Q1 2020 Earnings Call
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Again, thank you for standing by and welcome to <unk> to a suburban propane first quarter fiscal 2020 financial results Conference call.
At this point all that participant lines Arnaud listen only mode. However, the will mean opportunity for your questions instructions will be given at that time, if you should require any assistance during the call. Please press.
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This conference call contains forward looking statements within the meaning of section 21 E. I was a securities Exchange Act of 1934 as amended relating to the partnership's future business expectations.
Predictions and financial condition and results of operations.
Forward looking statements involve certain risks and uncertainties.
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 I 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 his behalf are expressly qualified in their entirety by such cautionary statements with that I'll turn the conference held in Mr. Davin Dambrosio.
Vice President Treasurer. Please go ahead.
Great. Thank you John Good morning, everyone. Thank you for joining US this morning for fiscal 2021st quarter earnings Conference call.
Joining me this morning, our Mike Stivala, our President and Chief Executive Officer.
Mike Kuglin, Chief Financial Officer and Chief.
Single Officer, and Steve Boyd, our Chief operating officer.
This morning, we will review our first quarter results along with our current outlook of the business.
As usual once we've concluded our prepared remarks, we will open the session. The question.
Our annual report on form 10-K for this fiscal year ended September 20.
<unk> 2019.
And form 10-Q for the period ended December 28, 2019, which will be filed by the end. The business today contains additional disclosure regarding forward looking statements and risk factors.
Copies may be obtained by contacting the partnership for the FCC.
Certain non.
GAAP measures will be discussed on this call. We've provided a description of those measures as well as this discussion of why we believe this information to be useful in our form 8-K, which was furnished to the FCC. This morning.
The form 8-K will be available through a lake in the Investor Relations section of our web site at suburban propane.
Oh.
At this point I will turn the call over to Mike Stivala for some opening remarks like.
Great. Thanks, Devin and good morning, Thank you all for joining us today.
The fiscal 2020 heating season started off with favorable weather primarily in October and the early part of November.
As well as active crop drying.
Demand in the agricultural sector.
However, unseasonably warm weather dominated the month of December which represents the most critical month for heat related demand.
Resulting in lower volumes compared to the prior year first quarter.
Excellent margin management by our operations personnel and a lower commodity price environment.
Helped drive margin improvement.
From an expense perspective, the most significant impact was a $5 million charge to settle certain product liability and other legal matters during the quarter.
As a result, adjusted EBITDA for the fiscal 2021st quarter was $85.4 million, a decrease of eight and a half first.
Sent from prior year.
On the strategic front, we continue to execute on our four pronged approach.
Organic growth through customer base growth and retention efforts in every one of our markets.
Fostering our new market expansion efforts.
Strategic acquisitions.
And positioning ourselves both.
Actually and operational operationally to be prepared for more transformative opportunities.
During the quarter, we closed on two well run propane businesses and strategic markets in California in Georgia investing more than $23 million in those businesses.
So while warm weather weighed.
On customer demand.
We continue to manage the things we can control.
And stay committed to our strategic growth objectives.
In a moment I'll come back for some closing remarks. However at this point I'll turn it over to Mike Kuglin to discuss the first quarter results Mike.
Thanks, Mike and good morning, everyone.
To be consistent.
With previous reporting as I discuss our first quarter results, excluding the impact of unrealized mark to market adjustments on derivative instruments used in risk management activities, which resulted in an unrealized gain of $2.8 million for the first quarter.
A fair to an unrealized loss at $15.9 million in the prior year.
Excluding these items net income for the first quarter was $37.4 million or 60 cents per common unit.
Fair to net income of $43.6 million were 71 cents per common unit in the prior year.
Adjusted EBITDA for the first quarter was $85.4 million, which was $7.9 million lower.
In the prior year.
The decrease in earnings was primarily due to $5 million charge for the settlement of certain product liability and other legal matters the negative impact of warmer weather on customer demand during the month December.
Retail propane gallons sold in the first quarter were 121.2 million gallons, which was 2.3%.
Or from the prior year and consistent with the year over year percentage decrease in heating degree days for the key month in December.
Robbing demand for the quarter was negatively impacted that considerably warmer than normal temperatures during the latter half of the quarter. Most significantly during the month of December when heating degree days generally have a.
Her impact customer demand for eating purposes.
Average temperatures for the first quarter were 4% warmer than normal.
At present warmer than the prior year.
And for the month of December average temperatures were 10% warmer than normal and 2% warmer than December 2018.
From a commodity perspective.
Wholesale propane prices increased 11% sequential quarter basis.
Mean fairly low compared to historical levels.
Overall average wholesale prices for the first quarter 50 cents per gallon based Mont Belvieu.
