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Edited Transcript of SPH earnings conference call or presentation 14-Nov-19 2:00pm GMT

Q4 2019 Suburban Propane Partners LP Earnings Call

WHIPPANY Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Suburban Propane Partners LP earnings conference call or presentation Thursday, November 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* A. Davin D'Ambrosio

Suburban Propane Partners, L.P. - VP & Treasurer

* Michael A. Kuglin

Suburban Propane Partners, L.P. - CFO & CAO

* Michael A. Stivala

Suburban Propane Partners, L.P. - President, CEO & Supervisor

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Conference Call Participants

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* Charles W Barber

JP Morgan Chase & Co, Research Division - Analyst

* Sharon Lui

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Suburban Propane's Full Year and Fourth Quarter Fiscal 2019 Financial Results. (Operator Instructions) As a reminder, today's call is being recorded.

And ladies and gentlemen, 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. 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.

Now with that being said, I'll turn the call now over to Mr. Davin D'Ambrosio, Vice President and Treasurer. Please go ahead, sir.

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A. Davin D'Ambrosio, Suburban Propane Partners, L.P. - VP & Treasurer [2]

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Thank you, John. Good morning, everyone. Thank you for joining us this morning for our fourth quarter and fiscal 2019 full year earnings conference call. Joining me this morning are Mike Stivala, our President and Chief Executive Officer; Mike Kuglin, Chief Financial Officer and Chief Accounting Officer; and Steve Boyd, our Chief Operating Officer.

This morning, we will review our fourth quarter and fiscal 2019 full year 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. Our annual report on Form 10-K for the fiscal year ended September 28, 2019, which contains additional disclosure regarding forward-looking statements and risk factors, will be filed on or about November 27. Once filed, copies may be obtained on the investor overview page of the partnership's website at suburbanpropane.com or by visiting the partnership's filings with 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 on the Investor Relations section of our website.

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

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Michael A. Stivala, Suburban Propane Partners, L.P. - President, CEO & Supervisor [3]

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Thanks, Davin, and thank you all for joining us this morning. We ended fiscal 2019 with another solid quarter, reporting an improvement in adjusted EBITDA of $1.4 million. In fact, we are pleased to say that for 3 out of the 4 quarters in fiscal 2019, we reported earnings that were higher than the prior year. For the full year, adjusted EBITDA of $275 million was $8 million or 2.8% lower than the prior year, primarily from a very erratic weather pattern during fiscal 2019, in which we experienced unseasonably warm temperatures during the most critical heating months of December and January as well as some challenges with hurricanes in the Southeast and wildfires in California.

Once again, our operations personnel did an outstanding job managing margins and expenses, providing exceptional service to the customers and communities we serve and in executing our growth and retention initiatives.

Like I do every year at this time, let me reflect a moment on some of our key accomplishments for this past fiscal year. We delivered nearly $50 million of excess cash flows and reported a strong distribution coverage ratio of 1.27x. We utilized the excess cash flows in a balanced way, investing more than $20 million in 3 high-quality propane businesses in attractive markets, while also focusing on our debt reduction initiatives by paying down $30 million of total debt. We improved our overall leverage ratio to 4.34x at the end of fiscal 2019. We also continued to foster several new market expansions in attractive growth markets that were previously just outside our delivery radius and identified a number of additional markets that can benefit from our expansion efforts. We made further investments in new technologies that will improve efficiencies, enhance the overall customer experience and provide enhanced revenue opportunities.

We also advanced a number of initiatives around recruiting and career development to attract and retain high-quality people as true ambassadors of our great brand. And with our increased focus on our time-honored Suburban Propane brand, we launched a brand refresh called the Three Pillars of the Suburban Propane Experience.

The first pillar, the Suburban Propane Commitment, focuses on our value proposition for our customers and the communities we serve and in particular, the reliability, dependability and flexibility in our commitment to excellence in customer safety and service.

The second pillar, the SuburbanCares pillar, highlights our devotion to the safety and career development of our people as well as our philanthropic activities at the local level and nationally with relationships like our partnership with the American Red Cross.

And the third pillar, the Go Green with Suburban Propane pillar, underscores our commitment to promote the inherent clean burning qualities of propane as a versatile energy solution and our focus as a partnership towards supporting and building a sustainable future.

