Suburban Propane Partners, LP (SPH) Q4 2021 Earnings Call Transcript

Image source: The Motley Fool.

Suburban Propane Partners, LP (SPH 2.91%)
Q4 2021 Earnings Call
Nov 11, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Suburban Propane Partners, L.P., Fiscal 2021 Full Year and Fourth Quarter Results Conference Call. [Operator Instructions] Please note this event is being recorded. This 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 and predictions and financial condition and results of operation.

These forward-looking statements involve certain risks and uncertainties. The partnership has 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 its earnings press release, which can be viewed on the Company's website. 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.

I would like to turn the conference over to Davin D'Ambrosio, Vice President and Treasurer. Please go ahead.

A. Davin D'Ambrosio -- Vice President and Treasurer

Thank you, Sarah. Good morning, everyone. Thank you for joining us this morning for our fourth quarter at fiscal 2021 full year earnings conference call. Joining me this morning are Mike Stivala, our President and Chief Executive Officer; Mike Kuglin, our Chief Financial Officer and Chief Accounting Officer; and Steve Boyd, our Chief Operating Officer.

This morning, we will review our fourth quarter and fiscal 2021 full year financial results, along with our current outlook for the business. Once we've concluded our prepared remarks, we will open the session to questions. Our annual report on Form 10-K for the fiscal year ended September 25, 2021, which contains additional disclosure regarding forward-looking statements and risk factors, will be filed on or about November 24th. Once filed, copies may be obtained on the investor overview page of the partnership's website at suburbanpropane.com, or by visiting the partnership's filings with the SEC. So our non-GAAP measures will be discussed on this call. We have provided description of those measures, as well as the discussion why we believe this information to be useful in our Form 8-K, which was furnished to the SEC last night. Form 8-K is available on the Investor Relations section of our website.

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

Michael A. Stivala -- President and Chief Executive Officer

Thanks, Davin. Good morning, everyone. Thank you for joining us today. First, on this Veterans Day, let me start by wishing all military veterans, and of course, their families for their service and sacrifices to protect our freedom. At Suburban Propane, through our SuburbanCares Corporate Pillar, we have a deep commitment to our military veterans community, and are committed to hiring our great American heroes through our Heroes Hired Here Program.

Let me just jump into some thoughts on the fiscal year we just ended and conclude at the end of our call on some reflection as we enter a new fiscal year. The fiscal year 2021 was another outstanding year for Suburban Propane. Customer demand was strong throughout much of the year from a combination of solid heat-related demand during the second quarter, normalizing demand in the commercial industrial customer sectors from the easing of COVID-19 restrictions and increased economic activity and positive momentum in our customer base growth and retention initiatives, generating incremental new customer activity. The increased demand drove propane volumes higher by more than 4%.

Our operating personnel did an exceptional job meeting and exceeding the needs of our customers, while continuing to adhere to our enhanced COVID-19 health and safety protocols, maintaining their focus on the highest standards for safety in all of their daily activities and managing margins in a volatile commodity price environment. All of these positive factors contributed to a $22 million or nearly 9% improvement in adjusted EBITDA from $253.7 million last year to $275.7 million in fiscal 2021. In addition to the strong earnings, let me also take a moment to highlight a number of other significant accomplishments for Suburban Propane during fiscal 2021.

First, we utilized excess cash flows to reduce debt by nearly $88 million, bringing our total leverage metric below 4 times to 3.96 times at the end of fiscal 2021, and that compares to 4.64 times at the end of the prior year. We opportunistically refinanced a portion of our senior debt, taking advantage of historically low interest rates to lower our annual interest requirements by $7 million and extending weighted average maturities by more than 3.5 years. With the improvement in earnings, coupled with lower interest expense and disciplined management of capital expenditures, we reported an increase in distributable cash flow by more than $26 million or 16% and ended fiscal 2021 with a very strong distribution coverage ratio of 2.55 times on a maintenance capex basis. On the strength of our earnings and cash flows, we were also pleased to improve the returns for our valued unit holders by delivering an 8.3% increase in our annualized distribution rate at the end of the third quarter fiscal 2021.

