Q4 2022 Suburban Propane Partners LP Earnings Call
Good morning, and welcome to the suburban propane partners fiscal 2022 full year and fourth quarter results Conference call.
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After todays presentation, there will be an opportunity to ask questions.
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I would now like to turn the conference over to Davin, Dambrosio, Vice President and Treasurer. Please go ahead Sir.
Thanks, Chad good morning. Thank.
Thank you for joining us this morning for our fiscal 2022 fourth quarter and full year earnings conference call joined.
Joining me this morning are Mike <unk>, our president and Chief Executive Officer.
Mike <unk>, our Chief Financial Officer, and Chief Accounting Officer, and Steve Boyd, Our Chief operating officer.
This morning, we will review our fiscal 2022 fourth quarter and full year financial results along with our current outlook for the business.
Once we concluded our prepared remarks, we will open the session to questions.
Our conference call contains forward looking statements within the meaning of section 21 E of the securities.
He is exchange access $19 34, as amended relating to the partnerships future business expectations, and predictions and financial condition and results of operations.
These forward looking statements involve certain risks and uncertainties. We've 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 our earnings press release, which can be viewed on our website at suburban propane dot com.
<unk> written and oral forward looking statements attributable to the partnership or persons acting on behalf are expressly qualified in their entirety by such cautionary statements.
Our annual report on Form 10-K for the fiscal year ended September 24, 2022, which contains additional disclosure regarding forward statements and risk factors will.
We will be filed on or about November 23.
What's filed copies may be obtained by contacting the partnership for 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.
Our form 8-K, which was furnished to the SEC. This morning.
The form 8-K will be available through a link in the Investor Relations section of our website.
At this point I will turn the call over to Mike <unk> for some opening remarks, Mike.
Thanks, Kevin Thank you all for joining us and good morning.
Fiscal 'twenty two was another outstanding year for suburban propane as we delivered solid operating results with an increase in adjusted EBITDA of more than $15 million or four 5% compared to the prior year.
We also made meaningful progress on the execution of our long term strategic growth initiatives with several investments to grow our renewable energy platform and.
And we continued to strengthen our balance sheet and improve our key financial metrics.
Despite the continued challenges in the broader economy that are affected in virtually every industry, namely high commodity prices inflation and labor shortages impacting recruitment efforts. Our operating personnel continue to do an outstanding job managing selling prices expenses and manpower.
While delivering exceptional service to our customers and the communities we serve.
With the strong earnings we utilized excess cash flow in a balanced manner to continue investing in the build out of our renewable energy platform supporting the growth of our core propane operations.
As well as to reduce debt by more than $42 million.
Our total leverage metric down to three six times from 396 times at the end of last year.
On the strategic front, we took a number of steps to advance our go green with suburban propane corporate pillar star.
Starting with the creation of our new subsidiary suburban renewable energy to serve as the growth platform for our investments in innovative renewable energy technologies and businesses.
Specifically during fiscal 2022, we announced the following strategic investments and collaborations.
In March we acquired a 25% equity stake in independents hydrogen.
A veteran owned and operating startup company developing a gaseous hydrogen ecosystem for a $30 million investment.
We made additional investments in Oberon fuels to support the commercialization of renewable dimethyl ether as a blend with propane, including our construction of the world's first commercial propane plus <unk> blending facility and our percentage of California location.
And in April we celebrated the industry's first ever commercial launch of propane plus <unk> in the United States with sales to forklift customers in our southern California markets.
In June we entered into an agreement with Adirondack farms in upstate New York to construct own and operate a renewable natural gas production facility using dairy cow manure as the feedstock.
And in May we announced a collaboration agreement with <unk> Corporation of America, a wholly owned subsidiary of <unk> Corporation in Japan.
To help accelerate the adoption of propane plus R&D and to explore opportunities to further advance investments and the hydrogen infrastructure in the United States.
We also expanded our presence in the growing and attractive market for propane usage and northern New Mexico.
