Q3 2023 Suburban Propane Partners L.P Earnings Call

Good day and welcome to the suburban propane partners third quarter earnings Conference call.

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After today's presentation, there will be an opportunity to ask questions.

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No. This isn't is being recorded I would now like to turn the conference over to Darren D. Ambrosio, Vice President and Treasurer. Please go ahead.

Thanks, Betsy good morning, everyone.

You for joining us this morning for fiscal 2023 third quarter earnings Conference call.

Joining me this morning, our <unk>, our president and Chief Executive Officer, like Kugel, Chief Financial Officer, and Chief Accounting Officer.

Boy, our Chief operating officer.

This this morning, we will review, our third quarter financial results, along or with our current outlook for the business.

We concluded our prepared remarks, we will open the session of questions.

Our conference call contains forward looking statements within the meaning of section 21.

Of the Securities Exchange Act of 1934 as amended related to the partnership's future business expectations and predictions.

You'll condition and results of operation.

These forward looking statements at Bob certain risks and uncertainties.

We've listed some of the important factors that could cause the actual results to differ materially from those discussed in such forward looking statements, which are referred to as cautionary statements and our earnings press release, which can be viewed on our website at suburban propane dot com.

All subsequent Britain and oral forward looking statements attributable to the partnership where persons acting on its behalf are especially qualified in its entirety by cautionary statements.

Alright annual report on Form 10-K for the fiscal year ended September 24th 2022.

<unk> 10-Q for the period and the 20th June 24th 2023, which will be filed by the end of business today contain additional disclosures regarding forward looking statements and risk factors copies may be obtained by contacting the partnership or S. E C.

Sorry, not GAAP measures will be discuss on this call we provide a description of those measures.

As well as the discussion of why we believe this information to be useful in our form 8-K, which was furnished to the SEC This morning, the form 8-K will be available through awake and the Investor Relations section of our website.

At this time I will turn the call over to Mike's of all for some opening remarks like.

Great. Thanks, Devon. Good morning, Thank you all for joining us today.

The physical twenty-two twenty-three thirdquarter was another strong quarter for suburban propane with adjusted EBITDA $33 million, our highest reported results for any third quarter in our history and.

And an improvement of nearly $4 million or 13% over the prior year third quarter.

Operating results benefited from strong customer demand due to cooler spring temperatures in certain parts of our territories, which increased volumes by 3.9%.

We also have continued success in our customer base growth and retention initiatives effective selling price management and a great job by our operating personnel and managing expenses and a persistent inflationary environment.

Additionally, the quarter included contributions from the Orangey platform that we acquired at the beginning of the second quarter.

Within our developing renewable natural gas or Orangey platform we.

We completed planned upgrades to help optimize plant operations at our Stanfield, Arizona facility.

And are now starting to exceed our initial projections for daily production and pipeline injection at that facility.

Additionally, at the Stanfield facility, we're making great progress integrating support functions <unk>.

Including Onboarding, the operating personnel, who were previously and pull employed by a third party operating and maintenance company.

This will enhance our operating controls and reduce expenses.

We also continue to advance the construction of the Orangey production assets at Adirondack farms in New York and the capital improvements at the Columbus, Ohio facility, which include enhancements to asset performance.

And the installation of gas upgrade equipment for RG production.

These two facilities are expected to be fully constructed and ended up and beginning to reach run right capacity capacity in fiscal 2025.

During the quarter, we use excess cash flows in a very balanced way to acquire a well run propane business and have strategic market on the west coast to support the growth of our core propane business.

As well as to fund ongoing capital projects in our Orangey operations make.

Make additional investments and o'bryan fuels and we also reduce that by approximately $21 million.

As I have stated on a number of occasions on previous quarterly earnings cause we were taking a very measured approach to positioning the business for a long term growth and sustainability.

Leveraging the strength of our core propane business and our 95 year legacy of being a trusted provider of energy to local communities.

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

Thanks, Mike and good morning, everyone.

To be consistent with previous reporting discuss our third quarter results and excluding the impact of unrealized mark to market adjustments on a commodity hedges.

Which resulted in an unrealized loss of $3 million for the third quarter compared to an unrealized loss of $900000 in the prior year.

Along with certain other non-cash items and acquisition related transaction costs.

Given the seasonal nature of our business, we typically experienced a net loss in the third quarter or fiscal year.

With that said the net loss of the third quarter was $1.5 million for two central <unk> unit compared to break even in the prior year.

