Suburban Propane Partners, L.P. (NYSE:SPH) Q2 2024 Earnings Call Transcript May 9, 2024

Suburban Propane Partners, L.P. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. Welcome to the Suburban Propane Partners Second Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, May 9, 2024. And I would now like to turn the conference over to Mr. Davin D’Ambrosio, Vice President and Treasurer. Thank you. Please go ahead.

Davin D’Ambrosio: Great. Thank you. Good morning, everyone. Thank you for joining us this morning for our fiscal 2024 second quarter earnings conference call. Joining me this morning are Mike Stivala, our President and Chief Executive Officer; Mike Kuglin, our Chief Financial 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 have concluded our prepared remarks, we will open the session to questions. Our conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended, relating to the partnership’s future business expectations, predictions, financial condition and results of operations.

These forward-looking statements involve certain risks and uncertainties. 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 suburbanpropane.com. All subsequent written and oral forward-looking statements attributable to the partnership or persons acting on its behalf are expressly qualified in their entirety by such cautionary statements. Our annual report on Form 10-K for the fiscal year ended September 30, 2023, and Form 10-Q for the period ended March 30, 2024, which will be filed at the end of business today, contain additional disclosures regarding forward-looking statements and risk factors.

Copies 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 this point, I will turn the call over to Mike Stivala for some opening remarks. Mike?

Mike Stivala: Great. Thanks, Davin, and good morning. Thank you all for joining us today. The fiscal 2024 heating season presented widespread unseasonably warm weather across the vast majority of our operating territories, with the exception of a 2-week period of extreme cold temperatures in mid-January, during which reported heating degree days were 33% colder than the prior year. 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. 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, providing exceptional service to our customers, managing selling prices and controlling expenses.

In addition, the recent and continued favorable trends in our customer base helped to offset some of the shortfall in heat-related demand. As a result, volumes for the second quarter of fiscal 2024 were just 2.7% below the prior year. Adjusted EBITDA for the quarter was $147 million, down $2 million or 1.3% compared to the prior year second quarter. In 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 and identifying additional local dairies in the Stanfield, Arizona area to increase manure intake. As a result, we are continuing to improve the amount of average daily pipeline injected RNG at the Stanfield facility with an average of 1,139 MMBTUs injected per day during the second quarter of fiscal 2024, an improvement of 8.4% compared to the first quarter of fiscal 2024.

And with the continued enhancements that we are making, we have additional opportunities to increase production levels even further. We’re also continuing to advance our capital improvement plans for the installation of RNG upgrade equipment at our Columbus, Ohio facility and the construction of our anaerobic digester facility at Adirondack Farms in Upstate New York. We expect both facilities to be completed in the second half of calendar 2025. Finally, subsequent to the end of the second quarter, we closed on two small propane acquisitions in strategic markets in Florida and Nevada, investing a total of approximately $13 million. So while warm weather weighed on customer demand in the fiscal 2024 heating season, our operational personnel delivered solid results, and we remain steadfast in our commitment to our long-term strategic growth objectives of fostering the growth of our core propane business while making strategic investments in lower carbon renewable energy alternatives.

In a moment, I’ll come back for some closing remarks. However, at this point, I’ll turn it over to Mike Kuglin to discuss the second quarter in more detail. Mike?

Mike Kuglin: 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 $5.9 million for the second quarter compared to an unrealized loss of $4.5 million in the prior year. Excluding these items as well as the non-cash equity and losses of our unconsolidated subsidiaries accounted for under the equity method as well as a loss on debt extinguishment resulting from the refinancing of our credit agreement and acquisition-related transaction costs in the prior year, net income for the second quarter was $110.3 million or $1.71 per common unit compared to net income of $112.8 million or $1.76 per common unit in the prior year.

Adjusted EBITDA for the second quarter was $147 million compared to $149 million in the prior year. As Mike mentioned, our earnings for the quarter were impacted by lower heat-related demand resulting from warm weather during most of the quarter but benefited from organic growth in our customer base, unit margin expansion and greater contribution from our R&D facilities. Retail propane gallons sold in the second quarter were 140.2 million gallons, which was 2.7% lower than the prior year, primarily due to the impact of widespread warm weather throughout much of the second quarter, except for a 2-week period of extreme cold temperatures in mid-January. According to NOAA, average temperatures for the quarter, as measured in heating degree days, were 8% warmer than normal and 4% cooler than the prior year second quarter.