With the acquisition of a well run propane business for $19 $5 million during July 2022.
So this was a very successful year for suburban propane and we are positioning the business, both operationally and financially.
Advocate the challenging macroeconomic environment, while also preserving capital to be strategic in our pursuit of our long term growth plans as a leading propane marketer and an investor in the country's ongoing energy transition to cleaner energy sources.
A little later I'll provide some closing remarks. However at this point I will turn the call over to Mike <unk>, who will discuss our full year and fourth quarter results in more detail Mike.
Thanks, Mike and good morning, everyone.
I'll start by focusing on our full year results enable a color on the fourth quarter towards the end of my remarks.
To be consistent with previous reporting I am excluding the impact of unrealized noncash mark to market adjustments on our commodity hedges, which resulted in an unrealized loss of $27 9 million in fiscal 2022.
Compared to an unrealized gain of $43 1 million in the prior year.
The unrealized loss on our commodity hedges for fiscal 2022 reflected the reversal of unrealized net gains at the end of the prior year as the majority of those unrealized net gains were realized during fiscal 2022, partially offset by unrealized gains on open positions as of September 2022.
The contracts associated with the open commodity hedges at the end of fiscal 2022 are expected to mature on a weighted average basis over the course of the fiscal 2023 heating season.
And the valuation of those hedges is subject to change as commodity prices fluctuate.
In addition to the unrealized adjustments on our commodity hedges I'm also excluding the noncash equity and earnings of over on fuels and in defense hydrogen, which are unconsolidated subsidiaries accounted for under the equity method.
Certain other noncash charges in both years.
We have included each of these items and a reconciliation of net income to adjusted EBITDA within the press release and our public filings.
Excluding these items net income for fiscal 2022 improved to $171 1 million.
Our $2 71 per common unit.
Compared to $101 9 million or $1 62 per common unit in the prior year.
Adjusted EBITDA for fiscal 2022 increased $15 3 million or five 6% to $291 million.
Compared to $275 7 million in the prior year.
As Mike mentioned the improvement in earnings for the fiscal year was driven by several factors, but most significantly through solid margin management.
Favorable impact of our commodity hedging and risk management strategy.
Period of high and volatile commodity prices and the benefits from new market expansion activities.
These factors more than offset the impact of soft volumes, resulting from warmer weather during the critical months of the heating season customer conservation and inflationary pressures on our expenses.
Retail propane gallons sold in fiscal 2022 were $401 3 million gallons.
Which is four 4% lower than the prior year.
Volume sold were negatively impacted by unseasonably warm and inconsistent temperatures throughout the heating season and customer conservation stemming from the high commodity price environment and overall inflationary pressures on household incomes.
In addition, <unk>.
<unk> in the prior year benefited from incremental outdoor heating and cooking demand associated with COVID-19 restrictions and more consumers staying at home at that time.
With respect to the weather average temperatures for fiscal 2022 were 10% warmer than normal and comparable to the prior year.
But during the most critical months for heat related demand, which is December through February average temperatures were 2% warmer than the comparable period in the prior year.
For a commodity perspective wholesale propane prices were elevated coming into fiscal 2022.
They continue to rise to a much of the heating season is the nation's inventory levels were tracking well below historical averages for that time of the year.
However, as we progressed through the second half of the fiscal year, the nation's inventory levels improve as solid production levels outpaced soft domestic demand and.
A slight pullback in exports, which in turn contributed to a decline in wholesale prices.
The <unk> inventory levels at the end of September 2022.
And now into the early part of fiscal 2023 are roughly in line with historical averages.
Which is a good position from a supply perspective has helped to bring protein prices down from the highs experienced earlier in the year.
Overall average wholesale prices basis, Mont Belvieu for fiscal 2022.
A $1 22 per gallon, which was 39% higher than the prior year.
Currently propylene prices seem to be somewhat range bound between 85 and 95 cents per gallon.
