Q2 2024 Suburban Propane Partners L.P. Earnings Call
Good morning, ladies and gentlemen, welcome to the sub urban and propane partners second quarter earnings Conference call. At this time all lines are in listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you require immediate assistance. Please press star.
Zero for the operator this call is being recorded on Thursday may nine 2024, and I would now like to turn the conference over to Mr. Davin, Dambrosio, Vice President and Treasurer. Thank you. Please go ahead.
Davin Dambrosio: Great. Thank you good morning, everyone.
Davin Dambrosio: You for joining us this morning for our fiscal 2024 second quarter earnings conference call joining.
Davin Dambrosio: Joining me this morning are Mike <unk>, our president and Chief Executive Officer.
Davin Dambrosio: Mike <unk>, our Chief Financial Officer, and Steve Boyd, our Chief operating officer.
Davin Dambrosio: This morning, we will review our second quarter financial results, along with our current outlook for the business.
Davin Dambrosio: Once we've concluded our prepared remarks, we will open the session to questions.
Davin Dambrosio: Our conference call contains forward looking statements within the meaning of section 21 E.
Davin Dambrosio: Of the Securities Exchange Act of $19 34, as amended relating to the partnerships future business expectations predictions financial condition and results of operations.
Davin Dambrosio: These forward looking statements involve certain risks and uncertainties.
Davin Dambrosio: We have 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.
Davin Dambrosio: All subsequent written and oral forward looking statements attributable to the partnership.
Davin Dambrosio: Persons acting on its behalf are expressly qualified.
Davin Dambrosio: In their entirety by such Questionary statements.
Davin Dambrosio: Our annual report on Form 10-K for the fiscal year ended September 32023.
Davin Dambrosio: <unk> Form 10-Q for the period ended March 32024, which will be filed at the end of the business today.
Davin Dambrosio: Additional disclosure regarding forward looking statements and risk factors copies may be obtained by contacting the partnership with the SEC.
Davin Dambrosio: Certain non-GAAP measures will be discussed on this call. We have provided a description of those measures as.
Davin Dambrosio: As well as a discussion of why we believe this information to be useful.
Davin Dambrosio: Our form 8-K, which was furnished to the SEC. This morning.
Davin Dambrosio: Form 8-K will be available through a link in the Investor Relations section of our website.
Davin Dambrosio: At this point I will turn the call over to Mike <unk> for some opening remarks, Mike.
Mike: Thanks, Devin and good morning, Thank you all for joining us today.
Mike: The fiscal 2020 for heating season presented widespread unseasonably warm weather across the vast majority of our operating territories.
Mike: With the exception of a two week period of extreme cold temperatures in mid January.
Mike: Which reported heating degree days were 33% colder than the prior year.
Mike: For the fiscal 2024 second quarter average temperatures were 8% warmer than normal, which followed a first quarter that was also 9% warmer than normal.
Mike: While the warm weather negatively impacted customer demand for heating purposes, we were once again able to leverage our experience in managing our business through a challenging heating season, and our operating personnel did an outstanding job managing the things they can control, namely keeping safety as their highest priority.
Mike: Providing exceptional service to our customers.
Mike: Managing selling prices and controlling expenses.
Mike: In addition, the recent and continued favorable trends in our customer base helped to offset some of the shortfall in heat related demand.
Mike: As a result volumes for the second quarter of fiscal 2024.
Mike: Two 7% below the prior year adjusted.
Mike: Adjusted EBITDA for the quarter was $147 million down $2 million or one 3% compared to the prior year second quarter.
Mike: And our renewable natural gas operations, we are continuing to install an operational excellence mindset that has made us a leader in the propane industry, including driving efficiencies modifying our manure collection practices to increase the amount of volatile solids to be processed.
Mike: And identifying additional local dairies in the Stanfield, Arizona area to increase manure intake.
Mike: As a result, we are continuing to improve the amount of average daily pipeline injected RMG at the Stanfield facility with an average level 1100, 39, <unk> injected per day during the second quarter of fiscal 2024.
