Q2 2022 Suburban Propane Partners LP Earnings Call

[music].

Good morning, and welcome to the suburban propane partners second quarter earnings Conference call.

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After todays presentation, there will be an opportunity to ask questions.

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Regina Your question. Please press Star then two.

Please note today's event is being recorded.

I'd now like to turn the conference over to Davin, Dambrosio, Vice President and Treasurer. Please go ahead Sir.

Thanks, Rocco good morning, everyone.

Let me start with the Safe Harbor language. This conference call contains forward looking statements within the meaning of section 21 E.

Of the Securities Exchange Act of $19 34, as amended relating to the partnerships future business expectations, and predictions and financial conditions and results of operations.

These 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 are referred to as cautionary statements in its earnings press release, which can be viewed on the company's website also written and oral forward looking statements attributable to the partnership or persons acting on behalf are expressly qualified in their entirety by such cautionary state.

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Joining me. This morning is Mike <unk>, our President and Chief Executive Officer, Mike <unk>, Chief Financial Officer, and Chief Accounting Officer, and Steve Boyd, Our Chief operating officer.

This morning, we will review our second quarter financial results along with our current outlook for the business. Once we concluded our prepared remarks, we will open the session to questions.

Our annual report on Form 10-K for the fiscal year ended September 25, 2021, and Form 10-Q for the period ended March 26, 2022, which will be filed by the end of business. Today contains additional disclosure regarding forward looking statements and risk factors.

These 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 suburban propane dot com.

At this point I will turn the call over to Mike <unk> for some opening remarks, Mike.

Great. Thanks, Devin good morning, Thank you all for joining us today.

The second fiscal quarter was another outstanding quarter for suburban propane on a number of fronts. We.

We delivered solid operating results.

Made further progress on the execution of our long term strategic initiatives towards the build out of a renewable energy platform and we continue to drive improvements in our key financial metrics.

Despite a challenging operating environment, resulting from an erratic weather pattern historically high commodity prices and inflationary factors impacting expenses, we were able to expand our customer base and effectively manage margins and expenses to deliver an improvement in adjusted EBITDA compared to the prior year second quarter.

You combine that with the improvement from our first quarter, we have now reported a $7 million or nearly 3% increase.

<unk> adjusted EBITDA through the first six months of the fiscal year.

On the strategic front, we made a number of moves during the quarter.

First in March we acquired a 25% equity stake in independents hydrogen, which is a veteran owned and operated startup company focused on developing a hydrogen ecosystem from production to distribution.

Which will deliver locally sourced clean hydrogen to local markets with an initial focus on the material handling and backup power applications.

This is a real strategic investment for US we believe in the role that hydrogen will play in the coming years as society moves toward de carbonization across many sectors of the economy.

That may prove difficult to address with alternative renewable energy sources.

Second.

We committed additional capital to support our investment in Oberon fuels as we collectively get closer to commercialization of our new product offering called propane plus our DMA. This.

Blended product combines the versatile clean and portable benefits of propane with the low carbon attributes of renewable dimethyl ether to reduce the carbon intensity of propane in order to create a pathway for meeting aggressive carbon reduction standards.

We also deployed capital to complete the construction of the world's first commercial propane plus <unk> blending facility and our percentage of California location and.

And just last week, we celebrated the first commercial launch of propane plus <unk> with a ribbon cutting ceremony at that location.

And we are now selling this lower carbon alternatives to our customers in southern California.

And third we formed a new subsidiary branded suburban renewables, which will serve as the platform for these and other investments in renewable energy businesses and assets.

You can learn more about these investments by visiting our website.

We funded these investments with excess cash flow from operations, while also allocating approximately $42 million to reduce debt during the quarter.

So it's a very balanced approach to making strategic investments and continuing to pay down debt to strengthen our balance sheet.

Which are all very long term focused and in line with our stated strategic goals.

In a moment I'll come back for some closing remarks and provide added color on our strategic initiatives. However at this point, let me turn it over to Mike <unk> to discuss the second quarter results in more detail Mike.

Thanks, Mike and good morning, everyone.

To be consistent with previous reporting as I discuss our second quarter results I'm, excluding the impact of unrealized mark to market adjustments on our commodity hedges, which resulted in an unrealized gain of $33 million for the second quarter.

Compared to an unrealized gain of $1 6 million in the prior year.