On the strategic front, we completed an acquisition of a well-run propane business in the North Carolina market, and we continue to make investments in our minority-owned subsidiary over on fuels to support our collective efforts to commercialize low carbon renewable dimethyl ether, which when used as a blend with propane will significantly reduce the carbon intensity of already clean burning propane and allow us to put propane on a pathway to net zero carbon emissions.

We're also working closely with the Oberon team to unleash the power of renewable DME, a strong hydrogen carrier to be able to convert renewable DME to green hydrogen. This effort is being supported by a grant through a public private partnership with Los Alamos National Labs from the U.S. Department of Energy, under their Energy Earthshot Initiative. And finally, we continued to advance our SuburbanCares corporate pillar with a specific focus this year on partnering with organizations that provide much needed assistance to women and children and underserved communities through our operating footprint with food, shelter, educational supplies and many other essential items.

During our fourth quarter of fiscal 2021, we also proudly entered into a partnership agreement with U.S. Army's partnership for youth success program, which is a strategic collaboration between the U.S. Army and a cross section of companies and public sector agencies that guarantees soldiers an interview and possible employment opportunity with Suburban Propane upon completion of their service. And this year, our SuburbanCares activities were recognized by New jersey Biz as a finalist in their corporate citizen of the year category. An honor that we're extremely proud of.

So, despite the challenging operating environment over the course of the past 18 months resulting from the COVID-19 pandemic, we have maintained our focus on delivering outstanding service to our customers and local communities, executing our customer base growth and retention initiatives, accelerating our debt reduction efforts and making strategic investments in line with our goal of building out a renewable energy platform and delivering solutions to help our customers meet their sustainability goals and support our efforts to continue to contribute to our country's ongoing energy transition. In a little later, I will come back with some closing remarks, but now I will turn it over to Mike Kuglin to discuss our full year and fourth quarter results in more detail. Mike?

Michael Kuglin -- Chief Financial Officer and Chief Accounting Officer

Thanks, Mike, and good morning, everyone. I will start by focusing on our full year results and give a little color on the fourth quarter toward the end of my remarks. To be consistent with previous reporting, I am excluding the impact of unrealized non-cash market-to-market adjustments on our commodity hedges, which resulted in an unrealized gain of $43.1 million in fiscal 2021, compared to an unrealized loss of $400,000 in the prior year. The contracts associated with the open commodity hedges at the end of fiscal 2021 are expected to mature over the course of the fiscal 2022 in season, and evaluation of the hedges is subject to change as commodity prices fluctuate.

In addition to the unrealized adjustments on our hedges, I'm also excluding certain other non-cash adjustments in both years, as well as a loss on debt extinguishment resulting from the refinancing of our 2024 and 2025 senior notes and the $4.3 million charge recorded in the fourth quarter of 2021 related to the partnership's withdrawal from a multi-employer pension plan. We have included each of these items in a reconciliation of net income to adjusted EBITDA within the press release and our public filings. Excluding these items, net income for fiscal 2021 was $101.9 million or a $1.62 per common unit, compared to $62.3 million or $1 per common unit in the prior year.

Adjusted EBITDA for Fiscal 2021 increased $22 million or 8.7% to $275.7 million, compared to $253.7 million in the prior year. As Mike indicated, the improvement in earnings was driven by several key factors, including an increase in volumes sold, unit margin expansion and operating efficiencies that contributed to lower expenses on a per gallon basis. Retail propane gallons sold in fiscal 2021 were 419.8 million gallons, which was 4.2% higher than the prior year, primarily due to an increase in weather-related customer demand during the most critical months of the heating season, an increase in commercial and industrial demand resulting from the easing of COVID related business restrictions and an improving economy, and positive trends in our customer base growth and retention initiatives.