Mike: An improvement of eight 4% compared to the first quarter of fiscal 2024 and with the continued enhancements that we're making we have additional opportunities to increase production levels even further.
Mike: Also continuing to advance our capital improvement plans for the installation of RMG upgrade equipment at our Columbus, Ohio facility and the construction of our anaerobic digester facility at Adirondack farms in upstate New York.
Mike: We expect both facilities to be completed in the second half of calendar 2025.
Mike: Finally, subsequent to the end of the second quarter, we closed on two small propane acquisitions in strategic markets in Florida and Nevada.
Mike: Investing a total of approximately $13 million.
Mike: So while warm weather weighed on customer demand in the fiscal 2020 for heating season, our operational personnel delivered solid results and we remain steadfast in our commitment to our long term strategic growth objectives are fostering the growth of our core propane business, while making strategic investments and lower carbon renewable energy.
Mike: Alternatives.
Mike: Moment I'll come back for some closing remarks, however at this point I'll turn it over to Mike <unk> to discuss the second quarter in more detail, Mike Thanks, Mike and good morning, everyone.
Mike: To be consistent with previous reporting as I discussed our second quarter results and excluding the impact of unrealized mark to market adjustments on our commodity hedges, which resulted in an unrealized gain of $5 $9 million for the second quarter.
Mike: Compared to an unrealized loss of $4 5 million in the prior year.
Mike: Excluding these items as well as the noncash equity and losses of our unconsolidated subsidiaries accounted for under the equity method.
Mike: What is that loss in debt extinguishment, resulting from the refinancing of our credit agreement.
Mike: And acquisition related transaction costs and a prior year.
Mike: Net income for the second quarter was $110 $3 million or $1 71 per common unit.
Mike: <unk> to net income of $112 8 million or $1 76 per common unit in the prior year.
Mike: Adjusted EBITDA for the second quarter was $147 million compared to $149 million in the prior year.
Mike: As Mike mentioned, our earnings for the quarter were impacted by lower heat related demand, resulting from the warm weather during most of the quarter, but benefited from organic growth of our customer base.
Mike: Net margin expansion and greater contribution from our R&D facilities.
Mike: Retail propane gallons sold in the second quarter were $140 2 million gallons, which was two 7% lower than the prior year.
Mike: Primarily due to the impact widespread warm weather throughout much of the second quarter, except for a two week period of extreme cold temperatures in mid January.
Mike: According to NOAA average temperatures for the quarter as measured in degree days were 8% warmer than normal and 4% cooler than the prior year second quarter.
Mike: Although we experienced an increase in heating degree days compared to the prior year.
Mike: The increase was heavily influenced by mid January heating degree days that were 33% colder than the same period last year.
Mike: Withstanding the shortly blast of cold weather average temperatures for the month of January were 4% warmer than normal.
Mike: For the month of February average temperatures were 12% warmer than normal and 1% warmer than the prior year and for March average temperatures were 10% warmer than normal and 7% warmer than the prior year.
Mike: From a commodity perspective.
Mike: Inventory levels in the U S experienced a seasonal decline during the quarter, but remained elevated relative to historical levels for this time of the year.
Mike: At the end of the second quarter U S. Propane inventories were at $51 8 million barrels, which was 7% lower than March 2023 levels get 8% higher than the five year average for March.
Mike: Given the decline in inventories relative to the prior year and other factors wholesale propane prices for the second quarter of 84 cents per gallon basis, Mont Belvieu increased 3% compared to the prior year.
Mike: Excluding the impact of the mark to market adjustments on our commodity hedges as I mentioned earlier.
Mike: Although gross margin of $302 1 million for the second quarter increased $2 $7 million or 1% compared to the prior year, primarily due to higher propane unit margins and higher margin contribution from the R&D assets.
Mike: Offset to an extent by lower propane volumes sold.
Mike: Propane unit margins for the second quarter increased eight cents per gallon or four 2% compared to the prior year.
Mike: With respect to expenses combined operating and G&A expenses of $154 4 million for the second quarter increased $1 2 million or zero, 8%.