Adjusted EBITDA for the third quarter increase $3.8 million or 13.2% to $33 million compared to $29.2 million in the prior year.

As Mike mentioned the improvement in earnings was driven by cooler spring temperatures and organic growth in our customer base that contributed to higher volume sold along.

Along with contribution from the Orange your production facilities.

The beginning of the second quarter.

Detailed propane gallon sold in the third quarter, where 78.5 million gallons, which is 3.9% higher than the prior year, primarily due to cooler weather and certain market and favorable customer base trends.

While average temperatures as measured heating degree days, where four per cent warmer than normal and comparable to the prior year third quarter experienced cooler spring temperatures and much of our territories in the west.

Certain portions of the northeast that contributed to an increase in heat related demand.

Alright commodity perspective broken inventory levels in the U S remained elevated during the third quarter and contributed to declined and wholesale prices compared to the prior year third quarter.

According to the energy information administration, you as appropriate inventories at the end of June 2023 were at 79.5 million barrels, which is 47 per cent higher than June 2022 levels and 18% higher than historical averages for that time of the year.

As a result of the increase in inventories and other factors average wholesale prices for the third quarter of 68 cents per gallon that's basis, Mount Bellevue decreased 46% compared to the prior year third quarter.

Excluding the impact the mark to market adjustments or commodity hedges that I mentioned earlier total gross margin of $171.1 million for the third quarter increased $10.8 million or 6.7% compared to the prior year.

Primarily due to higher volume sold and Martin contribution from the Orangey assets.

With respect to expenses combined operating and G&A expenses of $137.4 million for the third quarter increased $7.4 million or 5.7% compared to the prior year.

Primarily due to higher variable operating costs as a part of the increase in volume sold to.

The continued impact of inflation on payroll and vehicle lease and repair class, albeit at a moderate pace as well as the operating costs associated with the new Orangy assets.

Interest expense of $18.7 million for the third quarter was $3.7 million higher than the prior year <unk>.

Due to a higher level of average outstanding borrowings under a revolving credit facility to fund the Orangey acquisition in the second quarter.

Coupled with higher benchmark interest rates with borrowings under the revolver as.

What was the impact of the $86 million in Green bond assumed in the Orange acquisition.

Total capital spending for the quarter of $9.4 million was $1.6 million lower than the prior year <unk>.

Primarily due to a lower level of spending on propane tanks and cylinders as we leveraged inventory on hand.

More than offset capital growth associated with the expansion an upgrade of the Orangey production facility in Stanford Arizona.

And the ongoing construction of the Orangey facility at Adirondack arms.

Which is expected to be completed by December of 2024.

Overall capital spending for the on the Orangey projects is expected to range between five and $10 million in fiscal 2023.

In between $25 million to $35 million in fiscal 2024, excluding the benefit of potential investment tax credit.

Turning our balance sheet as Mike mentioned during the third quarter, we repaid $25 million of borrowings under the revolver with cash flows from operating activities.

And a fiscal year to date basis, we have repaid $45 million or the $150 million borrowed on the revolver to fund the R&D acquisition.

As a result of the increase in earnings and debt repayment during the third quarter or consolidate leverage ratio for the <unk> 12 month period ended June 2000, twenty-three improved to 4.36 times compared to 4.43 times at the end of the second quarter.

Although the leverage metric is elevated relative to our historical levels and our target level, three and a half times, we remain well within our deck covenant requirement of $5 75 times.

Factoring in that project runway EBIT contributions from the Orange the assets the pro forma consolidated leverage ratio approaches four times.

We will continue to remain focus on utilizing excess cash flows to fund the plane growth capital within the RMT platform as well as be strengthened the balance sheet and.

As opportunities arise to fund strategic growth of our core proprium business and renewable energy portfolio.

We have more than ample borrowing capacity under a revolver to support our capital expansion plans and ongoing strategic growth initiatives.

As we continue to focus on the execution of our longterm strategic goals. We will also stay focused on maintaining a strong balance sheet.

Back to you Mike Thanks.

Thanks, Mike.

As announced on July 20th or board of Supervisors declared our quarterly distribution of 32, and a half cents per common unit in respect of our third quarter of fiscal 2023.

Equates to an annualized rate of $1.30 per common unit.

Our quarterly distribution will be paid on August 8th two our unitholders a record as of August 1st.

Our distribution coverage continues to remain very strong at 2.27 times for the trail in 12 months ended June 2023.

