Ladies and Gentlemen, thank you for standing by. And Welcome to Suburban Propane Earnings Conference Call.

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 operations. .

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..

[Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to Vice President and Treasurer, Davin D'Ambrosio, please go ahead. .

Thank you, David, and good morning, everyone. Thank you for joining us this morning for our fiscal 2018 first quarter earnings conference call. .

Joining me this morning are Mike Stivala, our President and Chief Executive Officer; Mike Kuglin, Chief Financial Officer and Chief Accounting Officer; and Steve Boyd, our Chief Operating Officer..

This morning, we will review our first quarter financial results, along with our current outlook for the business. Once we've have concluded our prepared remarks, we will open the session to questions. However, before getting started, I'd like to quickly 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 30, 2017, and its Form 10-Q, for the period ended December 30, 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, suburbanpropane.com..

At this time, I'll turn the call over to Mike Stivala for some opening remarks.

Mike?.

Thanks, Davin, and thank you, everyone, for joining us this morning. We're extremely pleased to report an improvement of approximately $9 million or 11% in our adjusted EBITDA compared to the prior year first quarter..

Coming off back-to-back record warm winter heating seasons, our operating platform was presented with a much cooler and more favorable weather pattern in a majority of our service territories..

And particularly, in the eastern half of the United States. The colder temperatures arrived in November and continued through the end of December with some of the harshest conditions coming in the final 2 weeks of the quarter..

Customer demand responded to the colder temperatures. And as a result, we experienced an increase in volumes sold in every customer segment during the first quarter..

A 5.4% increase in propane volumes overall. In fact, even in the early part of the quarter, volumes in our agricultural sector benefited from an active crop drying season. Our volume performance was a real testament to our preparedness to meet the demand as well as the continued momentum in our customer base growth and retention in initiatives..

With some of the more extreme cold temperatures being reported towards the end of December and into January, the positive momentum in customer demand trends have carried over into the early part of the fiscal 2018 second quarter, with very strong performance in the month of January..

As we talked about at the end of fiscal 2017, we set our fiscal 2018 customer demand estimates and resulting volume expectations, using weather assumptions that are in-line with the average, the 10-year average heating degree days.

We then developed our man power plan and cost infrastructure to meet those volume levels, while maintaining flexibility to wrap up or down based on actual weather driven demand..

Through the first 4 months of the fiscal year, average heating degree days in our service territories are tracking in-line with that 10-year average, yet 6% warmer than the 30-year average..

Our operations personnel have done an outstanding job, meeting this year's higher demand, while continuing to effectively manage margins and expenses..

As a result, we were able to deliver 5.4% more volumes with a modest 1.7% increase in overall expenses in the first quarter..

Let me make one last comment before turning it over to Mike Kuglin to discuss the first quarter results in more detail. .

While the harsh weather conditions in certain parts of the country presented supply and logistics challenges for many in the industry, I'm extremely proud of the coordination between our field personnel and our supply department to ensure uninterrupted supply to our customer service centers in order to meet customer demand..

It is in conditions like these that are size, national presence and strong relationships with suppliers and logistics providers allows us to keep our locations adequately supplied in order to effectively manage demand spikes.

Mike?.

Thanks, Mike, and good morning, everyone. As Mike indicated in his opening remarks. We reported a solid improvement in earnings compared to the prior year first quarter..

Earnings benefited from a combination of higher volume sold and continued savings from operating efficiencies that helped offset higher bearable operating cost resulting from higher customer demand..

To be consistent with previous reporting, as I discussed on first quarter results, I'm excluding the impact of unrealized mark-to-market adjustments and derivative instruments to use in risk management activities, which resulted in unrealized loss of $1.5 million for the first quarter of fiscal 2018 and unrealized gain of $500,000 in the prior year first quarter..

Additionally, net income for the first quarter of fiscal 2018 included a $4.8 million loss on the sale of certain nonstrategic assets and operations within the propane segment, excluding the noncash adjustments on derivative instruments in both years.

And the loss of sale of assets, net income for the first quarter, the fiscal 2018 amounted to $43.5 million or $0.71 per common unit compared to net income of $34 million or $0.56 per common unit in the prior year first quarter. .

Adjusted EBITDA for the first quarter of fiscal 2018, amounted to $93.2 million, an increase of $8.9 million or 10.6% compared to the prior year..

