Bank of America Merrill Lynch

Morning everyone. Congrats on closing the transaction. Just, Mike you had said you’re comfortable with that $50 million number. Still I was just wondering just for our purposes in terms of trying to model that out. Will that be – if you think that will be realized evenly over the next three years or is that going to be front or back end loaded? Just curious if there is any comment color on that.

Michael J. Dunn, Jr.

Probably more back end loaded. However, we’ll start realizing synergies with next year’s fiscal year.

Gabriel Moreen – Bank of America Merrill Lynch

Got it. And then on the wholesale propane pricing environment, I know you had mentioned the potential benefit to margins going forward. Just curious what you’re seeing out there from competitors in terms of their pricing strategies, what you’re seeing real time. Do you think they’ll do going forward? Then also maybe related question, given the decline in wholesale propane pricing do you think that will allow you to maybe be more aggressive in terms of volumes and new business given how much more benign that pricing environment has gotten?

Michael J. Dunn, Jr.

Well, lower prices don’t necessarily mean you’re going to improve your margins. So the answer is here aggressive, nature has to keep margins in mind. As far as a little bit of opportunity with respect to margins today, yeah we realize some as the rest of the industry. But the industry is extremely competitive and obviously very, very fragmented and with this past winter people are still licking their wounds and looking to deliver gallon. So I’m not expecting any significant or material upside as a result of change in prices and you also have to keep in mind too Gabe that natural gas is a potential competitor as more of it is found.

Gabriel Moreen – Bank of America Merrill Lynch

Got it. Okay, thanks. Good luck guys.


And next we’ll go the line of Ron Londe, Wells Fargo Securities.

Ron Londe - Wells Fargo Securities

Thanks. Congratulations on the acquisition guys. Question here again on the potential number of blends that you have with energies service locations. Can you give us a feel for how many locations that you have in total and how many of those locations you think might be blended together to help attain that $50 million cost savings?

Michael J. Dunn, Jr.

The $50 million first of all a significant part of it does come from the field, but a lot of it will also come from the move from a decentralized environment to a more centralized environment. But as far as blends are concerned, we have an excess of 100 and it will probably be a two or a three step process. It’s going to take time because we want to do it right. We want to be fair to everyone. But you’ll obviously take care of the obvious blends and then we’ll begin to expand the geography as we’ve done with Suburban and then we’ll address the non-shared environment which is 11 states as we sit today with respect to the process. So as I said it’s a two to three year process. We’re very confident that $50 million in synergies is achievable, but it comes in multiple directions, not just from blends.

Ron Londe - Wells Fargo Securities

Okay. Also you mentioned the potential for using equity to help I assume reduce some of the debt. Can you give us an idea of size and timing of that?

Michael J. Dunn, Jr.

Well, it’s going to be market driven. As far as size is concerned it’s variable. You can look at the metrics that we’re living with today under a normal weather scenario, what Suburban’s star metrics are to come up with an idea of a number and as far as timing is concerned it’s truly market driven.

Ron Londe - Wells Fargo Securities

Okay and one of – I’m sorry, go ahead?

Michael J. Dunn, Jr.

Go ahead.

Ron Londe - Wells Fargo Securities

One other question. From a standpoint of mix looking forward, residential, commercial egg, where do you expect those numbers to fall out given the combination of the two companies?

Michael J. Dunn, Jr.

We will increase our residential percentage by 5%.

Ron Londe - Wells Fargo Securities

To what number?

Michael J. Dunn, Jr.

That will be a little over 55%.

Ron Londe - Wells Fargo Securities

Okay and commercial would be the rest?

Michael J. Dunn, Jr.

Commercial and agricultural if you want to call it that, yes. It would be a lion share of the rest.

Ron Londe - Wells Fargo Securities

There’s not going to be much egg this year, is there?

Michael J. Dunn, Jr.

Not this year, no.

Ron Londe - Wells Fargo Securities

Okay. That’s all I have. Thank you.


(Operator Instructions). And we have no further questions in queue.

Michael J. Dunn, Jr.

Well again thanks everyone and thank you Lola for helping us with the call today. Look forward to the next call.


Ladies and gentlemen, that does conclude your conference for today. Thanks you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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