Earnings Call: Q1 2018

Feb 8, 2018

Ladies and gentlemen, thank you for standing by and welcome to Suburban Pro Pain Earnings Conference Call. 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. 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. I'd now like to turn the conference over to Vice President and Treasurer, Davin D'Ambrosio. Please go ahead. Thank you, David, and good morning, everyone. Thank you for joining us this morning for our fiscal 2018 Q1 earnings conference call. Joining me this morning are Mike Stivala, our President and Chief Executive Officer Mike Cooglin, Chief Financial Officer and Chief Accounting Officer and Steve Boyd, our Chief Operating Officer. This morning, we will review our Q1 financial results along with our current outlook for the business. Once we have concluded our prepared remarks, we will open the session to questions. However, before getting started, I'd like to quickly 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 ks for the fiscal year ended September 30, 2017 and its Form 10 Q for the period ended December 30, 2017, 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 in 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 furnished to the SEC this morning. The Form 8 ks can be accessed through a link on our website suburbanpropane.com. At this time, I'll turn the call over to Mike Stivala for some opening remarks. Mike? Thanks, Davin, and thank you everyone for joining us this morning. We're extremely pleased to report an improvement of approximately $9,000,000 or 11% in our adjusted EBITDA compared to the prior year Q1. Coming off back to back record warm winter heating seasons, our operating platform was presented with a much cooler and more favorable weather pattern in the majority of our service territories and particularly in the eastern half of the United States. The colder temperatures arrived in November and continued through the end of December with some of the harshest conditions coming in the final 2 weeks of the quarter. Customer demand responded to the colder temperatures and as a result, we experienced an increase in volumes sold in every customer segment during the Q1, a 5.4% increase in propane volumes overall. In fact, even in the early part of the quarter, volumes in our agricultural sector benefited from an active crop drying season. Our volume performance was a real testament to our preparedness to meet the demand as well as the continued momentum in our customer base growth and retention the positive momentum in customer demand trends have carried over into the the positive momentum in customer demand trends have carried over into the early part of the fiscal 2018 Q2 with very strong performance in the month of January. As we talked about at the end of fiscal 2017, we set our fiscal 2018 customer demand estimates and resulting volume expectations using weather assumptions that are in line with the average, the 10 year average heating degree days. We then developed our manpower plan and cost infrastructure to meet those volume levels while maintaining flexibility to ramp up or down based on actual weather driven demand. Through the 1st 4 months of the fiscal year, average heating degree days in our service territories are tracking in line with that 10 year average, yet 6% warmer than the 30 year average. Our operations personnel have done an outstanding job meeting this year's higher demand, while continuing to effectively manage margins and expenses. As a result, we were able to deliver 5.4% more volume with a modest 1.7% increase in overall expenses in the Q1. Let me make one last comment before turning over to Mike Kuglin to discuss the Q1 results in more detail. While the harsh weather conditions in certain parts of the country presented supply and logistics challenges for many in the industry, I'm extremely proud of the coordination between our field personnel and our supply department to ensure uninterrupted supply to our customer service centers in order to meet customer demand. It is in conditions like these that our size, national presence and strong relationships with suppliers and logistics providers allows us to keep our locations adequately supplied in order to effectively manage demand spikes. Mike? Thanks, Mike, and good morning, everyone. As Mike indicated in his opening remarks, we reported a solid improvement in earnings compared to the prior year Q1. Our earnings benefited from a combination of higher volume sold and continued savings from operating efficiencies that help offset higher variable operating costs resulting from higher customer demand. Be consistent with previous reporting, as I discussed our Q1 results, I am excluding the impact of unrealized mark to market adjustments under derivative instruments used in risk management activities, which resulted in an unrealized loss of $1,500,000 for the Q1 of fiscal 2018 an unrealized gain of $500,000 in the prior year Q1. Additionally, net income for the Q1 of fiscal 2018 included a $4,800,000 loss on the sale of certain non strategic assets and operations within the propane segment. Excluding the non cash adjustments on derivative instruments in both years and the loss on sale of assets, net income for the Q1 of fiscal 2018 amounted to $43,500,000 or $0.71 per common unit compared to net income of $34,000,000 or 0 point 5 $6 per common unit in the prior year Q1. Adjusted EBITDA for the Q1 of fiscal 2018 amounted to $93,200,000 an increase of $8,900,000 or 10.6% compared to the prior year. Retail propane gallons sold in the Q1 of fiscal 20 18 of 125,000,000 