The large unrealized gain on our commodity hedges reflects the fair value of open positions and at the end of the second quarter, partially offset by the reversal of unrealized net gains at the end of the first quarter as a portion of those unrealized net gains were realized during Q2.

The contracts associated with the open commodity hedges at the end of the second quarter are expected to mature over the course of the next nine months and the valuation of the hedges are subject to change as commodity prices fluctuate.

Excluding these items as well as a noncash equity and earnings of Oberon fuels, which is an unconsolidated subsidiary accounted for under the equity method.

And a noncash pension settlement charge in the prior year.

Net income for the second quarter was $142 8 million or $2 26 per common unit.

Compared to net income of $126 3 million.

Or $2 <unk> per common unit in the prior year.

Adjusted EBITDA of $172 5 million for the second quarter improved by $5 million compared to the prior year.

As Mike mentioned the earnings for the quarter were driven by several factors, but most significantly from solid margin management and <unk>.

<unk> impact of our commodity hedging and risk management strategy in a period of dramatically rising commodity prices and.

And the benefits from continued positive trends in customer base growth.

These factors more than offset the impact of soft volumes, resulting from customer conservation.

Lower heat related demand from warmer weather and inflationary pressures on our expenses.

Retail propane gallons sold in the second quarter or $159 2 million gallons, which was five 8% lower than the prior year.

Volume sold were negatively impacted by elevated customer tank levels coming into the quarter due to the impact of near record warm temperatures during the month of December .

And from warm and inconsistent temperatures throughout the second quarter.

In addition to a less favorable weather pattern during the most critical months of the heating season was.

Was it December through February .

<unk> were also adversely impacted by a considerable level of customer conservation, resulting from the historically high commodity price environment.

With respect to the weather the second quarter got off to a warm start but a cooling trend in late January into early February provided a short lived boosted demand.

Warmer weather then returned in mid February and temporary heat related momentum.

Overall average temperatures for the second quarter or 7% warmer than normal and similar to the prior year second quarter.

For the critical heating months of December 2021 through February 2022 average temperatures were 8% warmer than normal and 1% warmer than the prior year.

From a commodity perspective wholesale propane prices were elevated coming into the second quarter and continued to rise throughout Q2 in line with increasing crude oil prices.

And as a result of persistently low inventory levels.

<unk> to historical averages for this time of year.

Within the quarter wholesale prices basis Mont Belvieu.

Move from a low of $1 10 in early January to $1 63 in early March.

This is the highest price for propane in 13 years.

Overall average wholesale prices for the second quarter were $1 31 per gallon.

Which is 45% higher than the prior year second quarter, and 5% higher than the first quarter of fiscal 2022.

Excluding the impact of the mark to market adjustments on our commodity hedges that I mentioned earlier.

Total gross margin of $316 1 million for the second quarter increased $12 million or 4% compared to the prior year.

The improvement in gross margin was driven by effective selling price management during a rising and volatile commodity price environment.

And from the favorable impact of commodity hedges that matured during the period.

Consistent with past practices, our hedging and risk management activities are.

Our intended to reduce the effects of price volatility associated with forecasted purchases of propane and propane sold on a fixed price basis.

The commodity hedges that matured during the second quarter were principally comprised of net long positions that were favorably impacted from the significant rise in commodity prices.

With respect to expenses combined operating and G&A expenses of $143 million for the second quarter increased $12 4 million or nine 5% compared to the prior year.

Primarily due to higher payroll and benefit related expenses.

Higher vehicle lease and fuel costs higher provisions for doubtful accounts.

And other inflationary pressures across many areas of the business.

Net interest expense of $15 3 million for the second quarter was $2 8 million or 15, 7% lower than the prior year due to the refinancing of two tranches of senior notes at lower rates in the third quarter of fiscal 2021.

As well as a lower average level of outstanding debt.

Total capital spending for the quarter of $11 6 million was $3 $2 million higher than the prior year.

Primarily due to the acquisition of several properties in growth markets that were previously leased.

And from the impact of higher steel prices on our purchases of tanks and cylinders to support customer growth.

And turning to our balance sheet.

During the second quarter, we repaid $41 9 million of borrowings under the revolver.

We funded the debt repayment.

Along with our seasonal working capital needs capital.

