Ladies and gentlemen, thank you for standing by. Welcome to Suburban Propane Partners LP Fiscal 2019 Second Quarter Results Conference Call. [Operator Instructions] As a reminder, this 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 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. I'd now like to turn the conference now to Davin D'Ambrosio, please go ahead..

Thank you Stacy and good morning everyone. Thank you for joining us this morning for our fiscal 2019 second 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 Chief Operating Officer.

This morning, we will review our second 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.

Our annual report on Form 10-K for the fiscal year ended September 29, 2018 and our Form 10-Q for the period ended March 30, 2019, which will be filed by the end of business today, both contains additional disclosure 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 suburbanpropane.com. At this point, I would turn the call over to Mike Stivala for some opening remarks.

Mike?.

Thanks Davin. Good morning, thank you all for joining us today.

Despite a slow start to weather driven customer demand in the second quarter resulting from the warmer average temperatures that started in December and carried through the better part of January in the vast majority of our service territories, we are very pleased to report another solid quarter with an improvement in adjusted EBITDA of nearly $1 million compared to the prior year second quarter.

For the month of January, 2019 average temperatures were 10% warmer than both normal and January of the prior year. However, as cooler temperatures arrived in February and March in the majority of our service territories, customer demand responded. While there were some significant swings in average temperatures.

On average, heating degree days for those two months were near or above normal.

Therefore, when you look at the fiscal 2019 heating season as a whole compared to the prior year, the weather pattern was much more erratic with heating degree days concentrated more in the shoulder months, primarily October, February and the first half of March versus fiscal 2018 in which heating degree days were more concentrated in December and January and picked up again in late March through much of April.

All that being said, our flexible business model allows us to be nimble and effectively adapt to such demand variability, contributing to the improvement in adjusted EBITDA our operations personnel did an outstanding job with manpower planning, margin and expense management, and ensuring the highest quality service to our customers and the communities we serve.

With this solid performance, we continue to generate excess cash flow which we used to reduce outstanding borrowings under our revolver by nearly $40 million from the levels at the end of December, while also funding the acquisition of a well run propane business in our west coast operating territory during the quarter.

So we continue to remain focused on our goal of reducing debt to a level closer to our target metric of less than four times, while also executing on our strategic growth initiatives and positioning our business for 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 the second quarter results in more detail.

Mike?.

Thanks Mike and good morning everyone.

To be consistent with previous reporting, as I discuss our second quarter results, I am excluding the impact of unrealized noncash mark-to-market adjustments and derivative instruments used in risk management activities, which resulted in an unrealized gain of $8.5 million in the second quarter of fiscal 2019 compared to an unrealized loss of $3.7 million in the prior year.

Excluding these items, net income for the second quarter of fiscal 2019 increased to $112.5 million or $1.82 per common unit, compared to net income of $110.5 million or a $1.80 becoming unit in the prior year.

Adjusted EBITDA for the second quarter of fiscal 2019 amounted to $163 million, an improvement of approximately $1 million compared to the prior year. Retail propane gallons sold in the second quarter of fiscal 2019 were 165.2 million gallons, which is 2.6% lower than the prior year.

Overall, average temperatures across all of our service territories for the second quarter as measured by heating degree days were 3% warmer than normal and 3% cooler than the prior year. However, as Mike indicated, despite these averages, the fiscal 2019 weather pattern was much more erratic than the prior year.

As such, our volumes are negatively impacted by the lack of momentum for customer demand heading into the second quarter, resulting from the warm December and significantly warmer temperatures in January, particularly across the mid-Atlantic, southeast and southwest regions.

In the commodity markets, wholesale propane prices were fairly stable, stayed in the range of $0.60 to $0.70 per gallon as basis Mont Belvieu throughout the quarter.

Overall, average wholesale prices for the second quarter were $0.67 per gallon, which was 21% lower than the prior year second quarter and 16% lower than the first quarter of fiscal 2019.

Total gross margins of $294.3 million for the second quarter of fiscal 2019, increased $1 million compared to the prior year, primarily due to slightly higher propane unit margins, primarily set by lower volume sold.

Excluding impact of that non-cash mark-to-market adjustments that I mentioned earlier, propane unit margins increased approximately $0.04 per gallon or 2.4% compared to the prior year.

With respect to expenses, combined operating and G&A expenses were essentially flat to the prior year, the decrease in insurance costs from favorable trends and claims data and lower bad debt expense was offset by higher variable compensation and an increase in spending and marketing, and advertising initiatives.

Net interest expense of $19.6 million for the second quarter of fiscal 2019, increased marginally compared to the prior year, as the impact of higher benchmark interest rates under the revolving credit facility were substantially offset by a lower average level of outstanding borrowings, in fact, compared to the level of borrowings at the end of last year second quarter, total debt at the end of this year second quarter was down by more than $30 million.