So all in all, this was another great year for Suburban Propane as we continue to make significant strides towards our stated goals of strengthening our balance sheet, advancing our strategic growth initiatives, investing in our people and positioning the partnership for long-term sustainability in an ever-changing energy environment.

A little later, I'll provide some closing remarks, however, at this point, I'll turn the call over to Mike Kuglin, who will discuss our full year and fourth quarter results in a little more detail. Mike?

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Michael A. Kuglin, Suburban Propane Partners, L.P. - CFO & CAO [4]

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Thanks, Mike, and good morning, everyone. I'll start by focusing on our full year results and give a little color on the fourth quarter towards the end of my remarks.

To be consistent with previous reporting, I'm excluding the impact of unrealized noncash mark-to-market adjustments on derivative instruments used in risk management activities, which resulted in an unrealized loss of $8 million in fiscal 2019 compared to an unrealized gain of $300,000 in the prior year. Additionally, fiscal 2018 included a loss of $4.8 million from the sale of certain assets and operations in a nonstrategic market of the propane segment. Excluding these items, net income for fiscal 2019 amounted to $76.6 million or $1.24 per common unit compared to $81 million or $1.32 per common unit in the prior year.

Adjusted EBITDA for fiscal 2019 amounted to $275 million compared to $283 million in the prior year. Retail propane gallons sold in fiscal 2019 were 426.7 million gallons, which was 3% lower than the prior year. While average temperatures across our service territories were 1% cooler than the prior year and 6% warmer than normal, the fiscal 2019 heating season presented a very erratic weather pattern. Cooler temperatures were concentrated in the early and latter parts of the heating season, which generally have less of an impact on customer demand in heating degree days, in the critical months, December and January. Average temperatures during the peak demand months of December and January were 4% and 10% warmer than the same months in the prior year.

Additionally, the weather pattern for April 2019 was considerably different from the unusually cold weather that we experienced in April 2018 as average temperatures for the month were 33% warmer year-over-year. This warmer weather pattern in fiscal 2019 negatively impacted customer demand for heating purposes. From a commodity perspective, wholesale propane prices trended lower throughout the year, reflecting higher U.S. inventory levels due to continued growth in production that outpaced demand. Overall, average propane prices, basis Mont Belvieu, decreased 32.8% compared to the prior year.

Total gross margins of $753.7 million for fiscal 2019 increased $2.2 million compared to the prior year, primarily due to solid margin management and a declining product cost environment, partially offset by lower propane volumes. With respect to expenses, combined operating and G&A expenses increased $10.2 million or 2.2% compared to the prior year, primarily due to higher payroll and benefit-related costs and higher vehicle repairs and maintenance costs, partially offset by lower bad debt expense. Net interest expense of $76.7 million for fiscal 2019 decreased $700,000 or 1% compared to the prior year, primarily due to lower average outstanding borrowings under our revolving credit facility during the year, partially offset by higher short-term benchmark interest rates. As Mike mentioned, we used excess cash flows to reduce total debt by $30.1 million in fiscal 2019.

Total capital spending for the year was $35 million, representing an increase of $2.1 million compared to the prior year. The increase reflects the purchase of properties to support our customer base growth initiatives, purchases of tanks and cylinders in support of new customer installations as well as investments in new technologies and equipment utilized by our field personnel. The capital spending and the 3 acquisitions that Mike mentioned in his opening remarks were funded with internally generated cash.

Turning to our fourth quarter results. Consistent with the seasonality of our business, we typically reported a net loss in the fourth quarter. With that being said, we reported a net loss of $51.1 million or $0.82 per common unit, which was essentially flat compared to the fourth quarter of fiscal 2018. Excluding the impact of unrealized noncash mark-to-market adjustments on our commodity hedges, which resulted in an $800,000 unrealized loss in the fourth quarter of fiscal 2019 compared to $1.7 million unrealized gain in the prior year, adjusted EBITDA for the fourth quarter of fiscal 2019 was a loss of $1.4 million, reflecting an improvement of $1.4 million compared to the fourth quarter of the prior year. Total gross margins increased $7.7 million or 7.3% due to strong unit margins. Combined operating and G&A expenses increased $6.2 million or 5.8%, primarily due to a higher level of general insurance expense.