Which was 37 and half percent lower than the prior year first quarter.
In early part of the fiscal 2000.
Second quarter propane prices have continued to remain low.
Generally from continued unseasonably warm weather.
Fine with us inventory levels that remain considerably above average levels for this time of year.
Total gross margins of $212.5 million for the first quarter increased two point.
A million dollars compared to prior year, primarily due to slightly higher propane unit margins.
The year over year decrease in commodity prices contributed to a combination of lower selling prices and an improvement in propane unit margins by seven cents per gallon or 4.4% compared to the prior year.
With respect to expenses, excluding the impact of the $5 million charge that I mentioned earlier.
Operating and gene expenses increased $5.2 million before and a half percent compared to the prior year, primarily due to higher payroll benefit related costs higher vehicle costs and an increase in spending on marketing.
And advertising activities.
Forward, our customer base growth and retention initiatives.
Net interest expense of $19.1 million for the first quarter was $400000 lower than the prior year.
Primarily due to lower level of average outstanding borrowings under our revolving credit facility.
Total.
Capital spending for the quarter of $30 million was $5.3 million higher than the prior year.
Primarily due to investments in new technologies and equipment.
Utilized by our field personnel to enhance the customer experience and drive incremental operating efficiencies.
As wells purchases of tanks and cylinders in support of.
New customer installations.
Turning to our balance sheet.
Given the seasonal nature of our business, we typically borrow under our revolving credit facility during the first quarter.
Help fund a portion of our seasonal working capital needs and investments in our strategic growth initiatives within the quarter, including acquisition funding.
With that said, we borrowed $61 million under the revolver in the first quarter.
Which was $21.8 million higher than our borrowings in the prior year first quarter due to the funding of the two propane acquisitions that Mike mentioned in his opening remarks.
Despite the borrowings to fund the acquisitions, our total debt as of December 2019.
Was $8.3 million lower in December of last year.
The first quarter, our consolidated leverage ratio was 4.69 times, well just slightly higher than where we ended the prior first quarter, yes, well within our debt covenant requirement of 5.5 times.
Working capital needs typically peak towards the end of the heating season.
Late February or early March timeframe.
After which we expect to begin reducing outstanding borrowings on our revolver with cash flows from operating activities.
We have more than ample borrowing capacity under our revolver to fund our remaining working capital needs for the heating season, and our strategic growth initiatives.
And before.
Turning the call back to Mike.
I'd also like to highlight that we adopted a new lease accounting standard referred to as HSD topic 842 at the beginning of the fiscal year.
Hey, assay 42 requires lessees to recognize leased assets and lease liabilities on their balance sheet for most leases, including those that were considered operating leases.
On the previous accounting standards.
Our adoption of AMC 42.
Built in all outstanding leases continuing to be classified as operating leases and the recognition of lease right to use assets and corresponding lease liabilities.
$103 million on the balance sheet as of September 29, 2019.
Which is the beginning of fiscal 2020.
While the adoption of the C 42, resulting in the recognition of lease assets and liabilities. It did not have an impact on earnings or financial metrics used for debt covenant compliance.
Thank you Mike.
Thanks, Mike.
As announced on July 23rd our board of Supervisors.
It was declared our quarterly distribution of 60 cents per common unit in respect of our first quarter fiscal 2020, which equates to an annualized rate of $2.40 per common unit.
Quarterly distribution will be paid on February 11, two our unitholders of record as of February 4th.
Our.
Vision coverage continues to remain strong at 1.2 times based on our trailing 12 month distributable cash flow despite the lower earnings for the quarter.
As we've stated before we remain focused on our goal of balancing debt reduction efforts with making strategic investments to support our long term growth initiatives.
Looking ahead, the unseasonably warm weather in December continued into January.
Which has ended up being 20% warmer than normal and 10% warmer than January of the prior year.
In fact, the period from December Onest through January 30, Onest has now been reported as a record warm stretch for this time of year.
Well, there's still plenty of heating season ahead, the lack of heating degree days in the most critical heating months of January will obviously impact volumes in the second quarter.
Nonetheless, our business remains well positioned to meet increased Keith.
Related demand.
With safety as our number one priority.
And our.
In this model allows us to be nimble and adapt in the event of continued unseasonably warm weather.
In the meantime, our operations personnel continue to remains focused on the highest level of safety standards.
Delivering exceptional service to our customers and the communities that we serve and executing on our long term growth in.
Issues.
Finally, I'd like to once again, thank all of the 3400 employees a suburban propane.
For their unwavering focus on the safety and comfort of our customers and the communities we serve.
And as always we appreciate your support and attention I would now like to open the call up for questions and.
And if you would mind, helping that please.
Thanks.
Ladies and gentlemen, if you wish to ask your question. Please press one then zero on your telephone keypad. You mean withdraw your question at any time bank repeating the one zero command if you're using the speakerphone. Please pick up the handset for press in the numbers.
Once again, if you have a question you May press, one then zero at this time.
And one moment for our first question.
And just a quick reminder.
My question. Please press one zero.
And we'll go to first Charlie Barber with Jpmorgan. Please go ahead.
Hey, good morning.
I wanted to ask on the higher payroll and vehicle costs is that more of a function of the acquisitions are maybe a bit more towards larger organic growth just trying to understand the.
Is there and then also just any color you can provide on that settlement the $5 million settlement.
Yes, so the the payroll and vehicle costs is more a function of just.
Bin bin.
The time of year, and making sure that we have the right level of headcount.
To support a level of.
Performance that we would expect for a normal weather scenario.
And in fact, I would say that we also have been.
Pretty aggressive in maintaining a certain level of of our.
Drivers in Texas.
Given just the challenges that a good strong economy has presented with respect to.
Recruiting and hiring qualified individuals so.
We're probably carrying a little bit more of a head count than than we would have in the past couple of years.
Here's.
And I think Thats just a good long term view of the business, we're not going to overreact to a short term whether scenario here.
Whether comes and goes.
We run this business for the long term.
And given the challenges with.
Respect that the whole industry, frankly, and not just the propane industry both the trucking.
Industry.
I think has been.
Well publicized as.
Highly competing for qualified drivers and so.
We're we're trying to make sure that we're not making short.
From decisions.
That we would.
Potentially regret the long term so.
I think it's a good sign of our confidence in.
Where we are as a business this short term weather related.
Impact on demand is not going to.
Good good a waiver our position with respect to how we handle our headcount.
As as it relates to the settlement.
We're we're.
We're in an industry that.
We do take safety as our highest priority.
We pride ourselves on being having the some of them.
Most highly trained people in the industry.
But as the industry.
He's had there are going to be situations here in there.
Fortunately there they are fewer and far between.
But there are situations where.
The there.
They would do deal with a volatile product and there are times when.
We have to make a settlement to to put something behind us. So that's what this this charge is all about.
Okay I appreciate the color and second question on on M&A can you talk a bit.
What about the two acquisitions.
And I guess.
Looking out into 2020, how that pipeline looks DC similar level of activity to to prior years or more or less just given the current current backdrop.
Yes, we're really happy about the acquisitions, we did in the first quarter.
They were.
We're right in line with our strategic.
[music].
Our strategic goals.
And in really good markets.
So.
Both one was a direct overlay the other one sort of fill the gap in part of Georgia that.
It was right in between two very.
Hi quality operations of ours that this kind of fill that void in the middle part of Georgia for Us and.
And so both extremely well run businesses were happy to have the employees and the customer base of those two businesses in house.
We will run.
[music].
As you you've gotten to know suburban will run them really really well.
As far the pipeline, we do have another acquisition that is likely very close at this point for the second quarter.
And then the pipeline at this point will.
This time of the heating season is usually the lightest than it normally is and I would expect that to build up again.
In the March March April timeframe.
Okay, Great and then last question I'm, just thinking about your current market share.
And and your peers and some of your peers.
In strategies to to kind of.
You know.
Oh go cutter underneath your pricing to take market share. How effective has has that been for some of your competitors what a suburban due to.
To retain.
Your existing market share.
Yes, I mean.
Our philosophy has always been the same.
Our goal is to provide the highest level of service in the markets that we serve were a value oriented.
Service provider.
We pride ourselves on having some of the most highly trained.
Employees and.
And.
We we not only train our.
Outside personnel that that handle the product and handle the customer deliveries and service activities, but we do spent a lot of time training the folks that answer the phones on interacting with our customers in a positive way.
And so.
Frankly.
We havent really seeing much of an impact.
On our customer base from some of the aggressive activities that are going on in the marketplace.
We do a good job to pass the defending our value proposition and and as I've said in my opening remarks.
Our our field personnel are doing an outstanding job continuing to stay focused on growing the the customer base organically and retaining what we have.
Appreciate it thanks Thats it for me.
Great. Thanks, Charlie.
And ladies and gentlemen, just a quick reminder, if you do have a question. Please press.
Just one zero.
And allowing a few moments no further questions in queue I'll turn it back to the company for any closing comments.
Okay, Great John Thanks, we helped today and thank you all for your.
Can we look forward to talking with you again.
In early May for our second quarter results.
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It's starts after 12 o'clock eastern today and will last until February 7th at Midnight, you can access the replay at anytime by dialing.
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To 970 0847 with the access code six 310 400 that does conclude your conference for today. Thank you for your participation you may now disconnect.
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