Suburban Propane Partners, L.P. (NYSE:SPH) Q1 2024 Earnings Call Transcript
Suburban Propane Partners, L.P. (NYSE:SPH) Q1 2024 Earnings Call Transcript February 8, 2024
Suburban Propane Partners, L.P. misses on earnings expectations. Reported EPS is $0.38 EPS, expectations were $0.63. Suburban Propane Partners, L.P. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to Suburban Propane Partners' first-quarter earnings conference call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Davin D'Ambrosio, Vice President and Treasurer. Please go ahead.
Davin D'Ambrosio: Thanks, Jason. Good morning, everyone. Thank you for joining us this morning for our fiscal 2024 first quarter earnings conference call. Joining me this morning are Mike Stivala, our President and Chief Executive Officer; Mike Kuglin, our Chief Financial Officer; and Steve Boyd, our Chief Operating Officer. This morning, we will review our first quarter financial results, along with our current outlook for the business. Once we conclude our prepared remarks, we will open the session to questions. Our 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. We have 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 our earnings press release, which can be viewed on our website at suburbanpropane.com. 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. Our annual report on Form 10-K for the fiscal year ended September 30, 2023, and Form 10-Q for the period ended December 30, 2023, which will be filed by the end of business today, contain additional disclosures regarding forward-looking statements and risk factors.
Copies 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 in the Investor Relations section of our website. At this point, I will turn the call over to Mike Stivala for some opening remarks. Mike?
Michael Stivala: Thanks, Davin, and good morning, and thank you all for joining us today. The first quarter of fiscal 2024 was dominated by widespread unseasonably warm weather, particularly during the month of December, which represents the most critical month of the quarter for heat-related demand. However, continued improvements in our customer base growth and retention initiatives, combined with active crop drying demand in the agricultural sector helped to mitigate the adverse impact of the warmer weather on volumes. Propane volumes for the first quarter of fiscal 2024 were down just 2% compared to the prior year first quarter, despite average heating degree days that were 9% warmer than normal and 6% warmer than the prior year, and with December reflecting 10% warmer weather.
Our field operations continue to do an excellent job managing selling prices in a lower, but at times volatile commodity price environment and are leveraging our efficient operating model to help manage expenses. For the quarter, adjusted EBITDA was $75.2 million, a decrease of $14.8 million from the prior year. In our renewable natural gas operations, we acquired at the beginning of the second quarter of last year. We have taken a number of steps to integrate the business and install the kind of operating disciplines, efficiencies, safety practices, and leadership that we have developed over the decades of operating our propane business to be recognized as best-in-class operators. To highlight some of our achievements since taking ownership of these assets.
We terminated the third-party operating contracts at both the Stanfield, Arizona and Columbus, Ohio facilities. These locations are now staffed with employees of our Suburban Renewable Energy subsidiary, including this, the facilities manager for the Stanfield location, who's now overseeing all of our RNG facilities. We exited the management services agreement that was supported by the seller Equilibrium Capital Group, two years ahead of schedule. We have increased the intake of local food and municipal waste to enhance the opportunity for improved tipping fee revenues and increased production of D5 RNG. We are now selling nutrient rich digestate from our Stanfield facility, which is a byproduct of RNG production, the material remaining after the anaerobic digestion of the biodegradable feedstock.
And we are selling that to local feedstock -- fertilizer producers to provide added revenue streams. We have made capital improvements to the production equipment to increase efficiencies and enhance production output of both D3 and D5 RNG. And we are beginning to develop relationships with additional dairy farms in the Stanfield area to potentially increase the manure intake and in turn, increase the amount of RNG output. And finally, we are continuing to execute on our capital improvement plans for the installation of RNG upgrade equipment at our Columbus, Ohio facility. And are advancing the engineering and construction of our anaerobic digester facility at Adirondack Farms in upstate New York. We expect construction for the Columbus facility to be completed in the early part of fiscal 2025, while we have experienced some delays in construction at Adirondack Farms due to permitting delays.
So while warm weather weighed on customer demand, we continue to manage the things we can control, and we remain steadfast in our commitment to our strategic growth objectives. There are still a lot of heating season ahead. Our operating personnel are very well prepared to handle any surge in demand from colder weather, such as some of the extreme cold conditions experienced in January 2024, as well as to adapt in the event of further softness in weather-related demand as the season progresses. In a moment, I'll come back for some closing remarks and provide added color on our strategic initiatives. However, at this point, I'll turn the call over to Mike Kuglin to discuss our first quarter results in more detail. Mike?
Michael Kuglin: Thanks, Mike, and good morning, everyone. To be consistent with previous reporting. As I discuss our first quarter results, I am excluding the impact of unrealized mark-to-market adjustments on our commodity hedges, which resulted in an unrealized loss of $10.8 million for the first quarter compared to an unrealized loss of $13.7 million in the prior year first quarter. Excluding these noncash items, as well as the non-cash equity and earnings of unconsolidated subsidiaries accounted for under the equity method and acquisition-related costs in the prior year, net income for the first quarter was $40.4 million or $0.63 per common unit prior to net income of $60.3 million or $0.95 per common unit in the prior year.
Adjusted EBITDA for the first quarter was $75.2 million compared to $90 million in the prior year. As Mike mentioned, our earnings for the quarter were impacted by lower heat-related demand resulting from a warmer weather pattern and continued inflationary pressures on our expenses. But benefited from favorable customer base activity, resulting from organic growth in some of our greenfield expansion efforts and contributions from the RNG production facilities that we acquired at the beginning of the prior year second quarter. Retail propane gallons sold 106.5 million gallons, were 2% lower than the prior year first quarter, primarily due to the impact of inconsistent and widespread unseasonably warm temperatures on heat-related demand, partially offset by higher agricultural volumes resulting from strong crop drying demand in early part of the quarter and from solid customer base management.
With respect to the weather. Average temperatures during the first quarter were 9% warmer than normal and 6% warmer than the prior year first quarter. Average temperatures for the month of December, which is the most critical month for heat-related demand in the first quarter, was 10% warmer than both normal and December 2022. From a commodity perspective, propane inventory levels in the US experienced a seasonal decline during the quarter but remained elevated relative to historical levels for this time of the year. At the end of the first quarter, US propane inventories were at 82.6 million barrels, which is 2% higher than December 2022 levels and 7% higher than the 5-year average for December. As a result of the increase in inventories and other factors, wholesale propane prices for the first quarter of $0.67 per gallon basis Mont Belvieu, decreased 17% compared to the prior year first quarter and 3% for the fourth quarter of fiscal 2023.
Since the end of the first quarter and with a burst of cold weather in January, propane prices have increased significantly from the average prices for the first quarter. With posted prices now in excess of $0.9 per gallon. Excluding the impact of the mark-to-market adjustments on our commodity hedges that I mentioned earlier, total gross margin of $223.6 million for the first quarter decreased $4.9 million or 2.2% compared to the prior year. Primarily due to lower volumes sold and lower propane unit margins offset to an extent by margin contribution from the RNG assets acquired at the end of December 2022. Excluding the impact of the unrealized mark-to-market adjustments, propane unit margins for the first quarter decreased $0.05 per gallon or 2.8% compared to the prior year.
Primarily due to the mix of volume with a higher concentration of commercial and industrial volumes that tend to be less weather sensitive than residential volumes. As well as from a less favorable benefit from commodity hedges that matured during the period compared to last year. Although total propane unit margins decreased due to volume mix. We reported an increase in unit margins in each of our customer segments compared to the prior year first quarter, due to effective selling price management during a period of declining commodity prices. With respect to expenses. Combined operating and G&A expenses of $147.6 million increased $9.8 million or 7.2% compared to the prior year. Primarily due to higher payroll and benefit related costs, higher costs in other areas due to persistent inflation, as well as the operating costs associated with our RNG production facilities.
The Interest expense of $18.2 million for the first quarter increased $2.2 million or 13.7%, due to a higher level of average outstanding borrowings under our revolving credit facility to fund the prior year RNG acquisition, coupled with higher benchmark interest rates for borrowings under the revolver. As well as the impact of the $80.6 million in green bonds assumed in the RNG acquisition. Total capital spending for the quarter of $11.2 million was marginally higher than the prior year first quarter. Primarily due to higher growth CapEx associated with the construction of the gas upgrading equipment at our Columbus, Ohio facility and ongoing construction of the RNG facility at Adirondack farms, partially offset by a lower level of spending on propane tanks and cylinders, as we leverage our inventory on hand.
Turning to our balance sheet. Given the seasonal nature of our business, we typically borrow under our revolving credit facility during the first quarter to help fund a portion of our seasonal working capital needs, an actual $54.8 million during the quarter. Our consolidated leverage ratio for the trailing 12-month period ended December 2023 was 4.72 times. Although the leverage metric has been elevated relative to our historical levels following the RNG acquisition, we remain well within our debt covenant requirement of 5.75 times. As we previously mentioned, factoring in the projected run rate EBITDA contributions from the RNG facilities and a more normalized weather pattern, the pro forma consolidated leverage ratio approaches 4 times. Our working capital needs typically peak towards the end of the heating season, late February, early March timeframe, after which we expect to generate excess cash flows.
We will continue to remain focused on utilizing excess cash flows to strengthen the balance sheet. And as opportunities arise, to fund strategic growth, including growth capital for our RNG projects. We have more than ample borrowing capacity under our revolver to fund our remaining working capital needs for the heating season and as well as to support our capital expansion plans and ongoing strategic growth initiatives. Back to you Mike.
Michael Stivala: Thanks, Mike. As announced on January 25, our Board of Supervisors declared our quarterly distribution of $0.325 per common unit. In respect of our first quarter of fiscal 2024, that equates to an annualized rate of $1.30 per common unit. Our quarterly distribution will be paid on February 13 to our unitholders of record as of February 6. Our distribution coverage continues to remain healthy at 2.03 times for the trailing 12-month period ended December 2023. Looking ahead to the rest of fiscal 2024, as I stated earlier, there's still a significant amount of the heating season ahead. And we are well positioned both operationally and financially to adapt as demand dictates. In fact, we experienced a blast of cold weather across our operating footprint during the last two weeks of January, driving heat-related demand and solid volume performance for the month.
In our RNG operations, with the investments we have made in Stanfield to improve efficiencies within the manure handling and processing activities, we are starting to see increasing production levels. While overall revenues have been influenced by lower benchmark natural gas prices and recent declines in California LCFS values. In addition, we are ramping up our internal resources to support the growth of our RNG platform and focusing on developing long-term offtake contracts in the voluntary RNG market, particularly for when Columbus and Adirondack farms facilities begin producing RNG. As we have stated in previous quarters, our long-term strategic growth plan is to continue to foster the growth of our core propane business while making strategic investments in lower carbon renewable energy alternatives.
We are committed to positioning Suburban Propane for long-term growth and sustainability, enhancing the career development opportunities for our valued employees and creating long-term value for all of our key and stakeholders. The foundation of our ongoing success continues to be rooted in our more than 3,200 dedicated employees at Suburban Propane and their hard work and unwavering focus on the safety and comfort of our customers and the communities we serve. I want to take a moment to thank them all for their efforts. Especially in some of the challenging conditions they have faced in the latter part of January. And as always, we appreciate your support and attention today and would now like to open the call up for questions. And Jason, if you could help us with that.
Operator: [Operator Instructions]. Our first question comes from Gabe Moreen from Mizuho.
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