gallons increased 5.4% compared to the prior year. Sales of fuel oil and other refined fuels of 9,100,000 gallons increased 1.2% compared to the prior year. As Mike mentioned, our volumes benefited from the arrival of cooler temperatures across nearly all of our service territories. Overall, average temperatures in our service territories were 6% cooler than the prior year Q1. Compared to normal heating degree days, average temperatures were 8% warmer than the 30 year average and 1% warmer than the 10 year average. From a commodity perspective, wholesale propane prices continue to experience an upward trend throughout much of the quarter as domestic inventory levels trailed the prior year and the 5 year average due to continued strength in the export market. Overall, average propane prices of $0.96 per gallon basis Mont Belvieu were approximately 64% higher than the prior year Q1 and 25% higher than the Q4 of fiscal 2017. Average fuel oil prices of $1.89 per gallon were 21% higher than the prior year Q1. Total gross margins of $209,600,000 for the Q1 of fiscal 2018 increased $10,900,000 or 5 point 5% compared to the prior year, primarily due to higher propane volumes sold. Propane unit margins were flat compared to the prior year Q1 as our field personnel effectively managed selling prices during the rising commodity price environment. With respect to expenses, while volumes sold increased more than 5% year over year, combined operating and G and A expenses increased just 1.7% compared to the prior year. This increase reflects higher variable operating costs attributed to an increase in operational activities to support higher demand as well as higher variable compensation expense associated with higher earnings and higher general insurance expense, all of which was substantially offset by continued savings from operating efficiencies. Net interest expense of $19,500,000 for the Q1 of fiscal 2018 was $700,000 higher than the prior year as a result of incremental borrowings under our revolving credit facility to help fund a portion of our working capital needs. Depreciation and amortization expenses of $31,100,000 for the Q1 were essentially flat compared to the prior year. Total capital spending for the quarter was $8,500,000 which included $4,500,000 in growth capital. Our CapEx spendings was $1,600,000 higher than the prior year Q1, primarily due to the purchase of tanks and cylinders in support of new customer installations. During the Q1, we also closed on the acquisition of a propane operation strategically located in our California market for a total purchase price of $4,900,000 Turning to our balance sheet. During the Q1, we funded a portion of working capital needs with $47,000,000 of incremental net borrowings under our revolver. Working capital needs during the Q1 increased $72,000,000 compared to the prior year Q1 as a result of the impact of higher volume sold and higher wholesale prices on receivables. Despite the incremental borrowings, our leverage ratio at the end of the Q1 was 5.15 times, which was flat compared to the end of fiscal 2017 and well within our debt covenant requirement under the amended threshold of 5.9 under our revolver to fund the working capital needs. Working capital requirements typically peak towards the end of the heating season after which we expect to begin reducing the outstanding balance on our revolver. Before turning the call back to Mike, I'd like to briefly comment on the impact of the December tax reform on our results. For background purposes, it's important to note that our propane business is structured as a partnership and therefore is not subject to corporate level federal income tax. However, our fuel oil and refined fuels, natural gas and electricity and service businesses are structured as corporate entities and therefore are subject to corporate federal level income tax. Our corporate entities have net deferred tax assets, which are primarily comprised of net operating loss carry forwards along with a full valuation allowance that was previously provided against the net assets. The federal net deferred tax assets were re measured during the Q1 using the new 21% federal corporate income tax rate. However, the remeasurement of the net assets did not have an impact on earnings due to a corresponding reduction in the valuation allowance. Tax reform also made alternative minimum tax credit carry forwards fully refundable without regard to future taxable income. Given the future reliability of such credits, we reversed the valuation allowance on the AMT credit carry forwards of our corporate entities, which resulted in a $1,100,000 deferred tax benefit reported within the income tax line for the Q1. Back to you Mike. Thanks Mike. As announced on January 25, our Board of Supervisors declared our quarterly distribution of $0.60 per common unit in respect of our Q1 of fiscal 2018, which equates to an annualized rate of $2.40 per common unit. Our quarterly distribution will be paid on February 13 to our unitholders of record as of February 6. Looking ahead, we still have a lot of heating season in front of us. As we have stated in the past, our flexible operating model is designed to help insulate the business from unseasonably warm weather as well as to ramp up our activity levels in relation to an increase in weather driven demand. Thus far, the outlook on weather seems to be shaping up favorably for February in many parts of the country. Obviously, that can change. Our people stand ready to deliver the highest quality service to our customers and the communities