Just a few closing remarks.

When we launched Argo Greenwood suburban propane corporate pillar in 2019 at highlighted our strategic focus on advocating for the inherent clean qualities of propane as a vert versatile energy solution to lowering the carbon footprint across multiple sectors of the economy, while also investing in innovative technologies.

And businesses that can help accelerate the energy transition to achieve aggressive low carbon standards.

Support infrastructure across multiple operational in back office functions.

While also providing suburban propane with a platform.

And exposure to potentially disruptive technologies or novel business processes in the transition to renewable energy <unk>.

With our assistance both companies are making good progress towards their commercialization efforts.

Most recently, we've begun to build out an orangey platform that suburban propane owns outright.

Who are wholly owned subsidiary suburban renewable energy.

The current portfolio of Orangey producing facilities are diversified by geography, feedstock offtake qualifying environmental credit attributes and eligibility for investment in production tax credits.

And as I stated in my opening remarks, the Stanfield, Arizona facility is currently producing and injecting orangey into a pipeline interconnect adjacent to the facility and through enhancements to the processing is exceeding our initial projections for daily volume injection.

The Columbus, an Adirondack facilities are undergoing planned construction of upgrading and as such will begin flowing orangey towards the end of fiscal 2024 or the beginning of fiscal 2025.

We also have another number of additional orangey acquisition or development opportunities in our pipeline that are in various stages of evaluation.

In conclusion, we are very much focused on continuing to foster the growth of our core propane business because it has the strength and stability of our of our propane business that helps provide the cash flow to support our investments in the energy transition.

As I mentioned, we're making strategic investments in the ongoing energy transition to lower carbon renewable energy alternatives in order to set the business up for the future.

In an effort to create long term value for our employees are valued unitholders and other stakeholders.

We are taking a very measured and disciplined approached in the execution of our strategic growth plans. While also staying focused on maintaining a strong balance sheet.

Which provide support for a long term sustainability as an organization and access to capital to fund opportunistic growth.

And to welcome the new employees that are supporting the operations in glory and growth of the Orangey business.

Thank you all for all that you do every day.

And as always we appreciate your support and attention. This morning, and now will open the call up to questions and Betsy if you wouldn't mind, helping us with that.

We will now begin the question and answer session.

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At this time, we apart from apparently to assemble our roster.

The first question today.

Gabriel <unk>. Please go ahead.

Okay.

Good morning, everyone.

Maybe I can start out I think I'm, Mike made some comments to make some comments about the.

The moderating inflationary environment, maybe you could elaborate on that and kind of what what you're seeing out there. What's your expectations may be on what kind of inflation rate and you may be facing from an opex standpoint next kind of into next year.

Yes, one of the biggest drivers behind the increase in expenses was in payroll.

And it was most pronounced I guess you would say we saw in 2022 and then throughout 2023, but the rate of increase is certainly coming down.

It's certainly not flatlining, but but the rate of increase is certainly moderating compared to what we experienced in the last 18 to 24 months.

Outside of that I'd say vehicle expenses.

They've <unk>, they've been pretty elevated but the last couple of years and as we look forward remain elevated but the rate of increase is can be starting to come down a bit.

Thanks, Mike and then maybe if I can ask about potential orangy acquisitions, there's dimension of looking at additional opportunities to there can you just talk about how to act of the pipeline is weather things.

Potentially imminent here and then how you play off allocating capital to more Orangey right now versus doing additional propane acquisitions like come on you do it on the West coast.

Yeah, there's nothing imminent Gabe Yeah, I think we're always pretty active in evaluating opportunities and now that we have an active portfolio of assets throughout the country. There, there's there's lots of opportunities that our team.

That's helping us operate that business as well as our strategic.

Corporate development team, they're continuously evaluating different opportunities building relationships in the space and and I think one of the things that we see with our involvement in the Orangey platform is a lot of the orangey assets that are out there right now have been sort of in the hands.

Investors and whether it be private equity or startup companies that that bootstrap themselves to create a platform and I think we bring a whole different level of focus on long term long term operation of the business and.

I think that that is is giving us an advantage in the conversations that we're having but there's nothing imminent were.

We're very deliberate and and the way we look at and evaluate these these opportunities we're going to continue to be patient in that regard as it relates to allocating capital you know same thing with propane propane. We're gonna we're always active I think the the pipeline there.