With respect to the weather, average temperatures across our service territories for fiscal 2021 were comparable to the prior year. But during the most critical months of the heating season, which is December to February, average temperatures were 7% cooler than the same period in the prior year and contributed to an overall increase in heat-related demand in overall volume sold. Higher volumes were experienced across all customer segments in fiscal 2021.

In the commodity markets, wholesale propane prices increased steadily throughout the year, reflecting lower U.S. inventories as domestic demand and exports outpaced production. Overall, average wholesale prices for the year were $0.88 per gallon, basis Mont Belvieu, which was 98% higher than the prior year. In the early part of fiscal 2022, wholesale prices have contributed -- have continued to rise as the nation's inventory levels remain approximately 15% below average levels for this time of the year. Currently, propane prices seem to be somewhat range bound between a $1.35 and a $1.45 per gallon. Mike will provide some additional color on the propane environment after my remarks.

Excluding the impact of the market-to-market adjustments on our commodity hedges, total gross margin of $760.2 million for fiscal 2021 increased to $34.8 million or 4.8% compared to the prior year primarily due to higher propane volumes sold and higher unit margins. Propane unit margins for fiscal 2021 increased about $0.02 per gallon or 1.2% compared to the prior year due to effective margin management during a rapidly rising and challenging commodity price environment.

With respect to expenses, combined operating G&A expenses increased $13.4 million or 2.9% compared to the prior year, primarily due to higher volume-related variable operating costs and higher variable compensation due to the higher earnings, partially offset by a decrease in accruals for self-insurance liabilities and bad debt expense. Our recent investments in new technologies for our drivers and service technicians has enhanced the customer experience, and also contributed to operating efficiencies that led to a reduction in operating expenses per gallon of more than $0.02.

Net interest expense of $68.1 million for fiscal 2021 decreased $6.6 million or 8.8% compared to the prior year, primarily due to lower average debt outstanding, coupled with a decrease in short-term benchmark interest rates, our revolver borrowings, and the impact of the refinancing of two tranches of senior notes at lower rates, which was completed in May. The senior note refinancing will result in net cash savings of approximately $7 million annually, extend our average debt maturity profile by more than 3.5 years, and push the overall weighted average debt maturity to nearly 8 years. In addition, with this opportunistic refinancing, we've shifted $125 million of debt within our capital structure from bonds to the revolver, which not only decreased our interest requirements, will also allow for efficient debt repayments in the future to facilitate our debt reduction strategy. Total capital spending for the year was $29.9 million compared to $32.5 million in fiscal 2020. The lower level of spending was the result of the investments that we made in the prior year to upgrade the hand-held technology utilized by our field personnel.

And now turning to the fourth quarter results. Consistent with the seasonality of our business, we typically reported net loss for the fourth quarter, excluding the multi-employer pension plan withdrawal charge that I mentioned earlier, as well as certain other non-cash adjustments in both years, we reported a net loss of $37 million or $0.59 per common unit, compared to a net loss of $41.7 million or $0.67 per common unit in the prior year. Adjusted EBITDA for the fourth quarter of fiscal 2021 was $300,000 compared to $5.5 million in the fourth quarter of fiscal 2020.

Total gross margin increased $4.5 million or 4% due to a combination of higher volumes sold, higher unit margins, and an increase of service-related activities resulted from tank sets, supportive improving customer base trends. Combined Operating and G&A expenses increased $9.5 million or 9.1% to an increase variable operating costs in support of higher demand and higher payroll costs. Our prior-year expenses benefited from considerable savings from the operational plans that we developed and implemented to address potential different customer demand scenarios resulting from COVID-19, including a temporary reduction to our manpower.

And turning to our balance sheet. As Mike mentioned, we repaid nearly $88 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 2021 improved to 3.96 times. We remain focused on utilizing excess cash flows to further strengthen the balance sheet, as we trend toward our target leverage profile of 3.5 times debt-to-EBITDA and as opportunities arise, to fund strategic growth. For liquidity position, we have ample borrowing capacity under our revolver to fund anticipated working capital needs for the upcoming heating season and to support our strategic growth initiatives.

