Davin D'Ambrosio - VP and Treasurer Michael Stivala - President and CEO Michael Kuglin - CFO and CAO Steven Boyd - SVP, Operations.

Mirek Zak - Citigroup Mike Gyure - Janney.

Ladies and gentlemen, thank you for standing-by. Welcome to Suburban Propane's Third Quarter 2017 Financial Results. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions, but the instructions being given at that time. [Operator Instructions] As a reminder, today's conference 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 now like to turn the conference over to our host, Vice President and Treasurer, Davin D'Ambrosio. Please go ahead..

Thanks Julia. Good morning, everyone. Thank you for joining us this morning for our fiscal 2017 third quarter earnings conference call. Joining me this morning are Mike Stivala, President and Chief Executive Officer; Mike Kuglin, our Chief Financial Officer and Chief Accounting Officer; and Steve Boyd, our Senior Vice President of Operations.

The purpose of today's call is to review our third quarter financial results along with our current outlook for the business. As usual, once we've concluded our prepared remarks, we will open the session to questions. However, before getting started, I'd like to briefly reemphasize what the operator has just explained about forward-looking statements.

Additional information about factors that could cause actual results to differ materially from those discussed in forward-looking statements is contained in the Partnership's SEC filings, including its Form 10-K for the fiscal year ended September 24, 2016, and our Form 10-Q for the period ended June 24, 2017, which will be filed by the end of business today.

Copies of these filings 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 furnished to the SEC this morning.

The Form 8-K can be accessed through a link on our website at suburbanpropane.com. At this point, I would like to turn the call over to Mike Stivala for some opening remarks.

Mike?.

Thanks, Davin. And thank you, everyone for joining us this morning. Coming out of another record more impeding season, we are very pleased to report a 16.4% increase in adjusted EBITDA for our third fiscal quarter compared to prior year.

The improvement in earnings for the quarter was a good balance of strong margin management and continued cost savings. On a year-to-date basis that brings our adjusted EBITDA for fiscal 2017 to $243.7 million that to an increase of $13 million compared to the prior year.

In a year in which the weather pattern proves to be even more challenging than the prior year's record one heating season, the nearly 6% improvement in earnings is a testament to the preparedness of our people to stay focused on the things they can control.

Providing exceptional service in the markets we serve, solid margin management in the phase of a fairly volatile commodity price environment, driving incremental cost savings and continuing to execute on our customer base growth and retention initiatives.

Let me comment now on our announcement this morning about our quarterly distribution, as we plan for fiscal 2018. Coming off with back-to-back record warm winters, a period in which we stretched our balance sheet in order to fund the weather driven cash flow shortfall.

As mentioned on our last earnings call in May, we are in the process of undertaking a thorough assessment of customer demand trends and expectations under varying weather scenarios.

As we ready our business for the new fiscal year, we have begun to set our volume expectations based on customer demand estimates assuming a weather pattern that is more in line with the average heating degree days experienced over the last 10 years, which incorporates three of the warmest winters on record.

Additionally, we're planning our manpower and cost infrastructure to support our volume expectations, while also retaining the flexibility to ramp-up our resources to meet a higher level of customer demand to the extend weather approaches more normal heat in degree days, as well as ensuring that we maintain our high standards for service quality, safety and reliability for our customers.

We believe this is a good level to plan and manage our cash flow needs and for assessing key financial metrics such as leverage and distribution coverage, we also believe planning for fiscal 2018 in this way provides a good balance of downside protection to the extent of continued one weather trends but with upside potential to the extent weather normalizes or as colder than normal.

Also, as we stated during our last quarterly earnings call. One of our goals as we plan for the new fiscal year is to restore our balance sheet strength. Conservative balance sheet management has always been a core philosophy of ours.

One, that has served us well and managing through challenging environments in the past as well as through this prolong stretch of record warm weather.

We are committed to maintaining a strong balance sheet, which provides enhanced financial flexibility to support our long-term growth initiatives, particularly from the perspective of liquidity and cost of capital. One of the levers we have to help restore our balance sheet strength is to reduce our cash flow requirements.

As we do every quarter, we continue to have extensive dialogue with our Board of supervisors regarding the level of cash distributions.

While the quarterly distribution in respect of the third quarter was maintained at the $80.75 per common unit level, at as meeting on August 1st, the Board discussed reducing the distribution level by up to 33% beginning with the upcoming quarterly distribution in respect of the fourth quarter fiscal 2017 to be paid in November 2017.

A final decision on the amount of a reduction in the distribution level will not be made until management finalizes our business plans for fiscal 2018 and the Board meets again in October to declare the fourth quarter distribution.

A reduction in the annualized distribution in this range would reduce our cash requirements by up to $70 million annually provide added cash flow cushion in the event of sustained weather driven softness, enhanced our distribution coverage ratio to provide excess liquidity.

And most importantly, set us on a better path toward long term growth by providing enhanced financial flexibility. As we stated many times in the past, we manage this business for the long-term.

Having the financial strength, flexibility and access to capital and attractive cost to support our long-term growth initiatives are all key to our long-term success. In a moment, I'll come back for some closing remarks however, at this point I'd like to turn the call over to Mike Kuglin, to discuss our third quarter results in more detail.

Mike?.

Thanks, Mike and good morning, everyone. Our results for the quarter benefited from combination of solid margin management and our ongoing focus on achieving operating efficiencies and cost savings. Offset some of by the impact of warmer temperatures during the quarter of volume sold.

Consist with the seasonality of our business, we typically report a net loss in the third quarter, but that being said our net loss was $29.7 million or $0.48 per common unit compared to a net loss of $29.6 million or $0.49 per common unit to the prior year.

To be consistent with previous reporting as I discussed our third quarter results, and excluding the impact of unrealized non-cash mark-to-market adjustments on derivative instruments used in risk management activities which result in a $655,000 unrealized loss in the third quarter of 2017, compared de minimis unrealized loss in the prior year.

Net loss and EBITDA to the third quarter of last year include a $9.8 million gain under sales certain non-strategic assets and operations within our propane segment, which is partially offset by a $6.6 million charge related to our voluntary withdrawal for a multi-player pension plan covering certain employees acquired in 2012 energy propane acquisition.

Excluding these items from current and prior year earnings, net loss would have improved by $3.6 million or $0.06 per common unit compared to the prior year third quarter. Adjust EBITDA for the third quarter of fiscal 2017 amounted to $21.4 million, an increase of $3 million or 16.4% compared to the prior year.

Retail propane gallon sold in the third quarter of fiscal 2017 of 77.7 million gallons decreased 2.5 million gallons or 3.1% compared to the prior year. Sales of fuel and other refined fuels of 5.2 million gallons decreased 528,000 gallons compared to the prior year.

Although, weather during the third quarter typically has less of an impact on volume sold and it does during heating season. Volume for the quarter were impacted by warmer spring temperatures earlier in the quarter. In fact, average temperatures during the month of April were 23% warmer than normal and 12% warmer than April 2016.

Overall, average temperatures across our service territories for the third quarter of fiscal 2016 were 18% warmer than normal and 9% warmer than the prior year.

In the commodity markets, wholesale propane prices fluctuate within the $0.12 basis Mount Bellevue throughout much of the third quarter with prices reaching a high of $0.70 per gallon in April and settling at $0.58 per gallon at the end of June. Overall, average propane prices for the third quarter were 28% higher than the prior year third quarter.

And on a sequential basis, average propane prices were 12% lower than the second quarter of fiscal 2017. Total gross margins of 131.5% for the third quarter of fiscal 2017 were $1.8 million higher than the prior year primarily due to higher average unit margins.

With respect to expenses, excluding the charge recorded in the prior year that I mentioned earlier, combined operating and G&A expenses decreased $1.2 million or 1.1% primarily due to continued savings of payroll and benefit related expenses attributable to the reduced headcount.

The savings from our operating efficiencies have partially offset by higher variable compensation associated with higher earnings, higher vehicle fuel costs and higher bad debt expense as a result of higher commodity prices.

Net interest expense of $18.5 million for the third quarter of fiscal 2017 was approximately $1000 lower than the prior due to the savings in the refinancing of our previously outstanding 7.38% senior notes due 2021 with the issuance of 5.78% senior notes due 2027 in the second quarter of this year.

The savings from the senior note refinancing was partially offset by interest on incremental borrowings under our revolver. Total capital spending for the third quarter amounted to $4.8 million representing a decrease of $2.8 million compared to the prior year primarily due to the savings from our tank refurbishment activities.

Turning to our balance sheet. As mentioned on our last call, we proactively work with our bank group to amend our revolving credit facility to provide us with added flexibility and managing our leverage and liquidity through September 2018.

The amendment increases our maximum consolidated leverage ratio from the previous level of 5.5 times to 5.95 times starting at the June 2017 quarter and continuing through June 2018 and stepping down to 5.75 times for the quarter ending September 2018 until returning to the 5.5 times threshold commencing with the quarter ending December 2018 and thereafter.

At the end of the third quarter, we have total borrowings under the revolver of $141.1 million, which includes a typical $100 million that we've historically have outstanding and $11.3 million of additional borrowings during the third quarter.

From a leverage perspective, the increase in adjusted EBITDA for the third quarter contributed to an improvement in our overall leverage metrics compared to the second quarter.