Retail propane gallons sold in the first quarter of fiscal 2018, 125 million gallons, increased 5.4%, compared to the prior year. .

Sales of fuel oil and other refined fuels of 9.1 million gallons, increased 1.2% compared to the prior year..

As Mike mentioned, our buyers benefited from the arrival of cooler temperatures across nearly of all our service territories.

Overall, average temperatures in our service territories were 6% cooler than the prior year first quarter, compared to normal heating degree days, average temperatures were 8% warmer than the 30-year and 1% percent warmer than the 10-year average..

For a commodity perspective, wholesale propane prices continued to experience an upward trend throughout much of the quarter, as domestic inventory levels trailed the prior year and the 5-year average to the continued strength in the export market..

Overall, average propane prices of $0.96 per gallon basis mark value were approximately 64% higher than the prior year first quarter and 25% higher than the fourth quarter of fiscal 2017..

Average fuel oil prices of $1.89 per gallon were 21% higher than the prior year first quarter..

Total gross margins of $209.6 million for the first quarter of fiscal 2018, increased $10.9 million or 5.5% compared to the prior year, primarily due to higher propane volume sold..

Propane unit margins were flat compared to the prior year first quarter as our fuel personnel effectively managed selling prices during the rising commodity pricing environment..

With respect to expenses, overall volume sold increased more than 5% year-over-year. Combined operating and G&A expenses increased just 1.7% compared to the prior year.

This increase reflects higher variable operating cost attributed to an increase in operational activities to support higher demand as well as higher variable of computation expense associated with higher earnings and higher general and insurance expense, all of which was substantially offset by continued savings from operating efficiencies..

Net interest expense of $19.5 million for the first quarter of fiscal 2018 was $700,000 higher than the prior year as a result of incremental borrowings under our revolving credit facility felt on the portion of our working capital needs..

Depreciation and amortization expenses of $31.1 million for the first quarter were essentially flat compared to the prior year..

Total capital spending for the quarter was $8.5 million, which included $4.5 million in growth capital. .

Our CapEx spending was $1.6 million higher than the prior year first quarter, primarily due to a purchase of tanks and cylinders in support of new customer installations..

During the first quarter, we also closed on the acquisition of a propane operation strategically located in our California market for a total purchase price of $4.9 million..

Turning to our balance sheet. During the first quarter, we funded a portion of our working capital needs with $47 million incremental net borrowings under our revolver. .

Working capital needs during the first quarter increased $72 million compared to the prior year first quarter, as result of the impact of higher volume sold and higher wholesale prices on receivables..

Despite the incremental borrowings, our leverage ratio at the end of the first quarter was 5.15x, which was flat, compared to the end of fiscal 2017 and well within our debt covenant requirement under the amended threshold of 5.95x and the 5.5x threshold in effect prior to the amendment..

We have plenty of heating season ahead with ample borrowing capacity under our revolver to fund the working capital needs. Our working capital requirements typically peak towards the end of the heating season. After which we expect to begin reducing the outstanding balance on our revolver. .

Now before turning the call back to Mike, I'd like to briefly comment on the impact of the December tax reform on our results..

For background purposes and it's important to note, that our propane business is structured as a partnership. And therefore, it's not subject to corporate level federal income tax. However, our fuel oil and refined fuels, natural gas and electricity, and service businesses are structured as corporate entities.

And therefore, are subject to corporate federal level income tax..

Our corporate entities have net deferred tax asset, which was primarily comprised of net operating loss carry forwards, along with a full valuation allowance, those previously provided against the net assets. .

The federal net deferred tax assets were remeasured during the first quarter using the new 21% federal corporate income tax rate. However, the remeasurements of the net assets did not have an impact on earnings to a corresponding reduction in the valuation allowance. .

Tax reform also [indiscernible] tax credit carry forwards were fully refundable without regard to future taxable income.

Given the future realizability of such credits, we reverse the valuation allowance on the AMT credit carry forwards of our corporate entities which result in a $1.1 million deferred tax benefit reported with in the income tax line for the first quarter..

Now, back to you Mike. .

Thanks, Mike. As announced on January 25, our Board of Supervisors declared our quarterly distribution of $0.60 per common unit in respect of our first quarter of fiscal 2018, which equates to an annualized rate of $2.40 per common unit. A quarterly distribution will be paid on February 13 to our unit holders of record as of February 6..