<unk> additional investments in Oberon fuels, and our $30 million equity investment in independent hydrogen with cash flows from operating activities.

With a debt repayment, our total debt outstanding as of March 2022 was $46 $7 million lower than March of last year.

The combination of the increase in earnings and debt repayment during the second quarter resulted in a consolidated leverage ratio for the trailing 12 month period ended March 2022, improving to 387 times.

We have now moved through our historically high period of seasonal working capital needs.

And remain focused on utilizing excess cash flows to further strengthen the balance sheet and if opportunities arise to fund strategic growth initiatives back.

Back to you Mike.

Thanks, Mike as announced on April 21.

Our board of Supervisors declared our quarterly distribution of $32.05 per common unit in respect of our second quarter of fiscal 2022 that equates to an annualized rate of $1 30 per common unit for the.

Quarterly distribution will be paid on May 10 to our unitholders of record as of May 3rd.

So looking back on the most recent heating season, we are extremely proud of how our operations personnel have continued to stay focused on delivering outstanding service to our customers.

Adhering to the highest standards for safety.

And executing on our customer base growth and retention initiatives to help drive net customer base growth.

All in the face of the significant challenges that continue to plague the economy.

Namely historically high commodity prices.

<unk> factors creeping into so many aspects of our business and expenses.

Shifting work behaviors and hiring challenges in a post COVID-19.

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And customer conservation efforts, resulting from the challenges consumers face in managing their own spending budgets in this inflationary environment.

And our supply and risk management team continues to do an outstanding job managing propane supplies as well as the volatility in commodity prices.

With the improvement in adjusted EBITDA.

EBITDA Cup.

Coupled with prudent management of capital expenditures and the benefits of nearly $10 million in interest savings and the trailing 12 month period, our distribution coverage remains strong at 256 times.

Our leverage is trending lower at 387 times compared to $3 95 at the end of March 2021.

And we are continuing to position the business.

Operationally and financially for long term growth and sustainability.

Leveraging our strengths as an organization, we will continue to look for opportunities to make strategic investments in the build out of our renewable energy platform in support of the country's ongoing energy transition toward a lower carbon future.

While also fostering the growth of our core propane business, both through acquisitions and strategic markets and through our Greenfield market expansion efforts.

And also bringing down leverage toward our mid three times target range.

Rob.

Today.

We feel that we offer a very compelling story of a business that has a more than 90 year tradition of safely meeting the energy needs of its customers and local communities around the country with a best in class operating model.

That is leveraging its expertise to help support the country's ongoing energy transition to a low carbon economy.

And is positioned to competitively grow the business for the next 90 plus years.

Finally, despite these these challenging times the foundation of our ongoing success.

<unk> to be rooted in our more than 3100 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 am extremely proud of all of their efforts.

As always we appreciate your support and attention today and would now like to open the call for questions Rocco could you help us with that.

If you would like to ask a question. Please press Star then one on your Touchtone phone.

If you are using a speaker phone we ask that you. Please pickup your handset before pressing the keys.

Throwing a question. Please press Star then two.

Ladies and gentlemen, once again that started on wondering if you have a question.

We will pause momentarily to assemble our roster.

And today's first question comes from Bob <unk> with Wells Fargo. Please go ahead.

Hi, good morning, Thanks for taking the questions.

Could you talk a little bit more about margin management, specifically could you provide additional details on your selling price management initiatives.

And maybe any thoughts on the gross margin trajectory going forward much appreciate it.

Sure Ned Thanks, Thanks again for your interest.

The obviously in the commodity environment like we're experiencing right now.

The real challenge out there not only for our customers that have to contend with higher energy bills.

But also.

We operate very competitive.

Market so managing prices in this environment is no easy easy task, but I think what we've experienced over the many many years that we've been running the business.

We do a heck of a job managing selling prices through any commodity cycle and I think thats, what youre seeing in.

In our field operations ability to.

To manage the increasing in prices.

On top of that you have to understand that.

When people talk about the ability to expand margins.

I say with inflation creeping in as much as it is in so many aspects of our expense base like fuel costs maintenance costs.

We're investing heavily in our people.

Payroll costs are up.

Margins sort of have to expand in order to keep up with the rising expense base.

And then the last comment I'd make just on overall margins as we do a heck of a job with our risk management activities to try to insulate the business as best we can to the volatility that we're experiencing in.

In the market and and so you have a combination of good solid margin management at the field level good risk management.

<unk> very volatile commodity with the commodity price environment to.

To deliver a very strong performance across the board.

And overall margins, but but.

It's no easy task for sure when commodity.

Prices have gotten to the level that as Mike pointed out in our opening remarks.

63 on a basis Mount Bellevue.

Is something we haven't seen.

In a very very long time.

That's helpful and maybe on that last point.

I guess lighter volumes in the quarter were largely due to weather, but in the press release, you also pointed out too.

Customer conservation.

Given that high commodity price. So maybe if you could expand a little bit on this point and quantify the impact from customer conservation in the quarter.

And also if you could talk about the price of propane on a wholesale basis that triggers.

<unk> patterns amongst your customer base.

Yes, I'll take the second 0.1st which is we have historically.

Seeing that when when prices at Belvieu start to get above $1 in a quarter or so with close to $1 50.

You really start to see a different behavior in the customer base and so right now today or at least yesterday Bellevue close at about $1 28, So youre sort of stuck in that range and we've been we've been in that above $1 25 now for quite.

Quite a bit of time and when you get up to a $1 63, a $1 50.

Certainly experience.

Evel, a conservation that you don't otherwise experience when you are.

And the $1 85 range I mean, Bellevue has been as low as 25 since I've been with.

With the company for the last 20 years, but but so certainly I think the level that we're at now is the level that we typically have seen the impact of conservation as far as quantifying it it's kind of tough to to put an exact impact on volumes volumes overall were down 6% year over year.

In the quarter.

And I would say probably a couple of percentage of that is probably due to conservation, but it's not an exact science, but for sure you can tell the customer behavior you can see the usage per customer is down a bit.

Trying to figure out how much of that is just pure weather versus conservation is not an exact science, but.

It's all of those factors coming together.

Understood. Thank you.

And thank you gentlemen, as a reminder, we would like to ask a question. Please press Star then one.

Pause momentarily to assemble our roster.

Oh I'm sorry.

From Bryan Maher with Wells Fargo. Please go ahead.

Thanks, again, just one more so it seems the fiscal second quarter distribution completes a full year of <unk>.

Higher distributions after the eight 3% step up in last year. So could you could you maybe talk about the boards. Most recent view on distribution increases going forward.

Yes Ned.

I think what we've said all along is we we obviously take a very hard look every quarter.

As to how to allocate capital.

I think what we're excited about right now is the opportunities that we see in front of us with respect to deploying capital towards the build out of our renewable platform.

A number of exciting things that that we're continuing to look at.

And continuing to support that effort.

And as well as propane opportunities that as you come out of the heating season, a lot more of our businesses come to market and we.

We're starting to see that activity pick up again as normal. So so it's a balance we're fortunate.

That we have.

The excess cash flow generating capacity that this business is generating if you look at our trailing 12 months, we're generating over $100 million of excess cash flow.

And as we've demonstrated in the second quarter, we really take a balanced approach towards deploying capital investing in growth, but also still getting to a point, where we get to our target level of leverage which is in the mid three times. So we're still we still have some work to do on debt reduction.

We still have opportunities that are really.

On the horizon for the build out of our of our renewable platform as well as propane opportunities. So so we have a period of time here where.

Clearly there's opportunities to deploy capital that will have long term strategic and growth implications and obviously as that comes to fruition not only do we ensure the long term sustainability of this business for the next 90 years, but also.

Provide growth opportunities for our unit holders that that.

Can stay with us through this transition of.

Of migrating the business from a from a.

Long term propane distributor to a diversified propane and renewable energy distributor four four for the long term and participating in the low carbon economy that is upon us so.

So it's a long way of saying that.

There's lots of great opportunities ahead of us that we feel.

Very very good about and we have to be disciplined in how we think about capital deployment.

And long term view.

Thank you.

And ladies and gentlemen. This concludes today's question and answer session I would like to turn the conference back over to Mike <unk> for any closing remarks.

Great Rocco Thanks for your help today and thank you all for joining us and for your interest we look forward to talking to you again.

In relation to our third quarter earnings in August in the meantime.

Wish you all.

A very happy start to the to the <unk>.

Summer season, and stay healthy and safe. Thank you.

Thank you Sir This concludes today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.