Earnings Call: Q2 2019

May 9, 2019

And gentlemen, thank you for standing by. Welcome to the Suburban Propane Partners LP Fiscal 2019 Second Quarter 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. As a reminder, this conference is being recorded. 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. I would now like to turn the conference over to Devin D'Ambrosio. Please go ahead. Thank you, Stacy, and good morning, everyone. Thank you for joining us this morning for our fiscal 2019 Q2 earnings conference call. Joining me this morning are Mike Stivala, President and Chief Executive Officer Mike Kuglin, our Chief Financial Officer and Chief Accounting Officer and Steve Boyd, our Chief Operating Officer. This morning, we will review our Q2 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 ks for the fiscal year ended September 29, 2018 and our Form 10 Q the period ended March 30, 2019, which will be filed by the end of business today, both 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 ks which was furnished to the SEC this morning. Form 8 ks will be available through a link in the Investor Relations section of our website at suburbanpropane.com. At this point, I will turn the call over to Mike Stivala for some opening remarks. Mike? Thanks, Davin. Good morning. Thank you all for joining us today. Despite a slow start to weather driven customer demand in the 2nd quarter, resulting from the warmer average temperatures that started in December and carried through the better part of January in the vast majority of our service territories, are very pleased to report another solid quarter with an improvement in adjusted EBITDA of nearly $1,000,000 compared to the prior year Q2. For the month of January 2019, average temperatures were 10% warmer than both normal and January of the prior year. However, as cooler temperatures arrived in February March in the majority of our service territories, customer demand responded. While there were some significant swings in average temperatures, on average heating degree days for those 2 months were near or above normal. Therefore, when you look at the fiscal 2019 heating season as a whole compared to the prior year, the weather pattern was much more erratic with heating degree days concentrated more in the shoulder months, primarily October, February and the first half of March. 1st fiscal 2018 in which heating degree days were more concentrated in December January and picked up again in late March through much of April. All that being said, our flexible business model allows us to be nimble and effectively adapt to such demand variability. Contributing to the improvement in adjusted EBITDA, our operations personnel did an outstanding job with manpower planning, margin and expense management and ensuring the highest quality service to our customers and the communities we serve. With this solid performance we continue to generate excess cash flow which we use to reduce outstanding borrowings under our revolver by nearly $40,000,000 from the levels at the end of December, while also funding the acquisition of a well run propane business in our West Coast operating territory during the quarter. So we continue to remain focused on our goal of reducing debt to a level closer to our target metric of less than 4 times, while also executing on our strategic growth initiatives and positioning our business for long term success. In a moment, I'll come back for some closing remarks. However, at this point, I'd like to turn the call over to Mike Kuglin to discuss the Q2 results in more detail. Mike? Thanks, Mike, and good morning, everyone. To be consistent with previous reporting, as I discuss our Q2 results, I'm excluding the impact of unrealized non cash mark to market adjustments on derivative instruments used in risk management activities, which resulted in unrealized gains of $8,500,000 in the Q2 of fiscal 2019 compared to an unrealized loss of $3,700,000 in the prior year. Excluding these items, net income for the Q2 of fiscal 2019 increased to $112,500,000 or $1.82 per common unit compared to net income of $110,500,000 or $1.80 per common unit in the prior year. Adjusted EBITDA for the Q2 of fiscal 2019 amounted to $163,000,000 an improvement of approximately $1,000,000 compared to the prior year. Retail propane gallons sold in the Q2 of fiscal 2019 were 165,200,000 gallons, which was 2.6% lower than the prior year. Overall, average temperatures across all of our service territories for the 2nd quarter as measured by heating degree days, were 3% warmer than normal and 3% cooler than the prior year. However, as Mike indicated, despite these averages, the fiscal 2019 weather pattern was much more erratic than the prior year. As such, volumes were negatively impacted by the lack of momentum for customer demand heading into the 2nd quarter, resulting from the warm December and significantly warmer In the commodity markets, wholesale propane prices were fairly stable. It stayed in the range of $0.60 to $0.70 per gallon and spacesmile Bellevue throughout the quarter. Overall, average wholesale prices for the Q2 were $0.67 per gallon, which was 21% lower than the prior year 2nd quarter and 16% lower than the Q1 of fiscal 2019. Total gross margins of $294,300,000 for the Q2 of fiscal 2019 increased $1,000,000 compared to the prior year, primarily due to slightly higher propane unit margins, partially offset by lower volumes sold. Excluding the impact of the non cash mark to market adjustments that I mentioned earlier, propane unit margins increased approximately $0.04 per gallon or 2.4% compared to the prior year. With respect to expenses, combined operating and G and A expenses were essentially flat to the prior year. A decrease in insurance costs from favorable trends in claims data and lower bad debt expense was offset by higher variable compensation and an increase in spending on marketing and advertising initiatives. Net interest expense of $19,600,000 for the Q2 of fiscal 2019 increased marginally compared to the prior year as the impact of higher benchmark interest rates under the revolving