Mike: <unk> to the prior year, primarily due to higher payroll and benefit related expenses.
Mike: Partially offset by lower fuel costs and other volume related variable operating costs.
Mike: The year over year comparison of our expenses was also impacted by acquisition related costs of $3 4 million in the prior year, which is reported in G&A excluded from adjusted EBITDA.
Mike: Net interest expense of $19 $9 million for the second quarter was essentially flat compared to the prior year.
Mike: Savings from a lower level of average outstanding borrowings under our revolving credit facility was offset by higher benchmark interest rates for borrowings under the revolver.
Mike: Total capital spending for the quarter of $14 5 million was $1 $3 million higher than the prior year, primarily due to growth capital associated with improving operating performance and Orange production at our facility in Stanfield, Arizona.
Mike: We're advancing construction efforts at our Columbus and Adirondack facilities.
Mike: She will set by a lower level of spending a propane tanks and cylinders as we leverage and refurbished the inventory on hand.
Speaker Change: Turning to our balance sheet.
Mike: During the second quarter, we utilized cash flows from operating activities to repay $32 3 million and borrowings under the revolver.
Mike: As a result of the debt repayment, our consolidated leverage ratio for the trailing 12 months period ended March 2024, improved 2461 times compared to $4 72 times at the end of the first quarter.
Mike: Although the leverage metric has been elevated relative to historical levels. Following the <unk> acquisition from the impact of the warm weather on earnings we remain well within our debt covenant requirement of 575 times.
Mike: You need to make progress in strengthening the balance sheet with debt repayment from excess cash flows.
Mike: As we previously reported during the second quarter, we took steps to further strengthen our liquidity position and extend debt maturities with the refinancing of our $500 million revolver.
Mike: Which was scheduled to mature in March 2025.
Mike: This new five year facility further extends our debt maturities.
Mike: <unk> interest rate pricing grid, and financial ratio covenants and provides enhanced financial flexibility and support of our long term strategic growth initiatives.
Mike: We are pleased with the outcome of this opportunistic refinancing and are appreciative for the continued support provided by our bank group with that I will turn the call back to Mike.
Mike: Thanks, Mike as announced on April 25th our board of Supervisors declared our quarterly distribution of $32.05 per common unit in respect of our second quarter of fiscal 2024 that equates to an annualized rate of $1 30 per common unit, our quarterly distribution will be paid on may 14th to unit holders of record as of May the <unk>.
Mike: Evan.
Mike: Our distribution coverage continues to remain healthy at 199 times for the trailing 12 month period ended March 2024.
Mike: Looking ahead to the rest of fiscal 2024 now that we're beyond the critical period for heat related demand our operations personnel in the propane segment will turn to some of our initiatives to further enhance our operating model to continue executing on our customer base growth and retention initiatives and to support our market expansion efforts.
Mike: And several strategic markets throughout our national footprint.
Mike: And our LNG operations, while overall revenues have been influenced by lower California, L CFS prices and to a lesser extent lower benchmark natural gas prices the.
Mike: The improvements we are making to the operating performance at our Stanfield facility are stabilizing and increasing the level of R&D production at that facility.
Mike: We're also continuing to support our minority owned subsidiaries Oberon fuels and independents hydrogen as they scale their platforms for the production and sale of ultra low carbon renewable dimethyl ether and clean hydrogen respectively.
Mike: The energy transition is still in the early stages and we are positioning suburban propane for long term growth and sustainability through our comprehensive growth strategy.
Mike: Builds on the low carbon attributes of propane and.
Mike: And our investments in innovative renewable energy products and technologies through our suburban renewable energy subsidiary.
Mike: And from a balance sheet perspective, as Mike mentioned.
Mike: We reduced our overall debt by more than $32 million during the second quarter, using excess cash flow and successfully renewed and extended our revolving credit facility.
Mike: As always we are committed to maintaining a strong balance sheet to help support our long term growth objectives.
Speaker Change: Finally, I want to take this opportunity to thank the more than 3200 employees at suburban propane for their hard work and unwavering focus on the safety and comfort of our customers and the communities we serve.