While our leverage remains elevated compared to the historical levels as a result of the impact of back-to-back record warm heating seasons, with the leverage ratio of 5.19 times to end of the third quarter, we are well within our debt covenant requirements under the amended threshold and the 5.5 times threshold in effect prior to the amended.

As we've stated in the past, we continue to target leverage in the mid-to-upper three times debt-to-EBITDA range. As Mike indicated in his opening remarks, we are very much focused on restoring our balance sheet strength, we have a number of levers at our disposal to help accelerate our average to bring down leverage.

An improvement in earnings would have the immediate meaningful impact on our leverage profile, we could see to monetize certain non-strategic assets and we could raise additional equity or seek return of equity financing to get the cost of capital make sense.

However, for now, we have adequate liquidity to fund our cash needs for the remainder of the fiscal year. And as we planned for fiscal 2018 heating season. Back to you, Mike..

Thanks, Mike. As announced in our July 20th press release, our Board of Supervisors declared our quarterly distribution of $0.8875 [ph] per common unit in respect of the third quarter of fiscal 2017. The quarterly distribution at this level will be paid on August 8th to our unit holders of record as if August 1st.

In closing, this unprecedented two years stretch of record one temperature is certainly presented challenges for the propane industry as a whole due to the significant impact on customer demand.

Nonetheless, our preparation for the potential for this year's repeat of record warm weather has helped us deliver a nearly 6% improvement in adjusted EBITDA.

We are proud of our operating performance through the first nine months of this year, which saw essentially flat volumes year-over-year prudent margin management and a challenging commodity and competitive environment and savings in capital spending and expenses.

Representing a balanced approach toward delivering an improvement in distributable cash flows. Now as we look forward to the next phase of growth for Suburban Propane, we are very much focused on showing up the balance sheet. We continue to undertake a very deliberate and thorough process to evaluate the business under many different circumstances.

All with the goal of best positioning the business for long-term growth, starting with a return to strong financial metrics that can support that growth.

And finally, I like to once again take this opportunity to thank all of the employees of Suburban Propane for their dedication and tenacity in maintaining their focus on the things they can control and in particular for delivering on our value preposition to our customers in every market we serve, and as always, we appreciate your support and attention this morning and we have now like to open the call for questions.

And Julia, would you mind helping us with that?.

[Operator Instructions] And our first question will come from the line of Mirek Zak of Citigroup. Please go ahead..

Good morning..

Hi, good morning guys.

What are you looking at to gauge if and by how much you may cut the distribution and are there a specific metrics that you are looking to target regarding coverage or leverage and how does the weather play into that cut range?.

So, we kind of touched in our opening remarks. What we are doing is we are planning in preparing our business for a scenario which weather is less than normal. A level that's frankly more in line with sort of a 10-year average heating degree days and if you did that calculation that would imply 94% of normal heating degree days.

So, we are developing our business plans for next year around that level and we believe that's the right level to try to plan and manage key financial metrics like leverage and coverage as you mentioned.

And it's also a level that would be meaningfully better than the past two years a record one weather yet below the performance level that could be achieve in a normal weather environment.

So, it provides a good balance of downside protection to the extent that this one weather trend we are experiencing continues, but yet it has upside potential to the extent weather normalizes.

So, as we evaluate our business plans for next year a cut as we say up to 33% would actually result in more than 1 to 1 coverage even at this year's lower level of earnings from this year's repeat record warm weather.

So, under a scenario in which weather improves even just in line with that 10-year average heating degree days, that would result in very healthy coverage and obviously strong excess cash flow.

And frankly in a normal or even colder than normal scenario obviously that the metrics would improve that much more and as we said numerous times our goal is to restore the strength of the balance sheet and having the excess cash flow to either delever or frankly to be opportunistic in accelerating our growth prospects is going to really put us on a better path towards sustainable long-term growth.

And improvement earnings from return to normal weather, we significantly reduced leverage by itself.

Mike indicated in his opening remarks that we continue to target leverage in the mid to upper threes and increasing our excess cash flow will help accelerate our path to get to that level and while enhancing our liquidity and also more importantly helping lower our overall cost of capital.

So, I said a lot there, but the bottom line is we manages business for long-term. We've always been known for our conservative approach towards managing the business in the balance sheet.

And this step while it's not taking lightly, it sets us up on a better path for long-term growth starting with a return to conservative financial metrics to give us the flexibility to support that growth..

Okay. And are you looking to achieve sort of similar coverage ratio that you've historically run on.

Do you feel that that's still adequate going forward even after the cut?.

Well, as I said, the cut is going to enhance value further. So yeah, it provides a good cushion a good runway to support growth and to imply that money back into the balance sheet or many other opportunities that come our way..

Okay. And just to put a range around, is the maximum 30% cut level, is that more based on if you see whether similar to as we had in the past couple of years.

