Q3 2022 Suburban Propane Partners LP Earnings Call

Some of the operating challenges included high and volatile commodity prices driving customer conservation and challenges managing price risk associated with inventories and future supply.

Tightness in the labor market in particular for qualified CDL drivers and service technicians, creating hiring challenges and higher labor costs and.

Inflationary factors, increasing the cost of vehicles tanks diesel fuel and many other operating costs and the impact of overall inflation on the consumer which is delaying collection efforts as customers are managing their household spending budgets.

Our continued strong performance in the face of these challenges is a testament to our unique flexible and nimble business model, which has consistently set us apart from our peers.

I am extremely proud of our operating personnel, who continue to do an outstanding job and safely meeting the needs of our customers and staying focused on our customer base growth and retention initiatives.

While effectively managing selling prices manpower levels and expenses.

Additionally, our supply and risk management teams continue to do a great job, ensuring adequate supplies of inventory and managing price volatility through our risk management activities, which have supported our overall margin performance and ability to offset some of the inflationary factors.

As a result, adjusted EBITDA for the third quarter was $29 2 million, an improvement of nearly $6 million compared to the prior year.

With the improvement in earnings we used excess cash flows to reduce debt by more than $43 million, bringing our.

<unk> leverage ratio down to 364 times from 396 times at the end of the prior year third quarter.

And a continued improvement from the prior sequential quarter, which was 387 times.

In addition to the improvement in earnings we had a very active quarter on the strategic front as we continue to advance the build out of our renewable energy platform and supported the country's ongoing energy transition towards a lower carbon future.

Specifically.

At the end of April we had a ribbon cutting ceremony at our customer service center located in Anaheim, California, as we launched the first ever commercial sales of propane plus <unk>.

Which combines the clean versatile and abundantly available propane with low carbon benefits of renewable dimethyl ether, which is produced by over on fuels our minority owned subsidiary.

We are now selling this new product to several of our forklift customers in southern California.

We also made additional investments in over on fuels to support their efforts to accelerate the commercialization of propane plus <unk>.

In May we announced the collaboration agreement with <unk> Corporation of America, a wholly owned subsidiary of <unk> with Tiny Corporation, Japan's largest distributor of propane and only fully integrated supplier of hydrogen.

We will work together to help accelerate the adoption of propane plus <unk> both.

Here in the U S and in Japan and to explore opportunities to advance investments and the hydrogen infrastructure in the United States.

In June we announced a new investment through our suburban renewables platform with an agreement reached with Adirondack farms are family owned dairy farm in upstate New York to construct own and operate.

And anaerobic digesters system for the production of renewable natural gas from dairy cow manure.

These strategic initiatives are on the heels of our $30 million investment for a 25% equity stake in independents hydrogen, which was announced at the end of the second quarter independents hydrogen continues to make great strides in executing on their business plans toward the build out of our hydrogen ecosystem.

We also remain focused on the growth of our propane operations and in July subsequent to the end of the quarter. We completed an acquisition of a well run propane business in northern New Mexico, which will expand our presence in this growing market and provide synergy opportunities to support our best in class propane operations.

Therefore, as we have stated over the course of the past several years, we continue to utilize excess cash flow in a balanced way to make investments in our long term strategic growth initiatives and to further strengthen our balance sheet.

In a moment I'll come back for some closing remarks and provide added color on our strategic initiatives. However, now I'll, let Mike give you our third quarter results in more detail Mike.

Thanks, Mike and good morning, everyone.

Consistent with previous reporting as I can.

Discuss our third quarter results I'm, excluding the impact of unrealized mark to market adjustments on our commodity hedges, which resulted in an unrealized loss of $900000 for third quarter.

Compared to an unrealized gain of $11 1 million in the prior year.

Excluding these items as well as a noncash equity and earnings of over on fuels and independent hydrogen which are unconsolidated subsidiaries accounted for under the equity method and certain other noncash charges in both years.

Our earnings for the third quarter improved from a net loss of $20 9 million or <unk> 33 per common unit in the prior year to breakeven in the current year.

Adjusted EBITDA for the third quarter was $29 2 million.

Which was $5 $9 million or 25, 3% higher than the prior year.

The improvement in earnings was driven by several factors most significantly from cooler spring temperatures.

Continued solid margin management.

Favorable impact of our commodity hedging and risk management strategy in a period of high and volatile commodity prices.

Retail propane gallons sold in the third quarter were $75 5 million gallons, which was one 6% lower than the prior year.

While volumes for the quarter were favorably impacted by cooler spring temperatures the benefit from the cooler weather was more than offset by a considerable level of customer conservation, resulting from the high commodity price environment.

And overall inflationary pressures on consumers' disposable income and buying habits.

In addition volumes in the prior year third quarter benefited from incremental outdoor heating and cooking demand associated with Covid related government restrictions.