we serve. And I'm extremely proud of their hard work and dedication to meet the challenges presented by the more seasonable weather up to this point. As we progress through the remainder of this fiscal year, we will look to build on the momentum from our positive first quarter performance, continuing to manage the things we can control, delivering continued improvement in operating performance and executing on our customer base growth and retention initiatives. In the meantime, from a financial perspective, as earnings improve, our leverage will continue to trend toward our target levels and we have plenty of liquidity and access to capital to continue to pursue our strategic initiatives. Finally, I'd like to thank all of the more than 3,200 employees of Suburban Propane for their unwavering focus on the safety and comfort of our customers. And as always, we appreciate your support and attention this morning And we'd now like to open the call up for questions. David, would you mind helping us with that? And the first question comes from the line of Mike Guyer with Janney. Please go ahead. Yes. Good morning, guys. Can you talk a little bit about the working capital use there and the borrowings on the line of credits and kind of, I guess, the balance between inventory and receivables? Sure Mike and good morning. As a result of the increase in commodity price that I mentioned in the opening remarks, propane prices being up 64% year over year and 25% for the Q4. It had an impact obviously on selling prices, which then gave rise to an increase in receivables. With our receivable balance compared to the beginning of the year, it's up a little more than $70,000,000 and up more than $30,000,000 compared to December of last year. So it's principally concentrated in that. AR is up, but not I mean inventory is up, but not nearly as much. So the expectation is to begin collecting on those receivable as we move into Q2. And looking at where we are today, of course, that's already starting to happen. When I look at the aging profile of the receivables, the aging profile remains stable. So the increase in receivables did not have a material impact on our bad debt expense, but obviously something we continue to monitor. But as of today, we're in good shape. Yes. Mike, just keep in mind, this is the seasonal nature of our business. We typically build working capital in the Q1 and our build of working capital peaks usually toward the end of February. So we're still in a position where, we will be building working capital. And as we collect all of that activity from the Q1 and then into the early part of the Q2, the Q2 and the Q3 become our big cash generating quarters. So we would expect and in fact that's what we're seeing already is those balances coming down and the requirements to fund working capital or the borrowings on our revolver coming down as well. Great. And then maybe kind of in conjunction with that, can you talk about the availability of propane across your service territories? I guess as we're moving here through February, I assume you feel like you're in a pretty good position to meet demand as you see things today? Yes, Mike. We're in a great position. I mentioned it in my remarks earlier. There was some challenges in the Q1 particularly in the Northeast, not necessarily for us. I think we had planned our inventory needs the way we always do, which is to be prepared to be able to meet demand if it's there and also to not be overbought to the extent that demand doesn't show up. So our folks in the supply department, our dispatchers did an outstanding job making sure we got product where we needed to get it. And there was no interruption at any of our customer service centers. That's not the case for the rest of the industry. The industry did struggle at times. And I think it's just a testament to our preparedness and the relationships that we have with our suppliers. Great. Thanks very much guys. Thanks Mike. The next question will come from the line of Mirek Zak with Citigroup. Please go ahead. Hi, good morning guys. Can you give us an idea if you're expecting to see any Q1 weather driven volumes to show up into Q2 maybe due to timing or deferral of fill up requests as the weather sort of got cold much later in the quarter or is 2Q volume sort of looking like a typical quarter based on historical weather trends? I think the weather, yes, there were some real harsh conditions the last 2 weeks in December, but the weather pattern was actually quite good in the Q1 with November, particularly on the eastern half of the United States, providing some real good weather in November, which built some momentum into December. And then that momentum sort of continued to build towards the end of December. And yes, that has created a significant amount of positive momentum coming into January. So, I don't think it's anything timing wise. I think the Q1 is a good reflection of, the weather that we got and the way that the weather pattern played out. And now as we're in the Q2, where the positive weather conditions particularly in January, which January was basically normal when you look at our entire service territory put together. The East Coast and the Midwest were generally colder than normal in January and the West Coast is lagging fairly significantly warmer than normal. So it blends out normal for the month of January and we're seeing that play out in our volumes similar frankly better than what we saw in the Q1. So I think so far the way this year's heating season and the weather pattern is playing out, it's playing