With that, I'll turn it back to Mike.

Michael A. Stivala -- President and Chief Executive Officer

Thanks Mike. As announced in our October 21st press release, our Board of Supervisors declared our quarterly distribution of $32.5 per common unit in respect of the fourth quarter of fiscal 2021, and that equates to an annualized rate of $1.30 per common unit. The quarterly distribution was paid on November 9th to our unit holders of record as of November 2nd. So just a few thoughts on the current environment for propane.

There's certainly been a lot of attention regarding the supply and pricing environment across the energy slate, and specifically for propane as we head into a new heating season. And those concerns are real. Prices are up, inventories are down. Some good news though, over the past thee weeks, propane has seen its best inventory build for this time of year since 2008. Production has increased slightly and exports pulled back about 15% from their peak levels over the summer. Where inventory levels were more than 20% lower than the five-year average just a few weeks ago, they are now trending about 15% below the five-year average. Given the inventory situation, spot propane prices are at the highest level for November since 2011. Therefore, there is good reason for some of the concern over the trajectory of propane prices and the potential for regional supply constraints as we head into the heating season. But a lot will ultimately depend on the severity and sustainability of winter weather. That said, the current outlook for the upcoming winter, calls for variations in different regions of the country, but generally cooler than average temperatures compared to last year's heating season. We are planning accordingly, while also working with our customers on ways to help insulate their energy bills from the potential for higher prices.

Given our scale, supply and logistics model and deep relationships with our suppliers and shippers, we're confident in our ability to ensure adequate supplies of propane when and where needed, and we've certainly managed through these tight supply markets many times in the past. On the strategic front, our business is extremely well positioned both operationally and financially to pursue our long-term strategic objectives. In addition to fostering the growth of our core propane operations, we are fully committed to making investments in innovative renewable energy businesses and technologies as we continue to build out our renewable energy platform in support of our go green with Suburban Propane corporate pillar.

Our first step toward this commitment was the investment in Oberon Fuels a little over a year ago. Since that time, we have made investments in our Anaheim, California location to accommodate the blending activities for propane and renewable DME, and we have also begun to develop the market demand for blended products. Oberon will be ready to produce about 3,000 gallons a day of rDME from their flagship plant in Brawley, California at the end -- at the beginning of calendar 2022. At the same time, we are actively pursuing the technical requirements and market potential to convert renewable DME to hydrogen, particularly for medium and light duty trucking. We continue to view the Oberon Fuels investment as a real game changer for the propane industry, but we are excited about the early momentum and the market potential.

We're actively evaluating additional renewable energy solutions and technologies to further increase our commitment to the renewable energy space and sustainable energy transition. Finally, I want to thank the more than 3,100 employees of Suburban Propane for their efforts in helping make fiscal '21 another successful year. Of course, I hope you and your families remain safe and healthy and wish everyone a very happy holiday season. We appreciate your support and attention, and now we'll like to open the call up to questions. And Sarah, would you mind helping us with that?

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Ned Baramov with Wells Fargo, please go ahead.

Ned Baramov -- Wells Fargo -- Analyst

Hey, good morning, guys. Thanks for taking the question. I'll start with one on capital allocation. As you approach your 3.5 times leverage target, are there any discussions with the Board on potential distribution increases or unit buyback plans that you could share?

Michael A. Stivala -- President and Chief Executive Officer

Well, first thanks, Ned, for the time this morning and your question. Look, obviously we had a long conversation in July and made the decision to increase the distribution of $0.10 on an annualized basis. We look at it every quarter. Right now, we still have some work to do relative to bringing our leverage down to our 3.5 times target. But we also have a lot of strategic opportunities in the build out of our renewable energy platform. So, a lot will depend on what strategic initiatives materialize over the course of the coming months and how much of our excess cash flow we can allocate to funding those acquisitions without the need to borrow. Those are good opportunities for us to really leverage the strength of our balance sheet, leverage the strength of our cash flow generating capacity to fund our strategic growth, which has a heavy influence of building out our renewable energy platform. And I think that will provide long-term growth opportunities for Suburban and our unit holders and ultimately lead to distribution growth down the road.