Mike: I am extremely proud of all of their efforts during another challenging heating season.
Speaker Change: And as always we appreciate your support and attention. This morning, and we'll now open it up to questions.
Mike: Ina.
Ina: You can help us with that.
Ina: Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your telephone keypad.
Ina: Should you wish to cancel your request. Please press star followed later too.
Ina: Thank you speaker phone please keep the handset.
Ina: Pressing any Keith one moment. Please for your first question.
Ina: And your first question comes from the line of Christopher Jaffray from Mizuho Securities. Please go ahead.
Christopher Jaffray: Hi, Good morning, everyone. Thanks for taking my question.
Christopher Jaffray: Maybe just on how you see the expectations for cash.
Christopher Jaffray: Cash flow kind of in the long term, maybe with normalized weather in the coming years.
Speaker Change: And then.
Speaker Change: You talked about.
Speaker Change: The priorities are to do that those exits.
Speaker Change: We've talked about it.
Speaker Change: But it seems like also bolstering.
Speaker Change: Propane and renewables.
Speaker Change: Are important.
Speaker Change: Yes, Thanks, Chris.
Speaker Change: I think if you look at it.
Speaker Change: Last several years, we've taken a very balanced approach towards utilizing our excess cash flow. We've done a fair amount of Delever de levering we've obviously.
Speaker Change: Invested in the build out of our renewable energy platform and we're also doing tuck in propane acquisitions, I think youre going to see a bit more of the same I mentioned in our opening remarks about the stage that.
Speaker Change: We see the country and frankly, the world and in the energy transition I think we are in the very early innings of that transition and we intend to ensure that we set the business up for the long term by making good investments.
Speaker Change: In renewable energy platforms that we see as real benefactors of the future of cleaner cleaner energy sources, and we want to leverage our.
Speaker Change: Our 95 year history is as trusted distributors of energy to local markets.
Speaker Change: As those newer cleaner energy sources developed in.
Speaker Change: Further further advance in their maturity over the over the coming decades, So I think youre going to see a bit more of the same from us.
Speaker Change: As you know we always maintained.
Speaker Change: Balance sheet strength is a core principle of ours and that's why.
Speaker Change: We have.
Speaker Change: We've done a good job of bringing leverage down following a bit of a leveraging event with the equilibrium acquisition in December of 2022.
Speaker Change: And so I think that's that's what you can expect to see from US obviously is as.
Speaker Change: The investments we're making.
Speaker Change: Begin to mature and deliver the kind of expectations that we see in the coming years. We will also be generating incremental EBITDA and cash flows that that will give us opportunities to to be strategic as well.
Speaker Change: Thank you Mike.
Speaker Change: Maybe just going back to the first part of that question.
Speaker Change: Any kind of.
Speaker Change: Ballpark.
Speaker Change: Yes, the cash flows I think we're just cash flows generated.
Speaker Change: <unk> talked about a $100 million in the past.
Speaker Change: Any.
Speaker Change: Any updated thoughts around that.
Speaker Change: Yes, that's going to fluctuate.
Speaker Change: With earnings this year has been a warmer winter scenario the first quarter, we were down.
Speaker Change: Year to date, we're down about $17 million.
Speaker Change: Year over year, EBITDA second quarter was a great quarter in relation to what the weather was but that followed a tough first quarter. So that that decline in earnings is going to be a temporary.
Speaker Change: Impact on the level of excess cash flow that we have but our cash flow post.
Speaker Change: Distributions post debt service and post growth Capex.
Speaker Change: Generally is going to range between 50 and $100 million depending on.
Speaker Change: The amount of growth Capex and the level of earnings.
Speaker Change: As the as the heating season.
Speaker Change: Continues to affect.
Speaker Change: Great. Thank you.
Speaker Change: And then maybe just an update on something brought up last quarter as far as.
Speaker Change: Interest in participating in voluntary LNG market.
Speaker Change: GP transportation market just any update.
Speaker Change: There are any particular gating items that.
Speaker Change: We're waiting to see.
Speaker Change: I think well first of all we hired a resource dedicated to the R&D commercial development. So we now have.
Speaker Change: Some dedicated commercial sales.
Speaker Change: Activities that are building relationships in the voluntary market that is long term the way we see the.
Speaker Change: The market for R&D developing.
Speaker Change: I'm sure you've seen.
Speaker Change: California, <unk> prices have been pretty depressed as of late.
Speaker Change: We're we're down this quarter about 6% from the average from the first quarter.
Speaker Change: So that does create some volatility and revenue opportunities.
Speaker Change: In that market. So I think for the longer term, we do we do see.
Speaker Change: Again back to the concept of we're in the early innings, we do see the markets for R&D developing in a way where RMG demand is going to expand beyond just transportation.
Speaker Change: I think as more and more of the.
Speaker Change: Demand for electricity grows from the adoption of electric vehicles and expanded.
Speaker Change: Hi.
Speaker Change: The need for.
Speaker Change: Enhanced computing.
Speaker Change: And data centers, I think youre going to see a significant.
Speaker Change: Uptick in demand for RMG to be a good source of power generation for the electric grid.
Speaker Change: Because the reality of powering with pure renewable sources from wind and solar is never going to keep up with the amount of demand increase on the electric grid. So I think we see.
Speaker Change: Voluntary markets for RMG demanding over developing over the course of the next five to 10 years as as.
Speaker Change: The reality of the transition towards electrification.
Speaker Change: It's in that we need.
Speaker Change: Additional cleaner energy alternatives and that's that's I think the opportunities of the future that we see.
Speaker Change: Great.
Speaker Change: Maybe just one follow up on that as well.
Speaker Change: Any kind of update on the O'brien fuels.
Speaker Change: Independent aggregating.
Speaker Change: Should we kind of expect.
Speaker Change: In the past as being more like a ratable capital put into those businesses.
Speaker Change: Kind of the expectation going forward.
Speaker Change: Well, they're both they're both.
Speaker Change: Advancing.
Speaker Change: Towards towards commercial scale they are both.
Speaker Change: Going to be seeking capital and.
Speaker Change: To enhance their opportunity to grow.
Speaker Change: There their supply of the respective products.
Speaker Change: And we have been.
Speaker Change: Supporting those businesses as as they as they get closer and closer to.
Speaker Change: Full scale commercialization of their business models and I think over the course of the next year both of them will we will continue to advance towards.
Speaker Change: Towards bigger scale production of the products that.
Speaker Change: That they serve.
Speaker Change: We will continue to pay attention to whether we should be.
Speaker Change: <unk> to put in additional capital to maintain our ownership stake or welcome an additional investors.
Speaker Change: <unk> continue to support that while we continue to support them from from from the perspective of the.
Speaker Change: What I like to say the weight of suburban propane behind us behind us to support these startup companies that need resources beyond just capital and.
Speaker Change: <unk> been a great source of capital, but we have been a bigger source of resources and.
Speaker Change: And so I think that.
Speaker Change: That's that.
Speaker Change: Those those two businesses are progressing nicely frankly and.
Speaker Change: A lot's going to be a lot is going to be determined over the next year.
Speaker Change: Got it alright, thank you.
Speaker Change: Thank you very much have great day.
Speaker Change: Great. Thanks, Chris.
Speaker Change: Thank you once again should you have any question.
Speaker Change: I'll take the one on your telephone keypad.
Speaker Change: There are no further questions at this time I would like to turn the conference back to Mr. Michael <unk> for closing remarks.
Michael: Okay, great. Thanks for your support Ina and thank you all for your attention today, we look forward to catching up with you.
Michael: And in August after the close of our third quarter and I Hope you all stay stay safe and healthy and.
Speaker Change: Enjoy the summer as it approaches.
Speaker Change: Thank you that concludes.
Speaker Change: Vince Your conference for today. Thank you.
Speaker Change: Participating you may all disconnect.
Speaker Change: Okay.
Speaker Change: [music].