credit facility was substantially offset by a lower average level of outstanding borrowings. In fact, compared to the level of borrowings at the end of last year's Q2, total debt at the end of this year's Q2 was down by more than $30,000,000 Total capital spending for the quarter amounted to $8,800,000 compared to $9,600,000 in the prior year. In addition, as Mike indicated, we completed the acquisition of a propane business strategically located in our West Coast operating territory for a total purchase price of $12,000,000 of which $10,600,000 was paid during the quarter. Looking at the year to date performance, adjusted EBITDA for the first half of fiscal twenty nineteen increased $1,000,000 compared to the prior year. The earnings were driven by solid volume performance despite the challenges from an erratic weather pattern, higher unit margins resulted from effective selling price management and maintaining tight control over expenses. And turning to our balance sheet, during the Q2, we funded our working capital needs, capital expenditures, the acquisition of a propane business and the debt repayment of $39,000,000 from operating cash flow. We have now moved through our historically high period of seasonal working capital needs and have ample liquidity to fund our strategic growth initiatives. The combination of the increase in earnings and debt repayment during the quarter resulted in our consolidated leverage ratio improving to 4.32 times at the end of Q2. We are well within our debt covenant requirements and remain focused on improving our leverage metric to less than 4 times. Back to you Mike. Thanks Mike. As announced in our April 25 press release, our Board of Supervisors declared our quarterly distribution of $0.60 per common unit in respect of our Q2 2019 and that equates to an annualized rate of $2.40 per common unit. The quarterly distribution will be paid on May 14 to our unitholders of record as of May 7. Just a few final remarks. While not an ideal weather pattern given the warmer weather during the critical months of December January, when cooler weather conditions did arrive, customer demand responded and our operations personnel were well prepared to meet that demand and exceed the expectations of our customers. Given our continued intense focus on managing all of the things that we can control, that's managing margins and expenses and driving efficiencies, We were pleased to deliver an improvement in adjusted EBITDA. The solid earnings also resulted in strong excess cash flow generation and strong distribution coverage of approximately 1.33 times based on our trailing 12 month distributable cash flow. And as we have said, we are using excess cash flow to reduce debt in line with our stated goals as well as to invest in small propane businesses in attractive markets and to strengthen our financial position as we continue to seek larger more transformative strategic opportunities. At the same time, we continue to make good strides with our customer base growth and retention initiatives and our pipeline of potential propane acquisitions remains robust. Just a brief comment on the outlook. The cooler temperatures experienced in March 2019 fizzled out toward the end of the month and significantly warmer than normal average were experienced in April 2019. In contrast, the prior year Q3 benefited from a strong blast of cold weather that arrived late March and lasted throughout the month of April, which contributed to unusually strong heat related demand for that time of year. In fact, from a heating degree day perspective, average temperatures for the month of April 2019 across all of our service territories were 17% warmer than normal compared to 16% colder than normal in April of last year. While weather typically has less of an impact on volumes sold during the Q3 than it does during the heating season, the cooler weather last April contributed to strong demand and the resulting impact on overall operating performance for the Q3. Lastly, I would like to express my deep gratitude and appreciation for the more than 3,200 employees of Suburban Propane for their efforts in continuing to remain focused on providing exceptional service to our customer base and local communities during another challenging winter. And as always we appreciate your support and attention this morning. Now I'd like to open the call up for questions and Stacy if you wouldn't mind giving us a hand with that. Sure. And our first question will go to Ben Brownlow with Raymond James. Please go ahead. Hey, good morning guys. Good morning, Ben. The OpEx was well maintained, especially relative to the variability you saw in demand. Can you just talk about was any of that decline in operating expenses, a structural kind of progress around efficiency initiatives? Any way to quantify that versus the variable component? Yes. There's definitely as we continually look for opportunities to drive efficiencies and that's through our manpower planning activities which I mentioned briefly in my opening remarks. We continue to do a good job managing the headcount, managing the overtime. And so from a fixed component perspective, a lot of those costs we did see some savings. And what you saw that sort of offset that with some of the variable compensation that comes with the slightly higher earnings. And for the most part that's what drives it. Otherwise, our vehicle expenses were a little higher given the additional activities that we had during the year and higher fuel costs. So for the most part, a little variable expenses that offset some savings and fixed expenses. Okay. And with the increase in G and A, do you expect that to level off in the second half? Yes. The expenses that drove the increase, the increases including initiatives in marketing advertising were all incurred in the first half and mostly in the second quarter, I would expect the expenses for G and A in the back half of the year to be roughly flat to the back half of the prior year. Great. Thanks guys. Thanks, Ben. And we'll go to Jeremy Tonet with JPMorgan. Please go ahead. Good morning, guys. This is