Ned Baramov -- Wells Fargo -- Analyst

Got it. That's great. And then, I guess, could you provide additional details on the strategic initiatives, specifically do these relate to potential increases in your ownership in Oberon, or are you referring to other assets when you talk about energy transition opportunities?

Michael A. Stivala -- President and Chief Executive Officer

Yeah, it's a little bit of both, Ned. Oberon is -- we've done a lot of work with them over the course of the last year. We have made additional investments in Oberon to support the business and to support moving forward with building out more capacity down the road for producing renewable DME from clean sources and significantly reducing the carbon intensity in the transportation sector. So, it's a little bit of further investments in Oberon. And also, we've been clear that we're really evaluating all renewable energy technologies and we're sort of looking more for small Oberon like investment opportunities where we can help foster a business that maybe is on the precipice of commercializing a real renewable product that can be a game changer in whatever component of the energy slate, whether it's natural gas, heating oil, propane, we're very close to a lot of different small start-up like companies that can use the benefit of our size and scale financial capacity, back-office support to help them mature and get to a point of real commercialization, similar to the activity that we've already proven with Oberon.

Ned Baramov -- Wells Fargo -- Analyst

That's great. And then I guess shifting gears to your core business, could you provide an update on the propane M&A market? Has there been a change in how you think about acquisitions, the multiples you are willing to pay for assets, and then, I guess the asking prices of potential sellers?

Michael A. Stivala -- President and Chief Executive Officer

Yeah, so propane is our bread and butter and that helps generate the free cash flow that will allow us to have more capital to invest in renewable energy businesses. So we will continue to look for opportunities to make strategic investments to continue to grow the propane business. We also are doing an excellent job of organically growing our customer base and we see opportunities to continue to do that both through just new customer activities and tank sets, but also fostering some of the greenfield market expansions that we have actively been pursuing in different markets throughout the country, and certainly we'll be very selective for the potential for M&A. I would say over the past couple of years, the M&A market and propane has really experienced an expansion in multiples that honestly doesn't make a lot of sense. And I think our opportunities are to continue to be disciplined, be in the game and look to find good strategic businesses that we can buy at a reasonable multiple, but we're going to maintain our discipline because we see a lot of growth opportunity to begin to transform this business into a bigger percentage of renewable energy, as the entire country is transitioning into a more renewable fuels. So, I think it's a long way to say -- we have a great business. We're going to continue to look to grow the business. We have multiple ways of doing that, which we're having great success at. We will look to be strategic, but disciplined and we'll look to utilize excess cash flow to pay down debt and fund our strategic initiatives.

Ned Baramov -- Wells Fargo -- Analyst

That's all I had. Thanks for the time this morning.

Michael A. Stivala -- President and Chief Executive Officer

Great. Thanks for the interest, Ned.

Operator

[Operator Instructions] Showing no further questions, this concludes our question-and-answer session. I would like to turn the [Speech Overlap]

Michael A. Stivala -- President and Chief Executive Officer

Thank you, Sarah. Thank you all for joining us again today, and I wish you all a very happy holiday season. We look forward to talking to you again in February after our first quarter results, and please be safe.

Operator

The conference has now concluded. To access the replay of this event, please dial 877-344-7529 or 412-317-0088. And when prompted, enter the code 10160600.

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

A. Davin D'Ambrosio -- Vice President and Treasurer

Michael A. Stivala -- President and Chief Executive Officer

Michael Kuglin -- Chief Financial Officer and Chief Accounting Officer

Ned Baramov -- Wells Fargo -- Analyst

More SPH analysis

All earnings call transcripts