Excluding the impact of the mark to market adjustments on our commodity hedges as I mentioned earlier total gross margin of $817 3 million for fiscal 2022.
Increased $57 1 million or seven.
We're seven 5% 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 effect of price volatility associated with forecasted purchases of protein.
As well as propylene sold on a fixed price basis.
The commodity hedges that matured during fiscal 'twenty. Two we're principally comprised of net long positions that were favorably impacted from a significant rise in commodity prices.
Propane unit margins for fiscal 2022 increased 21 cents per gallon or 13% compared to the prior year.
And helped offset the impact of inflationary pressures on expenses.
And with respect to expenses combined operating and G&A expenses increased $43 $1 million or 9% compared to the prior year primarily.
Primarily due to inflationary pressures across most areas of the business.
Including higher payroll and benefit related expenses and higher vehicle lease and operating costs.
The expense 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 $60 $6 million for fiscal 2022 decreased $7 5 million or 11% compared to the prior year due to the refinancing of two tranches of senior notes at lower rates in the third quarter of fiscal 2021.
And from a lower average level of outstanding debt, partially offset by an increase in base interest rates for borrowings under our revolving credit facility.
Total capital spending for the year was $44 4 million.
Compared to $29 $9 million in fiscal 2021.
The higher level of capital spending was a result of the acquisition of several properties to support Greenfield expansion efforts in various growth markets and from the impact of significantly higher steel prices on our purchases of tanks and cylinders to support customer growth.
And turning to our fourth quarter results.
Consistent with the seasonality of our business, we typically report a net loss for the fourth quarter.
With that said, excluding the effects of noncash adjustments in both years, we reported a net loss of $27 1 million or.
43 cents per common unit compared to a net loss of $37 million or <unk> 59 per common unit in the prior year.
Adjusted EBITDA for the fourth quarter of fiscal 2022 increased to $2 $8 million compared to $300000 in the fourth quarter of fiscal 2021.
Total gross margin increased $30 million 11, 3%, primarily due to higher unit margins and an increase of service related revenues.
Combined operating and G&A expenses increased $10 9 million or nine 6% due to higher payroll and benefit related costs.
Higher vehicle lease and fuel cost and other inflationary factors on our operating costs.
Turning to our balance sheet as Mike mentioned, we repaid $42 $4 million of revolver borrowings during the fiscal year with cash flows from operating activities.
As a result of the debt repayment and the increase in adjusted EBITDA, Our consolidated leverage ratio for fiscal 2022 improved to three six times.
With our debt to EBITDA ratio trending closer to our target level of three five times, our balance sheet and liquidity position is strong.
With the continued uncertainty regarding the economy.
<unk> and commodity markets the strength of our financial position allows us to insulate the business from short term challenges, while also supporting our short term and long term strategic growth objectives as opportunities arise.
With that said I'll turn it back to Mike.
Thanks, Mike.
As announced in our October 20th Press release, our board of Supervisors declared our quarterly distribution of $32.05 per common unit in respect to the fourth quarter of fiscal 2022 that equates to an annualized rate of $1 30 per common unit.
The quarterly distribution was paid on November 8th to our unit holders of record as of November one.
With the strategic investments and partnerships that we have made over the past three years, we have begun to develop an interconnected portfolio of renewable energy assets.
That are focused on the distribution of renewable fuels, including renewable propane and propane plus R&D to me as well as hydrogen and renewable natural gas and.
And we will support our long term strategic growth objectives.
These investments and partnerships allow us to leverage our logistics expertise as local distributors of energy.
Support the country's clean energy transition.
And physicians suburban propane for long term growth and sustainability.
In 2023 suburban propane will celebrate 95 years as a trusted supplier of energy to local communities across the nation.
We have a long and proud history of being innovators.
And in adapting our business to changing circumstances.
We will continue to focus on the investments, we are making to support and grow our renewable energy platform.
And to support the country's energy transition to a sustainable energy future while.
I'll also fostering the growth of our core propane operations to ensure that our business continues to navigate a pathway for long term growth.
For the next 95 years.
Finally, I wanted to thank the more than 3100 employees of suburban propane further efforts in helping make fiscal 2020 to another outstanding year.
Of course, I hope you and your families remain safe and healthy and wish everyone. A very happy holiday season, and we appreciate your support and attention and would now like to open the call up to questions.
And Chad if you could help us with that.
Certainly certainly will now be going up will begin our question and answer session.
To ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
Again pressing star then one will allow you to ask a question and at this time, we will pause momentarily to assemble that roster.
Yeah.
Thank you and our first question will be from Ned <unk> with Wells Fargo. Please go ahead.
Hey, good morning, Thanks for taking the questions the margin per gallon adjusted for Mark to market of derivatives was higher than our forecast and higher than margins you reported in prior years.
I think in your prepared remarks, you noted price management is one of the drivers for the margin strength could you could you elaborate a little bit more on this and maybe also touch on how your competitors are dealing with warmer weather and higher opex.
Would you say that the industry in general or the industry as a whole is being more price disciplined.
In the current environment.
Well I'll take the second question first.
Absolutely I think the environment that we're in right now with high high commodity prices, albeit they've come down a bit but they're still relatively high in terms of historical.
Context.
As well as the challenges with inflation and high steel costs high costs for new vehicles the fuel costs.
Get our trucks on the road.
Challenges with with with labor that we referenced in our opening remarks.
That is not unique to spirit propane that's for sure and I think the <unk>.
Industry as a whole is experiencing the same challenges we are so yes, we've definitely seen.
Discipline in terms of <unk>.
<unk> I think when you are facing the kinds of inflationary challenges, we reported about 10% increase overall in operating and G&A expenses.
That's something that.
We and the industry needs to continue to make sure that we're able to cover through good good margin management, good selling price management.
The volatility that we've experienced in the base commodity.
<unk> has certainly made it challenging to continue to.
To manage selling prices and certainly the pain that some of the consumers are experiencing given the economic situation and their own.
Personal lives is.
Is it challenging to make sure that we're pricing at a point where we.
We don't drive too much conservation, but also make sure that we're doing a good job covering our own costs and the rising level of inflation. So so I think thats really what you saw on the margin management to your first question was was just really good discipline on our part.
Our field management, and managing selling prices taking into consideration.
The market taking into consideration our consumers need to manage their own budgets, but also ensuring that we're covering the higher cost of doing business.
Thanks, very very helpful and then.
You may be talk about.
The propane M&A market has there been a change in how you think about acquisitions.
The multiples you're willing to pay for propane assets and maybe the asking prices youre seeing by potential sellers.
Yes, I think we're still very strategic in the way, we look at propane M&A we've been.
Very selective in finding the most attractive markets, where we're experiencing growth in our own.
Our own platform and finding businesses close by that can help support acceleration of that growth in those markets.
Obviously, we look for very well run respected businesses in those markets and so that's not going to change for suburban propane as far as the broader market for M&A I think when you look at the <unk>.
The rising interest rates and higher cost of capital.
I think I think.
We would expect and I think we are starting to see a little bit more discipline in the propane M&A market rare.
Relative to multiples just given the higher cost of capital. So I think I think that's something that I would expect to continue to see going into 2023.
Thanks for that that's all I had.
Great. Thanks, Thanks Ned.
Thank you and once again, if you would like to ask a question. Please press Star then one.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Mike <unk> for any closing remarks.
Great. Thanks, Chad I appreciate the support.
You all again happy holiday season, we look forward to speaking with you in early February as we will be prepared to close out our first quarter of fiscal 2023, we are very excited about the prospects for 2023 and the position that we've placed suburban propane.
To be successful going forward. So thank you again for your support.
And thank you Sir this concludes our question and answer session and our call. Thank you for attending today's presentation. You may now disconnect. Thank you.
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