Turning to our balance sheet. From a leverage perspective, the debt reduction during the fiscal year resulted in our consolidated leverage ratio improving to 4.34x at the end of the fiscal year. We remain well within our debt covenant requirements and continue to be focused on utilizing excess cash flows in a balanced fashion to strengthen the balance sheet and invest in strategic growth. We continue to make good progress on our stated goal to achieve a target leverage profile below 4x. From a liquidity position, we have ample borrowing capacity under our revolver to fund anticipated working capital needs for the upcoming heating season and to support our strategic growth initiatives.

With that, I'll turn it back to Mike.

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Michael A. Stivala, Suburban Propane Partners, L.P. - President, CEO & Supervisor [5]

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Thanks, Mike. As announced in our October 24 press release, our Board of Supervisors declared our quarterly distribution of $0.60 per common unit in respect to the fourth quarter of fiscal 2019. That equates to an annualized rate of $2.40 per common unit. The quarterly distribution was paid this past Tuesday, November 12 to our unitholders of record as of November 5.

So in closing, as I've stated, fiscal 2019 was another year in which we continued to advance our strategic growth activities and set ourselves apart within our industry. Our business is very well positioned both operationally and financially to continue to build on the successes for the next phase of growth for Suburban Propane and our valued unitholders.

We're very excited to start a new fiscal year and for the start of a new heating season. We have a number of exciting new technologies and initiatives to advance in fiscal 2020. And as always, we are keenly focused on delivering the most in total value to our customers and local communities.

Finally, I'm extremely proud of the more than 3,300 employees of Suburban Propane carrying out our commitment to outstanding service to the customers and communities we serve, executing on our customer base growth and retention initiatives and keeping safety as our highest priority at all times.

As always, we appreciate your support and attention this morning. I would now like to open the call up for questions, and John, if you wouldn't mind helping us.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And first from the line of Jeremy Tonet with JPMorgan.

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Charles W Barber, JP Morgan Chase & Co, Research Division - Analyst [2]

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This is Charlie on for Jeremy. As we kind of move into November, I was wondering if you could talk maybe a little bit about some of the activity you're seeing across your footprint as we kind of move closer towards the heart of heating season?

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Michael A. Stivala, Suburban Propane Partners, L.P. - President, CEO & Supervisor [3]

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Well, certainly, the first couple of weeks here in November, we've seen some significant weather come into good parts of the country. I think I saw -- if you looked at the map yesterday, it seemed as though there was more purple throughout the United States than anything else, which is always a good sign of very cold temperatures. But similar to last year, you just -- you don't know. This is a little early to start building expectations for what that means for the whole heating season. Certainly, it's creating a lot of good demand early on here, but we still have a lot of heating season to go. And from our perspective, we are extremely well prepared to meet the demand and -- as well as to be there for our customers in the most extreme circumstances that may or may not arise as the heat season progresses.

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Charles W Barber, JP Morgan Chase & Co, Research Division - Analyst [4]

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Okay. And then in your prepared remarks, you noted a couple of new opportunities that were outside of your radius. Can you talk a little bit more about that?

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Michael A. Stivala, Suburban Propane Partners, L.P. - President, CEO & Supervisor [5]

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Yes. We've done -- we talked about this for a couple of years now, we've had an initiative of new greenfield expansion activities where we look outside of our territory. We typically say that one of our locations can have a delivery radius of upwards of 50 to 75 miles from their location. But we have parts of the map in areas in the West Coast, in the Southeast, the Mid-Atlantic and virtually every territory that we have in the country is working on some form of market expansion activity. And really, what it means is if we're not -- if we don't have a significant presence because we're not physically located in a market that we believe is a good propane market that has demonstrated potential growth opportunities just for propane in general, and we're not strong or we're not physically present in that market, we go in and penetrate with some marketing. We build up a bit of a following in terms of customer base. And as we get to a certain critical mass, we start looking for property to house a location. And depending on how fast we can ramp up the customer base, that location can become a stand-alone location with a full staff or it could be a satellite of one of our other locations that are relatively close by. And so those are a lot cleaner and cheaper ways of expanding our reach without paying the multiples of an acquisition. Not to say that acquisitions aren't an additional way to grow, we did 3 good quality acquisitions. We're happy to say we just closed another one last week. And we have a couple more that we've been working on. So there's a good pipeline of good quality businesses that we can fold into our mix and welcome to the Suburban Propane family.