Looking ahead, we still have a lot of heating season in front of us. As we have stated in the past, our flexible operating model is designed to help insulate the business from unseasonably warm weather, as well as to ramp-up our activity levels in relation to an increase in weather-driven demand.

Thus far, the outlook on weather seems to be shaping up favorably for February and many parts of the country. Obviously, that can change. Our people stand ready to deliver the highest quality service to our customers and the communities we serve.

And I'm extremely proud of their hard work and dedication to meet the challenges presented by the more seasonable weather up to this point. As we progress through the remainder of this fiscal year, we will look to build on the momentum from our positive first quarter performance.

Continuing to manage the things we can control, delivering continued improvement in operating performance, and executing on our customer base growth and retention initiatives.

In the meantime, from a financial perspective, as earnings improve, our leverage will continue to trend towards our target levels and we have plenty of liquidity and access to capital to continue to pursue our strategic initiatives..

Finally, I'd like to thank all of the more than 3,200 employees of Suburban Propane for their unwavering focus on the safety and comfort of our customers..

And as always, we appreciate your support and attention this morning. And would now like to open the call for questions.

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

[Operator Instructions] And the first question will come from the line of Mike Gyure with Janney. .

Yes, can you talk a little bit about kind of the working capital used there? And the borrowings on the line of credits? And kind of I guess the balance between inventory and receivables?.

Sure, Mike, and good morning. As a result of the increase in commodity price that I mentioned in the opening remarks, propane price is being up 64% year-over-year and 25% for the fourth quarter. It had an impact, obviously, on selling prices, which then give rise to an increase in receivables.

Though that receivable balance compared to the beginning of the year, it starts little more than $70 million and up more than $30 million compared to December of last year. So it’s principally concentrated on that. AR is up but not -- I mean inventory is up but not nearly as much.

So the expectation is to begin collecting on those receivables as we move into Q2. And looking at where we are today, of course it’s already starting to happen. When I look at the aging profile of the receivables, the aging profile remain stable. So the increase in receivables does not have a material impact on our net debt expense.

But obviously, something we continue to monitor. But as of today we are in good shape. .

Yes, Mike, just keep in mind, this is the seasonal nature of our business. We typically build working capital in the first quarter. And our build to working capital peaks usually towards the end of February. So we're still on a position where we'll be building working capital.

And as we collect all of that activity from the first quarter and then into the early part of the second quarter. The second quarter and the third quarter become our big cash generating quarters. So we will expect and in fact that's what we're seeing already is those balances coming down.

And the requirements to fund working capital or the borrowings on our revolver coming down as well. .

Great.

And then maybe to have in conjunction with that? Can you talk about the availability of propane across your service territories? I guess as we're moving here to February, assuming you feel like you're in a pretty good position to meet demand as you see things today?.

Yes, Mike, we're in a great position. I mentioned it in my remarks earlier, there was some challenges in the first quarter, particularly, in the Northeast, not necessarily for us. And I think we had planned our inventory needs the way we always do, which is to be prepared to be able to meet demand if it's there.

And also to not be overbought to the extent that demand doesn't show up. So our folks in the supply department, our dispatchers did an outstanding job, making sure we got product where we needed to get it. And there was no interruption at any of our customer service centers. And that's not the case for the rest of the industry.

The industry did struggle at times and I think it's sort of a testament to our preparedness and the relationships that we have with our suppliers. .

And the next question will come from the line of Mirek Zak with Citigroup. .

Can you give us an idea since you're expecting to see any Q1 weather driven volumes to show up into Q2, may be due to timing or deferral of sell up request as the weather sort of got cold much later in the quarter? Or is 2Q volume sort of looking like a typical quarter based on historical weather trends?.

Yes, I think, the weather -- yes, there was some real harsh conditions the last 2 weeks in December. But the weather pattern was actually quite good in the first quarter with November, particularly, on the eastern half of the United States, providing some real good weather in November, which built some momentum into December.

And then that momentum sort of continued to build towards the end of December, and yes, that has created a significant amount of positive momentum coming into January. So I don't think it's anything timing wise, I think the first quarter is a good reflection of the weather that we got and the way that the weather pattern played out.

And now as we're in the second quarter, we're -- the positive weather conditions, particularly, in January, which, January was basically, normal, when you look at our entire service territory put together.