Although we experienced an increase in heating degree days compared to the prior year, the increase was heavily influenced by mid-January heating degree days that were 33% colder than the same period last year. Notwithstanding the short-lived blast of cold weather, average temperatures for the month of January were 4% warmer than normal. 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. From a commodity perspective, propane 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. 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, yet 8% higher than the 5-year average for March.

Given the decline in inventory relative to the prior year and other factors, wholesale propane prices for the second quarter of $0.84 per gallon, basis Mont Belvieu, increased 3% compared to the prior year. Excluding the impact of the mark-to-market adjustments on our commodity hedges that I mentioned earlier, total 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 RNG assets, offset to an extent by lower propane volumes sold. Propane unit margins for the second quarter increased $0.08 per gallon or 4.2% compared to the prior year. With respect to expenses, combined operating and G&A expenses of $154.4 million for the second quarter increased $1.2 million or 0.8% compared to the prior year primarily due to higher payroll and benefit-related expenses, partially offset by lower fuel costs and other volume-related variable operating costs.

The year-over-year comparison of our expenses was also impacted by acquisition-related costs of $3.4 million in the prior year, which was reported in G&A and excluded from adjusted EBITDA. Net interest expense of $19.9 million for the second quarter was essentially flat compared to the prior year as 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. 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 RNG production at our facility in Stanfield, Arizona and from advancing construction efforts at our Columbus and Adirondack facilities, partial offset by a lower level of spending on propane tanks and cylinders as we leveraged and refurbished the inventory on hand.

Turning to our balance sheet. During the second quarter, we utilized cash flows from operating activities to repay $32.3 million in borrowings under the revolver. As a result of the debt repayment, our consolidated leverage ratio for the trailing 12-month period ended March 2024 improved to 4.61x compared to 4.72x at the end of the first quarter. Although the leverage metric has been elevated relative to our historical levels following the RNG acquisition, from the impact of the warm weather on earnings, we remain well within our debt covenant requirement of 5.75x and continue to make progress in strengthening the balance sheet with debt repayments from excess cash flows. 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, which was scheduled to mature in March 2025.

This new 5-year facility further extends our debt maturities, maintains the interest rate pricing grid and financial ratio covenants and provides enhanced financial flexibility in support of our long-term strategic growth initiatives. We’re very pleased with the outcome of this opportunistic refinancing and are appreciative of the continued support provided by our bank group. With that, I’ll turn the call back to Mike.

Mike Stivala: Thanks Mike. As announced on April 25, our Board of Supervisors declared our quarterly distribution of $0.325 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 14 to our unitholders of record as of May 7. Our distribution coverage continues to remain healthy at 1.99x for the trailing 12-month period ended March 2024. Looking ahead to the rest of fiscal 2024, now that we are 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 in several strategic markets throughout our national footprint.

In our RNG operations, while overall revenues have been influenced by lower California LCFS prices and, to a lesser extent, lower benchmark natural gas prices, the improvements we are making to the operating performance at our Stanfield facility are stabilizing and increasing the level of RNG production at that facility. We’re also continuing to support our minority-owned subsidiaries, Oberon Fuels and Independence Hydrogen as they scale their platforms for the production and sale of ultra-low carbon renewable dimethyl ether and clean hydrogen, respectively. 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 that builds on the low carbon attributes of propane and our investments in innovative renewable energy products and technologies through our Suburban Renewable Energy subsidiary.

And from a balance sheet perspective, as Mike mentioned, 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. As always, we are committed to maintaining a strong balance sheet to help support our long-term growth objectives. Finally, I want to take this opportunity to thank the more than 3,200 employees at Suburban Propane for their hard work and unwavering focus on the safety and comfort of our customers and the communities we serve. I’m extremely proud of all of their efforts during another challenging heating season. And as always, we appreciate your support and attention this morning. And we’ll now open it up to questions.

And Ina, if you can help us with that.

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