Think has gotten smaller over the years, there's there's seems to be less and less mom and pops that come to market in the past two years and I would say the five years prior to that and but we're always in the market looking at those opportunities, but they have to be in really strategic markets and and they.

Have to be at the rate multiple and so.

The allocation is really dependent on how strategic the particular opportunity is that's in front of US. The good thing is is that we're generating excess cash flow from the business and we have capacity to to allocate that excess cash flow as I said in my opening remarks, we.

We had a combination of a propane acquisition that was less than $10 million.

We continued to fund the capital expansion.

Of the renewable platform and we also reduce that by $21 million. So that's sort of the way we like to to be opportunistic with the excess cash flow for now while we're building out this platform.

Great. Thanks, I appreciate it.

That's good.

The next question comes from Jane Spicer with T. T Securities. Please go ahead.

Hey, good morning hygiene prepared remarks, you mentioned pro forma leverage factoring in projected run rate EBITDA contributions from your R&D business, just wondering what you're assuming they're thinking about in terms of EBITDA contributions and then more broadly how we should be thinking about build multiples for your.

Various RMG projects.

Yeah, I mean, I think you could do the math.

We're at 4.3, now and I said, we're we're approaching four so you could do the math on how that what that what that means in terms of the incremental EBITDA that we have we haven't.

We're not out there projecting out what what the what the contribution is gonna be that's not our style. We don't typically give guidance like that so that's the guidance, we're giving that when you look at it on that basis and the way we looked at the deal before we did it was was on a pro forma basis to get us closer to four times.

I'm, so so that's kind of.

The way we are you know the the Leverages.

Shaking out.

As far as your.

Your your second question.

Remind me what was the second question was yeah. Yeah. It was just sign up build models you have to build multi yeah sorry.

So yeah on build multiples obviously, we're still in the early stages here of of renewable energy investments.

You know I think build multiples are probably gonna be in the high single digit is kind of the way we're thinking about it at this stage and that's what that's what.

Okay. That's that's helpful. Okay can you also remind me.

You are on Capex at this point relative to your full year budget.

Yeah. So on the on the propane side, what you would typically expect to see his capex running between 35 to 45 million came in around $45 million last year given elevated.

That's correct.

Okay. Thank you very much.

Thanks James.

The next question comes from Burma with Wells Fargo. Please go ahead.

Hey, good morning, Thanks for taking my questions.

Hi, so be it seems to be Arizona Orangy facility is tracking ahead of your internal volume expectations can you maybe touch on what is driving the outperformance there and and if there's any potential additional upside.

The performance of the digester itself and the ability to get <unk> get more yield out of the feedstock that we were bringing in growth from here. There are still some opportunities for expansion without putting in more capital, meaning bringing in more feedstock both from other farms that are.

Locally situated in the area that.

Are not currently sending their manure into our facility, but also we do take in local.

Biomass.

As a bio solids.

And our.

D five oriented digester as well so there are some opportunities to increase the amount of feedstock that we're bringing in in both of those streams. So that we can increase the the amount of production that's gonna take a bit of time I think we what we focused on since we've only assets for the past six months is is really.

Performance of the assets themselves enhancing the streamlining the business enhancing the the actual performance of the Digesters.

Working through some some challenges that that they had previous to our ownership and we've worked all that out now and and and are really seeing great great performance of those assets.

Got it and and my second question can you can you provide more detail on your most recent propane acquisition on the West coast five any details behind the process synergy potential et cetera.

It's relatively small on that.

I said it I think in my first answer it's less than $10 million of a purchase price. So you know, it's it's not it's not a significant contributor but.

It is something that the way, we look at propane acquisitions.

They have to be in really good markets, where where are we see opportunities either through synergies or because of the population growth or other growth. That's that that market is experiencing. This one. This particular one sits right in the middle of a really good territory of ours in the upper northwest.

That's going to generate good good synergies for us and gives our gives our team up there an opportunity to take one of their competitors out and and expand their market share. While also putting in our operating platform to drive the synergies. So it's.

It's not a big deal not a big acquisition, but it's important for our operations on the West coast and and it's the right kind of deal for us to be doing to continue to feed the propane business.

That's great. Thank you that's all I had.

Great. Thanks net.

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Question.

Great. Thanks, Betsy. Thank you all again for joining us. This morning I appreciate your attention enjoy the rest of your summer. Please be safe out there. We look forward to talking to you in November as as we close out another great fiscal year for suburban propane.

So so thank you again.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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