The East Coast and the Midwest were generally colder than normal in January and the West Coast is lagging, fairly -- significantly warmer than normal. So it blends out normal for the month of January, and we're seeing that play out in our volumes similar, frankly, better than what we saw in the first quarter.

So I think so far, the way this year's heating season and the weather pattern is playing out. Its playing out as best as it can be, which is create some demand earlier in the first quarter.

I mentioned our ag business had some good crop drying demand and our ag volumes responded significantly and that was followed by the heat demand from the residential side of the business and now that heat demand is really kicking in here in the second quarter and across all segments.

And so far, it's playing out, obviously, a lot better than the past 2 winters. .

Okay. Great.

And have you been seeing any ability to capture some unit margin recently as propane prices have started to retreat a little bit? Or sort of to cut core competitive dynamics or other issues making it a little bit more difficult to do right now?.

Yes, I think the folks are doing a great job managing margins. We talked about our margins in the first quarter, we're essentially flat from prior year. And we're seeing that similarly play out in the second quarter.

The competitive landscape is quite challenging and the volatility in the commodity price makes those challenges a little bit more intense at times. But I think it is refreshing to see propane prices trending on a downward momentum here in the early part of February.

Today, Belvieu is in the high 70s, so that's coming off with an average in the first quarter of $0.96. So that's a nice welcome retreat for the consumer in terms of their overall energy costs. .

[Operator Instructions] The next question will come from the line of Sharon Lui with Wells Fargo. .

Just Wondering if you can touch on I guess your acquisition that you closed in the first quarter.

How many gallons do you expect that to add? And perhaps, like the acquisition multiples that you've been seeing?.

Yes, so our gallon perspective, it’s not that significant. It is a very strategic market for us on the West Coast and this was exactly the kind of business that we look to add to our platform. It was a business that we had our eye on, that we knew the owners, we knew it was a very well run business.

We knew it overlaid directly into a very attractive market for us. And so we're able to bring that into the mix at a reasonable multiple.

Multiples have remained consistent, probably, on an axis basis we're talking 6x, 7x times and that's really the quality of the market that we added to -- that really fits into our overall strategy when it comes to buying small propane businesses. .

That's helpful. And maybe if you could just also touch on the sale of noncore assets.

Was that in a particular market, that you're trying to get out of? And could that be I guess the source of cash flow to fund growth?.

Yes, I mean, I would say it was a good trade, right? It was a market in the upper Peninsula of Michigan, that was just very, very challenging just given -- just how remote that area is and the challenges that presented for our type of operating model. So when you say markets that we're trying to get out of. We are now out of it.

So we did execute on that strategy to monetize an asset and, I guess, you could say that we use some of those proceeds to fund the acquisition on the West Coast. So overall, it's a good trade. .

And our next question will come from the line of Jeremy Tonet with JPMorgan. .

Hi, this is Charlie in for Jeremy. Most of my questions have been answered, I just wanted to clarify some comments, just earlier on timing and volumes, I guess the question is probably related to one of your peers that talked about kind of the cold snap both with very, very end of December just kind of causing a recognition of volumes to the view.

Question is, is it the following quarter? I guess, I just want to clarify that's not the case here?.

I don't think that's what I said. I said the volumes are strong in the second quarter. I just wouldn't sort of blame it on late weather in the first quarter. I think we're getting good weather in the second quarter and the volumes is responding accordingly. Our volumes were up in the first quarter because the weather in the first quarter was good, okay.

Our volumes were up almost 5.5% on weather that was still below the average heating degree days, not normal average heating degree days. So that's not what I said. I said were getting the volume in the second quarter that is appropriate for the kind of weather that we're getting, which is for January, as I said, was normal.

So it was 100% of the 30-year average when you put our service territories together, which means the East Coast was a lot better than the normal, and the West Coast was a lot lower than the normal. .

Yes, sorry. I wasn't saying that you're saying that. I's just trying to -- I think what the -- kind of implied question was before so that make sense. And then just lastly on the agriculture.

What kind of volumes do that makeup of the total volumes?.

About 5% of our total. .

And at this time I'm seeing no further questions on the phone lines. .

Okay. Terrific. David, thank you for your help this morning, and thank you all for joining us again. We look forward to speaking with you again at the end of our second quarter in early May. And in the meantime, stay warm. .

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