Charlie on. I just wanted to start on M and A. You noted a robust pipeline and you had that acquisition on the West Coast territory. I was wondering if you could maybe talk high level about your market share in your territories, but maybe more so about what opportunities you see in certain regions versus others and why those might be more attractive to you? Yes. So we're actually seeing a fair amount of activity in virtually every one of our territories. We have some opportunities on the West Coast, some on the East Coast, some down in the Southeast. And so it really is across the board, Charlie. As I said, the pipeline is robust. And as you know, we traditionally look for very well run businesses. We look to add in markets that we believe is an attractive market for us that we have good management that can effectively integrate the business and typically we have our eye on the good quality businesses that we would like to bring into our mix and we do foster those relationships to be in the best position to be able to execute on those deals when they come our way. So it's not really concentrated in any one particular part of the country. It is a pretty good list though of very well run businesses that we will take a nice run at. What sort of hurdles do you put in place in terms of economics of going after one business versus another? And I guess what typically have you seen historically? What have you been able to see in terms of streamlining costs? What sort of margin improvement do you typically see? Yes, it's all over the board, Charlie. Every deal is different. Every customer base that you're looking at is slightly different. Some businesses that we look at will have a higher concentration of residential business, some will have a higher concentration of commercial industrial business. Some are a direct fold into some of our existing territories, Some support some of our market expansion initiatives where we've identified a good quality market that might be slightly outside of our current delivery radius that we've already started to market into and we find a business that's in that market that allows us to make a bigger splash by putting the investment in to buy the business and accelerate our efforts to expand in that market. So the dynamics of every deal are different and we look at pricing of each of those deals a little differently. Some have more synergies than others and some have a little bit more attractive customer mix than others and that will all factor into the way we look at valuing those businesses. That's helpful. Thanks. There's one more for me. Balance sheet, I didn't hear it in the opening remarks sorry, where it leverage is and then what's the capacity on the revolver right now? So yes, we ended the quarter at about 4.32 on leverage and we have full capacity under our revolver which is effectively $300,000,000 Perfect. Thanks guys. Thank you. And we'll go to Sharon Lui with Wells Fargo. Please go ahead. Hi. Good morning, gentlemen. Hi, Sharon. Just wondering if the lower propane prices have had any benefit on your margins yet? Well, I think look, we do a good job managing margins. We had in our prepared remarks and you'll see it in the 10 Q later on. You saw it in the press release this morning. Our margins were up about $0.04 in the Q2. So it's not significant. It's pretty marginal. But I think that was reflective slightly of a fairly stable yet as you say lower cost environment than we've experienced certainly in the Q1 and also in the Q2 of last year. So I think what we saw in the Q2, we feel good about, we feel is probably pretty sustainable. Okay, great. And then maybe just, if you can touch on your views on your corporate structure as a MOP, given all the changes in the MLP sector including some of your propane peers? Look, we feel good about where we are and we always as you know, we've always been one of the unique MLPs. So nothing really has changed for us. We were one of the first to really get rid of the GP altogether and that was way back in 2006 which eliminated all the IDRs. We were originally when we went public in 1996, we were one of the more non traditional MLPs to begin with because our corporate structure or our governance structure look more like a C Corp than an MLP. So we really are governed with the unitholders in mind more so than any one individual or any one group of individuals through a GP. So Suburban has always been sort of an anomaly in the MLP space because our governance structure is so clean. And by taking the step in 2006 to eliminate the IDRs, eliminate the GP, it just further aligned the interest of the unitholders at the forefront. So we feel we've always felt that we are uniquely positioned as an MLP. And I would say even more so now where one of our major peers is assuming the vote goes through will no longer be a separately traded public MLP rather there'll be a subsidiary underneath the utility. So I think that should bode well for investors that are still seeking a good quality yield that is protected by very strong distribution coverage, a strong balance sheet and should feel pretty good that that distribution is very sustainable. And if you look at where we're trading today, you're talking north of 10% tax deferred yield. I think that's a pretty good investment when you see all the volatility in the marketplace right now and the uncertainty that is circulating through the markets, we feel pretty darn good about the investment opportunity that Suburban Propane provides for those seeking income oriented tax advantaged, high yielding and fairly stable cash flow generating business. Thank you. And at this time, there are no questions in queue. Please continue. Great. Thanks, Stacy. I appreciate your help today. And thank you all again for joining us. I hope you have a safe start to the summer season. We look forward to talking to you again in early August following our Q3 results. Thank you. Thank you, ladies and gentlemen. That does conclude your conference for today. Thank you for your participation and for using AT and T Executive Teleconference. You may now disconnect.