After such a mild winter and seeing its largest competitor throw the market a curveball during its most recent earnings report, the bar was set pretty low for Suburban Propane Partners (NYSE:SPH) when it reported earnings for the fourth quarter and fiscal year. While the fourth quarter was a loss as expected for the propane distributor, the company showed why it was such a good idea to stay conservative this past year versus FerrellGas Partners' (OTC:FGP) more aggressive actions. Let's take a quick look at Suburban Propane's most recent quarterly and annual results and what investors can expect for the coming year.
By the numbers
|Metric||Q4 2016||Q4 2016||Growth (YOY)|
|Revenue||$161.0 million||$174.3 million||(7.6%)|
|Operational profit||($41.3 million)||($47.9 million)||N/A|
|Earnings per share||($0.99)||($1.11)||N/A|
|Distributable cash flow||($29.3 million)||($17.3 million)||N/A|
In the propane distribution business, this past quarter is typically always the worst quarter of the year as customers have not yet started demanding propane or fuel oil for heating yet. What is also impacting this year in particular is that this past spring was a little cooler than usual. As a result, there were more spring refills and higher levels of customer inventory going into this final quarter before winter propane orders start to come in. So don't be too shocked to see that the company lost money in this quarter because that is a pretty common thread for this business.
When comparing this year compared to last year, things don't look much better.
|Metric||FY 2016||FY 2015||Growth (YOY)|
|Revenue||$1,046 million||$1,416 million||(26.1% million)|
|Operational profit||$90.4 million||$177.8 million||(49.1% million)|
|Earnings per share||$0.24||$1.38||(82.6%)|
|Distributable cash flow||$130.8 million||$236.3 million||(44.6% million)|
What a difference the weather can make. Winter of 2015/2016 was the warmest on record in the regions Suburban supplies propane. According to the National Oceanic and Atmospheric Administration. Average winter temperatures were 17% warmer than historical averages and 15% higher than the winter of 2014/2015. What makes this so difficult for Suburban is that it is a relatively higher fixed-cost business because the one variable cost -- the price of propane -- is passed onto the customer. If volumes decline like they did last year, though, it's harder to adjust to the fixed costs of its distribution terminals and fleet vehicles.
The big concern is that, for the year, Suburban didn't generate enough cash to cover its $3.55 per share annual distribution. Fortunately, the company had enough cash on hand from the prior year to make up for the shortfall.
The one highlight
This year wasn't about what Suburban did, it's what the company didn't do: Try to diversify. FerrellGas Partners, on the other hand, did the exact opposite and it came back to haunt it. The company decided to acquire some oil and gas midstream and logistics assets the same year as one of the most brutal winters for a propane distributor. When that business didn't exactly pan out as planned, there wasn't support from the legacy business.
By sticking to its knitting, Suburban was able to make some smaller acquisitions of other propane distributors and kept plenty of cash lying around to cover up the weakness from last year's business and not have to significantly tap the debt markets. This gave the company the flexibility to refinance its credit facility, which extended the maturity date and lowered the coupon rate.
What management had to say
CEO Michael A. Stivala commented:
Notwithstanding the challenges resulting from the record warm temperatures, fiscal 2016 had some notable achievements that will provide further support for our long-term strategic growth initiatives. Specifically, during the first quarter we acquired the assets of Propane USA Distribution, LLC ("Propane USA"), which expanded our presence in an already strong market for Suburban and provided an opportunity to apply our operating model to enhance overall returns. During the second quarter, we took steps to further improve our liquidity position with the opportunistic refinancing of our revolving credit facility which was scheduled to mature in January 2017. The new facility improved our cost of capital, extended this facility's maturity until 2021, and increased our available borrowing capacity. Throughout the year, we made further refinements to our operating footprint and business model to enhance our position in several markets, and we extended our reach in certain strategic markets.
We funded all working capital needs, including the Propane USA acquisition, from cash on hand without the need to borrow under our revolving credit facility, and ended the year with more than $37.0 million of cash. The fundamentals of our business haven't changed and we are well positioned to continue to focus on our next phase of growth.
What a Fool believes
Suburban Propane Partners was able to make a little bit of lemonade from the lemons that this past year's winter gave to the company. Unlike FerrellGas Partners that took on the wrong acquisition at the worst possible time, Suburban stayed in its lane.
Though the company had enough financial strength to last one lousy winter without compromising its payout to shareholders, it probably can't last another one. If we have another unusually warm winter, don't be surprised if Suburban is forced to cut its payout like FerrellGas expects to in the coming quarter.