And would a normal weather scenario based on your past 10-year average temperature days, does that suggest a smaller cut or possibly no cut at all, or is that off the table at this point?.

I think what we say is, we will finalize the level of cut in October. We're still here it is early August. This is timing here that we finalize our budgets for next year. We have a preliminary assessment of where we're planning the business. We have had extensive conversations with the board around our expectations for next year.

And what we believe the right metrics are to target to provide that cushion for a further softness in demand, but also to set us up for significantly more excess cash flow in the event weather surprises on the upside. So, I don't want to get ahead of the rest of the process, but I think we're it's well enough.

We're pretty deliberate in our thought process. And I think we wouldn't put a number like 33% out there if we didn't think that was an area that we were comfortable with..

Okay.

And lastly, my last question is can you speak to what you think your position is regarding possibly increasing margin is going into the winter considering your expectations on propane demand and possibly the cost of supply going higher with the exports seem to be strength today?.

Yeah, certainly it's in an interesting environment right now with respect to propane inventories in the U.S. We're sitting here as of yesterday at about 68 million barrels in storage in the country. That's about 10% below the five-year average. So, you're starting to see that translate into higher commodity prices.

My quote that the end of the June, end of the third quarter, propane was trading at about $0.58, well as of yesterday it was closer to $0.74.

So, you're right, as we get closer to next year's heating season, it will be interesting to see what hopefully we get real weather and real customer demand, so it will be interesting to see what commodity prices, how they react to that and what level of exports continue and what kind of an impact that that also has on prices.

So, for us though, look, I think we proven time and time again and in many, many different commodity price environments, our ability to manage our margin profile. This quarter was another perfect example of that. We had a nice improvement in unit margins in an environment that sort of had commodity prices been would saw it all over the place.

And we were able to achieve excellent margin performance, and I would expect that that would continue going forward. Not to say that it won't be challenging, but it will be challenging for the whole industry. And I think I put our margin management up against anybody frankly..

Okay, great. Thank you, guy. That's all from me..

Great, thanks Mirek..

Thank you. And our next question will come from the line of Mike Gyure. Your line is open..

Good morning. The growth initiatives, growth opportunities, if you're looking that potentially for 2018.

Should we think about that more on the organic side, or on the acquisition side, maybe what market segments I assume mostly in the propane business but can you touch a little bit I guess some of the opportunities you see out there?.

You kind of broke up on that a little bit Mike, but I think I got it. Look our growth opportunities for next year and beyond is we're going to continue with our Propane approach towards growth, one being organic. We have a very focused effort on customer base growth and retention, our field operations are doing an excellent job.

Improving year-in and year-out with respect to our customer's base management that provides good stability of customer base and we continue to make positive strives in that regard, net debt enhances our organic opportunities.

We're also - in that light, we're also looking at some markets where we are - we don't have a strong presence, but we have a good presence around the market where we can actually extend or reach by perhaps adding some satellite storage to be able to serve a market that makes good sense.

We have a handful of those sort of, I would categorize those as kind of Greenfield opportunities that don't cost a heck of a lot of money to get into, but we're - we can have a meaningful impact on our customer base in those markets. And then we continue to be focused on Propane acquisitions.

I mean we have a handful right now that we have in the Hopper [ph] with respect to small modern pop type acquisitions, and obviously we always looking at other ways to extend our presence in the propane space in the bigger way. And then, we haven't lost sight of our goals to continue to look for diversification opportunities.

Obviously, the weather that we've experienced the past two years, sort of enhances the - it proves out why a diversification strategy, if done right, could make sense. Because of the impact it could have on insulating the business from some of the weather dependency that we have.

So, we continue to be focused on diversification, but I think as we've said, time and time again, we're extremely patient and disciplined, because it does have to be done right. We can diversify for diversification sake. So, we will continue to look for opportunities for the right diversification plate.

And the only other comment I would make is, frankly given where our equity yield has been hovering at 14%, 15% which is touched to justify, and our leverage at five times given the lower earnings from weather. It has somewhat hindered our ability to focus on that meaningful kind of growth opportunities.

We've continue to stay active but, you have to be practical with respect to the cost of capital and our ability to finance the right acquisition.

So, we think this step-in sort of resetting some of our cash flow requirements and showing up the balance sheet, puts us right back in that position to be able to be more aggressive and focusing on that next phase of growth. So, this is really a long-term growth play and that's what we're giving to deliver for unit holders..

Great. Thank you very much..

Sure, thanks Mike..

Thank you. And at this time, there are no further questions coming from the phone line..

Well, terrific, Julia. Thank you for your help this morning. I thank you all for your support. We look forward to talking at the mid-November after the end of our fiscal year, and we'll give you more of an update on our expectations for 2018. And I hope everybody has an enjoyable rest of the summer. Thank you..

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