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Charles W Barber, JP Morgan Chase & Co, Research Division - Analyst [6]

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I guess, along those lines, as you look to target other opportunities, as we think about next year with leverage at 4.3, what are you looking to -- is that like a leverage target? And how do you -- I guess, how do you balance that with growth opportunities?

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Michael A. Stivala, Suburban Propane Partners, L.P. - President, CEO & Supervisor [7]

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Yes. Certainly, it's a great leverage target, particularly when you compare it to our peers in the propane industry. So we have full comfort in running our business at that level. As you know, we've been here for a long time running this business, and we generally have always had a balance-sheet-first mentality, meaning we run the business with a strong balance sheet. We're conservative in our nature. So we do have a stated target of getting below 4x on a leverage profile perspective, and we can achieve that through a balance of growing EBITDA and investing in reducing the balance sheet with excess cash. I think this year was a great example of that. We had $50 million, and we bought 3 businesses and spent $20 million of that excess cash funding those acquisitions, and we had $30 million of debt reduction. So I think that's a great balance. And -- but as far as living at 4.3, we're fully comfortable at that level. We're well within our covenant requirements. And as I said, as has been the case for many, many years, it puts Suburban Propane as the strongest balance sheet profile among our peers.

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Operator [8]

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(Operator Instructions) We'll go the line of Sharon Lui with Wells Fargo.

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Sharon Lui, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [9]

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I guess, historically, the expansion of like gas utilities in the grid has eroded some of the propane demand out there. I just wonder, has that outlook changed a bit given all the regulatory hurdles pipelines have faced, I guess, especially in the Northeast? Have you seen that impact demand for propane at all?

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Michael A. Stivala, Suburban Propane Partners, L.P. - President, CEO & Supervisor [10]

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Yes. I think, first of all, natural gas expansion has occurred for decades. And propane has always found a way to continue to maintain a good solid market share for the heating market because generally, expansion also represents population growth and expansion of communities outside of the main lines where natural gas will run anyway. So while natural gas expansion has always been a challenge or a risk, a potential risk for the industry, the industry has always done a good job of maintaining a good share. As far as now, I think you're absolutely right. I think we've -- you're starting to see a lot more pressure from environmentalists, particularly in the Northeast, which is helping the -- helping our situation by putting some pressure on natural gas expansion. And also, I think when I mentioned in our opening remarks, and we talked about it in our last call, and I think you even asked us a question in the last call about our Go Green initiative, one of the things that we're -- that is absolutely true is propane is one of the cleanest burning fossil fuels out there. So I think there's a tremendous opportunity for us and the industry to make sure that propane is better understood by educating legislators and consumers about the positive attributes that propane provides for those that are seeking a reduction of greenhouse gas emissions. And that's going to be -- one of our common themes going forward is to make sure that we're doing our part to promote and educate those that want to decarbonize the energy footprint because we believe that propane is an excellent source of energy that can contribute to a sustainable future. And if nothing else, it is an excellent transition to a future that has more renewable energy sources, perhaps, in the mix.

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Operator [11]

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And with no further questions in queue, I'll turn it back to the company for any closing comments.

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Michael A. Stivala, Suburban Propane Partners, L.P. - President, CEO & Supervisor [12]

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Well, great, John, I appreciate your help. I appreciate everybody's attention today. I wish everybody a happy holiday season. Stay warm, be safe, and we will look forward to speaking to you in the new year, sometime in early February as we finish up our first quarter results. So thank you all.

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Operator [13]

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Ladies and gentlemen, this conference is available for replay. It starts today at 12:00 p.m. Eastern and will last until tomorrow, November 15, at midnight. You may access the replay at any time by dialing (866) 207-1041 or (402) 970-0847. The access code is 4331782. That does conclude your conference for today. We thank you for your participation. You may now disconnect.