And more consumers staying at home at that time.

With respect to the weather average temperatures for the third quarter were 4% warmer than normal and 5% cooler than the prior year third quarter.

From a commodity perspective average wholesale propane prices remain elevated.

Even as they have gradually come down over the last few months due to improving but still lower than normal inventory levels across the country.

The nation's inventory levels during the third quarter.

Now into the early part of the fourth quarter have remained around 12% to 15% below the five year average.

Which is an improvement from earlier in the fiscal year, but remains below historical averages at U S. Propane production continues to struggle to keep pace with demand and more significantly strength in exports.

Overall average wholesale prices basis, Mont Belvieu for the third quarter were $1 25 per gallon, which was 44% higher than the prior year third quarter and 4% lower than the second 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 $163 million for the third quarter.

Increased $16 4 million.

Or 11, 4% compared to the prior year.

The improvement in gross margin was driven by effective selling price management during a 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 intended to reduce the effects of price volatility associated with forecasted purchases of propane and propane sold on a fixed price basis.

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

With respect to expenses, excluding noncash pension settlement charges in both periods.

Combined operating and G&A expenses of $130 million for the third quarter increased $10 4 million.

Or eight 7% compared to the prior year.

Primarily due to inflationary pressures across most areas of the business.

Excluding higher payroll and benefit related expenses and higher vehicle lease and fuel costs.

The increase was also attributable to higher accruals for variable compensation due to the increase in earnings and higher provisions for doubtful accounts due to higher selling prices and delays in customer payments.

Net interest expense of $15 million for the third quarter was $1 7 million or 10, 4% 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 $10 9 million was.

<unk> was $3 $5 million higher than the prior year, primarily due to greenfield market expansion activities and growth markets.

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

Turning to our balance sheet as Mike mentioned during the third quarter, we repaid $43 1 million of borrowings under the revolver with cash flows from operating activities.

The debt repayment, our total debt outstanding as of June 2022 was $60 million lower than June of last year.

A combination of the increase in earnings and debt repayment during the third quarter resulted in our consolidated leverage ratio for a trailing 12 month period ended June 2022, improving to 364 times.

With our debt to EBITDA ratio trending closer to our target level of three five times, our balance sheet liquidity position is strong.

With the continued uncertainty regarding the economy.

Inflation and commodity markets the strength of our financial position allows us to insulate the business from short term challenges, while also supporting our strategic growth as opportunities arise.

Back to you Mike.

Thanks, Mike.

As announced on July 30, 21.

Our board of Supervisors declared our quarterly distribution of $32.05 per common unit in respect of our third quarter of fiscal 2022, which equates to an annualized rate of $1 30 per common unit, our quarterly distribution will be paid on August nine to our unit holders of record as of August 2nd.

So in closing.

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Since the onset of COVID-19 in early 2020, and now with the challenges in the economy as we emerge in a post COVID-19 environment.

We have taken many steps to adapt our business model protect and invest in our valued employees and strengthen our balance sheet.

All while continuing to support our long term strategic growth initiatives through our participation in the energy transition to a cleaner energy future.

With the investments in Oberon fuels independents hydrogen in the most recent agreement to produce renewable natural gas. We have developed an interconnected set of renewable energy assets that are very complementary to our expertise as energy energy distributors and service providers to local communities.

We will continue to focus on the execution of our strategic growth plans to support these and other renewable energy technologies and businesses. While also fostering the growth of our core propane operations.

With the strength of our earnings and cash flows through the first nine months of fiscal 2022, our distribution coverage for the trailing 12 month period remains strong at two six times after maintenance Capex.

We are in a very strong position, both operationally and financially, especially as our leverage ratio trends closer to mid three times, which provides support for our long term sustainability and growth for you our valued unitholders.

Finally, the foundation of our ongoing success continues to be rooted in our more than 3200 dedicated employees of suburban propane and their hard work and unrated wavering 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 and would now like to open the call up for questions. Chuck If you could assist us with that please.

Yes, Sir we will now begin the question and answer session.

Ask any question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the key and to withdraw. Your question. Please press Star then two and at this time, we will pause momentarily to assemble our roster.

Again, if you have a question. Please press Star then one.

Okay.

And this will conclude our question and answer session I would like to turn the conference back over to Mr. Mike <unk> for any closing remarks.

Great. Thanks, Chuck and thank you all again, we look forward to talking to you in November as we close out at the end of our fiscal year, we intend to continue to manage the business.

Through these challenges and end the year very strong and continue to focus on our strategic initiatives. So so thank you again and have a safe rest of your summer and early fall.

To access the digital replay of this conference you May dial one 870, 734 475 to nine or one four <unk> to 31 70088, you will be prompted to enter a conference number which will be 10168137. Please record your name.

<unk> company when joining the conference is now concluded. Thank you for attending today's presentation you may now disconnect.

Sure.

With regard.