out as best as it can be, which is create some demand early in the Q1. I mentioned our ag business had some good crop drying demand and our ag volumes responded significantly. And that was followed by the heat demand from the residential side of the business. And now that heat demand is really kicking in here in the Q2 across all segments. And so far it's playing out obviously a lot better than the past 2 winters. Okay. Great. And have you been seeing any ability to capture some unit margin recently as propane prices have started to retreat a little bit or sort of the competitive dynamics or other issues making that a little bit more difficult to do right now? Yes. I think the folks are doing a great job managing margins. We talked about our margins in the Q1 were essentially flat to prior year and we're seeing that similarly play out in the Q2. The competitive landscape is quite challenging and the volatility in the commodity price makes those challenges a little bit more intense at times. But I think it is refreshing to see, propane prices trending on a downward momentum here in the early part of February. Today, Bellevue is in the high 70s. So that's coming off of an average in the Q1 of $0.96 So that's a nice welcome retreat for the consumer in terms of their overall energy costs. Okay, great. Thanks. That's all for me. Thank you. The next question comes from the line of Sharon Lui with Wells Fargo. Please go ahead. Hi, good morning gentlemen. Hi Sharon. I was wondering if you can touch on, I guess, your acquisition that you closed in the Q1. How many gallons do you expect that to add? And perhaps like the acquisition multiples that you've been seeing? Yes. From a gallon perspective, it's not that significant. It is a very strategic market for us on the West Coast and this was exactly the kind of business that we look to add to our platform. It was a business that we had our eye on that we knew the owners. We knew it was a very well run business. We knew it overlaid directly into a very attractive market for us. And so we were able to bring that into the mix at a reasonable multiple. Multiples have remained consistent. Probably on an exit basis, you're talking 6, 7 times. And that's really the quality of the market that we added to that really fits into our overall strategy when it comes to buying small propane businesses. That's helpful. And maybe if you could just also touch on the sale of non core assets. Was that in a particular market that you're trying to get out of? And could that be, I guess, a source of cash flow to fund growth? Yes. I mean it was I would say it was a good trade, right? It was a market in the Upper Peninsula of Michigan that was just very, very challenging just given just how remote that area is and the challenges that that presented for our type of operating model. So when you say markets that we're trying to get out of, we are now out of it. So we did execute on that strategy to monetize an asset. And I guess you could say that we used some of those proceeds to fund the acquisition on the West Coast. So overall, it's a good trade. Okay, great. Thank you. Thank you. And our next question will come from the line of Jeremy Tonet with JPMorgan. Please go ahead. Hi, this is Charlie in for Jeremy. Most of the questions have been answered. I just wanted to clarify some comments, questions have been answered. I just wanted to clarify some comments just earlier on timing and volumes. I guess the question probably related to one of your peers had talked about kind of the cold snap both very, very end of December is kind of causing a recognition of volumes to be pushed into the following quarter. I guess I just want to clarify that's not the case here. I don't think that's what I said. I said the volumes are strong in the Q2. I just wouldn't necessarily blame it on late weather in the Q1. I think we're getting good weather in the Q2 and the volume is responding accordingly. Our volumes were up in the Q1 because the weather in the Q1 was good, okay. Our volumes were up almost 5.5% on weather that was still below the average heating degree days, normal average heating degree days. So it's not what I said. I said we're getting the volume in the second quarter that is appropriate for the kind of weather that we're getting, which is for January, as I said was normal. So it was 100% of the 30 year average when you put our service territories together, which means that the East Coast was a lot better than normal and the West Coast was a lot lower than normal. Yes, sorry. I wasn't saying that you were saying that. I was just trying to I think what the kind of implied question was before. So that makes sense. And then just lastly on the agriculture, what percent of the volumes does that make up of total volumes? About 5% of our total. Okay, great. Thank you. Thank you. And at this time, I'm seeing no further questions on the phone lines. Okay, terrific, David. Thank you for your help this morning and thank you all for joining us again. We look forward to speaking with you again at the end of our Q2 in early May. And in the meantime, stay warm. Ladies and gentlemen, this conference will be made available for replay after 11 am Eastern Time today until tomorrow, which is February 9, 2018 at midnight. You may access the AT and T playback service at any time by dialing 1-eight hundred-four 701 and entering the access code 443,503. Again, that number is 1-eight hundred 4756 701 and the access code 4,43,503. That does conclude our conference for today. Thank you for your participation and for using AT and T