Total capital spending for the quarter amounted to $8.8 million, compared to $9.6 million in the prior year. In addition, as Mike indicated, we completed the acquisition of a propane business strategically located in our West Coast operating territory for a total purchase price of $12 million, of which $10.6 million was paid during the quarter.

Looking at the year-to-date performance, adjusted EBITDA for the first half of fiscal 2019 increased $1 million compared to the prior year.

The earnings were driven by solid volume performance, despite the challenges from an erratic weather pattern, higher unit margins, resulted from effective selling price management and maintaining tight control over expenses.

And turning to our balance sheet, during the second quarter, we funded our working capital needs, capital expenditures, the acquisition of our propane business and the debt repayment of $39 million from operating cash flow.

We’ve now moved through our historically high period of seasonal working capital needs and ample liquidity to fund our strategic growth initiatives. The combination of the increase and earnings and debt repayments during the quarter, resulted in our consolidate leverage ratio improving to 4.32 times at the end of Q2.

We are well within our debt covenant requirements and remain focused on improving our leverage metric to less than 4 times. Back to you, Mike..

Thanks, Mike.

As announced in our April 25th press release, our Board of Supervisors declared our quarterly distribution of $0.60 per common unit in respect of our second quarter of fiscal 2019 and that equates to an annualized rate of $2.40 per common unit, the quarterly distribution will be paid on May 14 to our unit holders of record as of May the 7.

Just a few final remarks, while not an ideal weather pattern, given the warmer weather during the critical months of December and January, when cooler weather conditions did arrive, customer demand responded and our operations personnel were well prepared to meet that demand and exceed the expectations of our customers.

Given our continued intense focus on managing all of the things that we can control, that's managing margins and expenses and driving efficiencies.

We were pleased to deliver an improvement in adjusted EBITDA with solid earnings also resulted in strong excess cash flow generation and strong distribution coverage of approximately 1.33 times, based on our trailing 12 month distributable cash flow.

And as we have said, we are using excess cash flow to reduce debt in line with our stated goals, as well as to invest in small propane businesses in attractive markets and to strengthen our financial position as we continue to seek larger more transformative strategic opportunities.

At the same time, we continue to make good strides with our customer base growth and retention initiatives and our pipeline of potential propane acquisitions remains robust. Just a brief comment on the outlook.

The cooler temperatures experienced in March 2019 fizzled out toward the end of the month and significantly warmer than normal average temperatures were experienced in April 2019.

In contrast, the prior year third quarter benefited from a strong blast of cold weather that arrived late March and lasted throughout the month of April, which contributed to unusually strong heat related demand for that time of year.

In fact, from a heating degree day perspective, average temperatures for the month of April 2019 across all of our service territories were 17% warmer than normal, compared to 16% colder than normal in April of last year. While weather typically has less of an impact on volumes sold during the third quarter than it does during the heating season.

The cooler weather last April contributed to strong demand and the resulting impact on overall operating performance for the third quarter.

Lastly, I'd like to express my deep gratitude and appreciation for the more than 3,200 employees of Suburban Propane for their efforts in continuing to remain focused on providing exceptional service to our customer base and local communities during another challenging winter. And as always, we appreciate your support and attention this morning.

Now I'd like to open the call up for questions. And Stacy, if you wouldn't mind give us a hand with that..

Sure. [Operator Instructions] And our first question will go to Ben Brownlow with Raymond James. Please go ahead..

Hey, good morning, guys..

Good morning, Ben..

On the – the OpEx was well maintained, especially relative to the variability you saw in demand.

Can you just talk about – was any of that decline in operating expenses are structural kind of progress around efficiency initiatives? Any way to quantify that versus the variable component?.

Yes. There is definitely as we continually look for opportunities to drive efficiencies and that's through our manpower planning activities, which I mentioned briefly in my opening remarks.

We continue to do a good job, managing the headcount, managing the overtime and so from a fixed component perspective, a lot of those costs we did see some savings.

And what you saw that sort of offset that was some of the variable compensation that comes with slightly higher earnings and for the most part that's what drives and otherwise, our vehicle expenses were little higher, given the additional activities that we had during the year in higher fuel costs.

So for the most part, little variable expenses that offset some savings and fixed expenses..

Okay.

And with the increase in G&A, do you expect that to level off in the second half?.

Yes. The expenses that drove the increases including initiatives in marketing advertising will incur in the first half and mostly in the second quarter. I'd expect the expenses for G&A in the back half of the year to be roughly flat to the back half of the prior year..

Great. Thanks guys..

Thanks, Ben..

We'll go to Jeremy Tonet with JP Morgan. Please go ahead..

