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Suburban Propane Partners, L.P. (SPH)

Q4 2013 Earnings Call· Thu, Nov 14, 2013

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Transcript

Operator

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Suburban Propane's Full-Year and Fourth-Quarter 2013 Financial Results. For the conference all participants are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. As a reminder, today’s call 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, predictions, financial conditions 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 the 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. With that being said, I’ll turn the conference now to Mr. Davin D’Ambrosio. Please go ahead. A. Davin D’Ambrosio: Thank you John and good morning everyone. Welcome to Suburban’s fourth quarter and fiscal 2013 full year results conference call. I’m Davin D’Ambrosio, Vice President and Treasurer at Suburban. Joining me this morning is Mike Dunn, our President and Chief Executive Officer; and Mike Stivala, our Chief Financial Officer. Purpose of today’s call is to review our fourth quarter and fiscal 2013 full year results, along with the current outlook for the business, including an update on the status of our integration efforts whit regards to the Inergy Propane acquisition that was completed on August 1, 2012. As usual, once we’ve concluded our prepared remarks, we will open the session to questions. Before getting started however, 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 our Form 10-K for the fiscal year ended September 28, 2013, which will filed on or about November 27, 2013. 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. The Form 8-K will be available through a link in our Investor Relations section on our website at www.suburbanpropane.com. At this point, I will turn the call over to Mike Dunn for some opening remarks. Mike.

Michael J. Dunn, Jr.

Management

Thanks, Davin, and thanks to everyone for joining us this morning. With our first full year of operations inclusive of the Inergy Propane business under our belt, we’re very pleased with the results of the combined business, particularly in a year in which we experienced unseasonably warm temperatures during the most critical months of a heating season. When colder than normal weather arrived later in the season, our employees and operations responded. In addition, we are extremely proud of the efforts of all of our employees to remain focused on providing superior service to our customer base, while at the same time, making significant strides towards executing our integration plans. We have made notable progress not only in our integration efforts, but also in executing our strategic financing initiatives, all of which have better positioned us operationally and financially to continue to pursue further growth opportunities. To highlight a few key accomplishments for fiscal year 2013, key regional management positions where to put in place to oversee the combined operations prior to the start of the heating season, regular and on going communication was established with the entire Inergy Propane customer base, as well as the combined employee base in order to manage change, we defined our local operating footprint and identified management teams across the entire platform. Substantial progress was made on our retail system conversions that support our new operating footprint. We achieved our targeted year one synergies at $15 million, we reduce our overall average by $157 million through a combination of net proceeds from a successful issuance of common units, as well as cash on hand, we funded all of our working capital needs, capital expenditures and integration efforts without the need to borrow under our revolving credit facility for the seventh consecutive year and we ended the year with more than $107 million of cash. We increased the annualized distribution rate by $0.09 per common unit to an annualized rate of $3.50 per common unit, a growth rate of 2.6%. All in all fiscal 2013 was a very successful year for Suburban. As we begin a new fiscal year, our operating platform is well positioned to continue to focus on customer growth initiatives and driving operational efficiencies. Our balance sheet remains well positioned and we have more than adequate liquidity to fund our ongoing operations and integration efforts. A little later I’ll provide some closing remarks; however, at this point I will turn the call over to Michael Stivala, to discuss our full year and fourth-quarter results in more detail.

Michael A. Stivala

Management

Thanks Mike and good morning everyone. Let me start by focusing on our full-year results and give a little color on the fourth-quarter toward the end of my remarks. As we’ve now completed our first full year since the purchase of Inergy Propane, the majority of the year-over-year variances for fiscal 2013 were attributable to the inclusion of Inergy Propane, as well as to a lesser extent improvements in the Suburban legacy operations. In order to provide a more meaningful comparison of year-over-year operating performance, for certainty metrics I will like I have the past few quarters provide a comparison of the actual fiscal 2013 results versus the prior year results on a pro forma combined basis, since the Inergy Propane acquisition had occurred at the beginning of fiscal 2012. Furthermore, let me point out that fiscal 2013 included 52 weeks of operations, compared to 53 weeks in the prior year. To be consistent with previous reporting, I’m excluding the impact of a $4.3 million unrealized non-cash loss applicable to FAS 133 accounting in fiscal 2013, compared to an unrealized gain of $4.6 million in fiscal 2012. For fiscal 2013, we reported net income of $83.1 million or $1.42 per common unit, compared to a net loss of $4 million or $0.10 per common unit in the prior year. Fiscal 2013 included several items that had a negative impact on earnings, specifically we incurred $10.6 million of integration related costs, a $7 million charge for the voluntary withdrawal from multi-employer pension plans covering certain employees acquired in the Inergy Propane acquisition; and a loss on debt extinguishment of $2.1 million associated with the $157 million debt reduction that Mike referenced in his opening remarks. This compares to the following items recorded in fiscal 2012. We incurred acquisition related costs of…

Michael J. Dunn, Jr.

Management

Thanks Mike. Just a brief comment on our quarterly distribution, as announced in our October 24 press release our Board of Supervisors declared our quarterly distribution of the $87.5 per common unit, in respect of the third quarter – fourth quarter of fiscal 2013, which equates to an annualized rate of $3.50 per common unit. This represents a growth rate of 2.6% over the previous year. Quarterly distribution was paid on November 12 to our unit holders of record as of November 5. As for the status of our ongoing integration of Inergy Propane, as I outlined earlier, we have made tremendous progress during the fiscal year, this past fiscal year and remain on or ahead of schedule. Our detailed integration tasks for 2013 have been successfully completed and we were able to achieve our synergy target of $15 million for the year. With the start of fiscal 2014 already upon us, we will take a pause from our field integration efforts over the next few months, in order to maintain our operating focus on serving our customers throughout the upcoming heating season. We will resume our field integration and system conversion efforts in the March timeframe. By this time next year we expect a fully converted all of Inergy Propane’s legacy operating systems to as single system platform and to have made substantial progress on adopting our operating model throughout the entire footprint. Throughout the integration process, we will continue to refine or operating approach, drive our operational excellence and remain focused on the overall cost structure. All things if you have become accustomed to observing from Suburban. We have all along indicated that we fully expect to realize synergies of approximately $50 million over the first three years following the acquisition and we remain confident that we can…

Operator

Operator

Certainly. (Operator Instructions). And we’ll first go to the line of Shneur Gershuni with UBS. Please go ahead. Schneur Gershuni – UBS Securities: Hi good morning everyone.

Michael A. Stivala

Management

Good morning.

Michael J. Dunn, Jr.

Management

Good morning Schneur. Schneur Gershuni – UBS Securities: And first and foremost, I would like to wish both of you congratulations on the retirement and on the promotion as well too.

Michael J. Dunn, Jr.

Management

Thank you. Thank you very much. Schneur Gershuni – UBS Securities: No problem. Just a couple of quick questions here. We got a lot closer to normal weather last year than we were the previous year. I’m sure we could get a little closer. How are you thinking about volumes for fiscal 2014? Should we try to be thinking of it kind of similar to how it was over the last year, plus or minus a percent or so, has any of the synergies that you have sort of putting the assets together place you in a position where we could see a little bit more volume growth? I was wondering if you could sort of give us a little bit of flavor on how to think about that for 2014.

Michael A. Stivala

Management

I think the way that the weather pattern occurred in fiscal 2013 is an important thing to keep in mind when you think about 2014. The most critical months for the heating seasons really is, December, January, February and when you look at those months, the heating degree days were significantly warmer than the overall average for the year would otherwise indicate. So I think if you look versus last year, I think as long as the weather cooperates a little bit more when you like to get it more, I would expect to see the volumes pick up in those months. We did get a nice pop in March and April, so it would temper some of the overall volume improvement if we get volume or weather in December, January, but otherwise if we get weather in those months this year I would expect to see an improvement. Schneur Gershuni – UBS Securities: Okay, and would there be any organic growth that we should be thinking about with the synergies or it would be really mostly relying on getting a normal weather pattern in the proper months?

Michael A. Stivala

Management

I think you are going to get more of an impact of weather, frankly. And I think the synergy efforts that we’re doing is more focused on the cost side right now. I expect that our growth initiatives will also help us out, but I think weather is going to be the… Schneur Gershuni – UBS Securities: The primary driver.

Michael A. Stivala

Management

Would drive factor, yes. Schneur Gershuni – UBS Securities: Okay. And just as a follow-up, there has been a lot of talk about propane exports out of the United States. You have got a lot closer to heating value or you have closed the gap with heating value with natural gas over the last – a little bit from a propane pricing perspective. But should we see exports, we would expect that pricing for propane would go up. I’m not sure, and maybe you have some better color on this, but I don’t believe it will really change conservation patterns really that much if that were to happen. But I do wonder if there would be a margin impact. There has been some pretty healthy margins over the last couple of quarters, would we see more of a normalization of that if we were to see propane prices average up 10%, 15% from where they are or relative to where they have been on the comparison with the heating value of natural gas?

Michael A. Stivala

Management

Schneur I think a sort of the export situation of NGLs probably has more of an impact on the logistic side. So you are going to see, I think, in certain markets higher prices than you would ordinarily expect, so that could have some of an impact. However, I don’t foresee anything dramatically changing in the price structure, from where we are today. We’ve – with crude oil being reasonably flat, the ratio of propane to crude oil has inched its way back up to the 52%, 53% from below to mid-40s and relative to the natural gas it’s a little bit closer as well. So I’m not so sure that you’re going to see this sort of margin experience that – you margin expansion experience that you had over the course of last few months before fiscal year ended, but I don’t think they are going to be dramatically reduced either. Schneur Gershuni – UBS Securities: Okay great. Thank you very much guys.

Michael J. Dunn, Jr.

Management

Thank you.

Michael A. Stivala

Management

Thank you.

Operator

Operator

We will next go to Darren Horowitz with Raymond James. Please go ahead. Darren Horowitz – Raymond James: Good morning guys.

Michael J. Dunn, Jr.

Management

Good morning Darren.

Michael A. Stivala

Management

Hi, Darren. Darren Horowitz – Raymond James: Mike, also on behalf of Raymond James, congratulations on the announcement. We certainly wish you the best in your future endeavors and Mike Stivala, congratulations on the opportunity.

Michael J. Dunn, Jr.

Management

Thank you.

Michael A. Stivala

Management

Thank you. Darren Horowitz – Raymond James: Sure, so a couple quick questions for you. First, Mike, heading into the heating season across your customer base, where do you think tank fills are relative to last year? And this kind of dovetails with the previous question. Just thinking about this LPG export bid and the tailwind behind propane prices I'm just trying to get a sense for how much incremental volume you think might be in addition to what is already in customer tanks.

Michael J. Dunn, Jr.

Management

It’s really hard for us to say where customer inventory positions are, but I would try to kind of back into what Michael Stivala had said a little bit earlier with respect to the weather pattern kicking of last year. And in our opinion we believe people entered last winter in light of the warm year we had in 2012 with low inventories. And I think that’s one of the reasons why our business really, really and the industry experienced a real good pop in February and March, because inventories were low. I would expect quite frankly people’s positions to be at the same or near the same level today. And we’re hoping that pop is a little but more even spread, than it was last year. Darren Horowitz – Raymond James: Okay. With the seemingly structural shift across the entire propane pricing market, has that opened any additional opportunities for you as it relates to consolidation with maybe some mom and pops who don't quite have the economies of scale or the leverage in order to achieve price?

Michael J. Dunn, Jr.

Management

Here it goes, I mean, we’re seeing more people, I think, it’s fair to say more people interested in selling their business. However, their value expectations are little bizarre. And I think the reason for that is, that you had a period where some of the older line mom and pops don’t have someone to pass the business on to. However, they are not sure what they would do with the money they got from the sale of their business. So it’s kind of like choose, I’d like to sell only if I get this ridiculous price kind of thing. And that’s kind of what we’re seeing in the markets that we would have been most interest in. Darren Horowitz – Raymond James: Okay. And then just finally two quick housekeeping questions, the first, Mike, back to what you said about the integration efforts and obviously recognizing you are taking a break for the heating season here and you've still got about $35 million in synergies remaining. So is the goal at this point to have the bulk of that done by fall 2014 or are you thinking maybe that fiscal 2014 might look a lot like fiscal 2013, or you can knock down $15 million of synergies and then the remaining $20 million or $25 million happens in fiscal 2015?

Michael J. Dunn, Jr.

Management

I think the latter Dan. Darren Horowitz – Raymond James: Okay. And then last question again on the housekeeping side, with that $4.6 million integration-related expense that materialized in the fiscal fourth quarter, that looked to track about double which you had been recording in the prior two fiscal quarters. And I’m assuming that you are going to anticipate similar type expenses in fiscal 2014 once you pick back up the integration efforts. So, from a modeling perspective both in terms of timing and magnitude, should fiscal 2014 at least on that item look like fiscal 2013?

Michael J. Dunn, Jr.

Management

I think from a timing perspective, yes. I don’t expect the second year of integration. We really did accomplish a lot this year relative to our system conversion activities. And we probably have about a third left of what we did this year from a system conversion perspective. So I would expect the cost to be somewhat less than this past year. Darren Horowitz – Raymond James: Okay Thank you.

Michael J. Dunn, Jr.

Management

Thank you.

Operator

Operator

(Operator Instructions). And to the presenters there are no further questions coming in.

Michael J. Dunn, Jr.

Management

Okay John thank you for your help and for everyone that’s on the call I want to wish you all you a very happy holiday. And we’ll talk to you again in the next year. Thank you.