Good morning, guys. This is Charlie on….

Hey, Charlie..

I just wanted to start on M&A, you noted a robust pipeline and you had that acquisition on the West Coast territory.

I was wondering, if you could maybe talk high level about your market share in your territories, but maybe more so about what opportunities you see in certain regions versus others and why those might be more attractive to you?.

Yes. So we're actually seeing a fair amount of activity in virtually every one of our territories. We have some opportunities on the West Coast, some on the East Coast, some down in the Southeast. And so it really is across the Board, Charlie.

As I said the pipeline is robust and as you know, we traditionally look for very well-run businesses, we look to add in markets that we believe is an attractive market for us that we have good management that can effectively integrate the business and typically we have our eye on the good quality businesses that we would like to bring into our mix and we do foster those relationships to be in the best position to be able to execute on those deals when they come our way.

So it's not really concentrated in any one particular part of the country, it is a pretty good list though a very well-run businesses that we will take a nice run at..

What sort of hurdles do you put in place in terms of – on your economics of going after one business versus another? And I guess, what typically have you seen historically? What have you been able to see now in terms of streamlining cost? What sort of margin improvement do you typically see?.

Yes. It's all over the Board, Charlie, every deal is different, every customer base that you're looking at is slightly different.

Some businesses that we look at will have a higher concentration of residential business, some will have a higher concentration of commercial industrial business, some are a direct fold into some of our existing territories, some support some of our market expansion initiatives, where we've identified a good quality market that might be slightly outside of our current delivery radius that we've already started to market into and we find a business that's in that market that allows us to make a bigger splash by putting the investment into buy the business and accelerate our efforts to expand in that market.

So the dynamics of every deal are different and we look at pricing of each of those deals a little differently. Some have more synergies than others and some have a little bit more attractive customer mix than others and that will all factor into the way we look at valuing those businesses..

That's helpful. Thanks.

There's one more from me on balance sheet, I didn't hear in the opening remarks, sorry, where leverage is and then what's the capacity on the revolver right now?.

Yes. We ended the quarter at about 4.32 on leverage. And we have full capacity under our revolver which is effectively $300 million..

Perfect. Thanks guys..

Thank you..

[Operator Instructions] And we'll go to Sharon Lui with Wells Fargo. Please go ahead..

Hi. Good morning, gentlemen..

Hi, Sharon..

I was just wondering if the lower propane prices have had any benefit on your margins yet..

Well, I think, we do a good job in managing margins. We had in our prepared remarks and you'll see it in the 10-Q later on, you saw it in the press release this morning. Our margins were up about $0.04 in the second quarter. So it's not significant.

It's pretty marginal, but I think that was reflective slightly of fairly stable, yet as you say lower cost environment than we've experienced certainly in the first quarter and also in the second quarter of last year. So I think what we saw in the second quarter, we feel good about it, we feel it's probably pretty sustainable..

Okay, great.

And then maybe just – if you can touch on your view on your corporate structure as a MLP, given all the changes in the MLP sector including some of your propane peers?.

Look we feel good about where we are. As you know, we've always been one of the unique MLPs. So nothing really has changed for us. We were one of the first to really get rid of the GP altogether and that was way back in 2006, which eliminated all the IDRs.

We were originally when we went public in 1996 we were one of the more non-traditional MLPs to begin with, because our corporate structure or governance structure looked more like a C Corp., than an MLP. So we really are governed with the unit holders in mind more so than any one individual or any one group of individuals through a GP.

So Suburban is always been sort of an anomaly in the MLP space because our governance structure is so clean. And by taking this step in 2006 to eliminate the IDRs, eliminate the GP, it just further aligned the interests of the unit holders at the forefront. So we've always felt that we are uniquely positioned as an MLP.

And I would say even more so now, where one of our major peers is assuming the world goes through will no longer be a separately traded public MLP, rather there will be a subsidiary underneath the utility.

So I think that should board well for investors that are still seeking a good quality yield that is protected by very strong distribution coverage, strong balance sheet and should feel pretty good that distribution is very sustainable. And if you look at where we're trading today, you're talking north of 10% tax deferred yield.

I think that's a pretty good investment when you see all the volatility in the marketplace right now and the uncertainty that is circulating through the markets.

We feel pretty darn good about the investment opportunity that Suburban Propane provides for those seeking income oriented tax advantage, high yielding and fairly stable cash flow generating business..

Thank you..

Thank you..

[Operator Instructions] At this time there are no questions in queue. Please continue..

Great. Thanks, Stacy. I appreciate your help today. And thank you all again for joining us. I hope you have a safe start to the summer season. We look forward to talking to you again in early August following our third quarter results. Thank you..

Thank you, ladies and gentlemen. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect..