Suburban Propane Partners, L.P.

Good day and welcome to the Suburban Propane Partners' third fiscal quarter results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Davin D'Ambrosio, Vice President and Treasurer. Please go ahead, sir.

Thanks, Chuck. Good morning, everyone. Thank you for joining us this morning for our fiscal 2022 third quarter earnings conference call. Joining me this morning are Mike Stavall, our President and Chief Executive Officer, Mike Coogland, Chief Financial Officer and Chief Accounting Officer, and Steve Boyd, our Chief Operating Officer. This morning, we will review our third quarter financial results along with our current outlook of the business. Once we've concluded our prepared remarks, we will open the session to questions. Our 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 conditions and results of operations. These forward-looking statements involve certain risks and uncertainties. We have 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 our earnings press release, which can be viewed on our website at suburbanpropane.com. All supplementary and forward-looking statements attributable to the partnership or persons acting on its behalf are expressed expressly qualified in their entirety by such cautionary statements. Our annual report on Form 10-K for the fiscal year ended September 25th, 2021, and Form 10-Q for the period ended June 25th, 2022, which will be filed by the end of business today, contain additional disclosures regarding forward-looking statements and risk factors. Copies may be obtained by contacting the partnership or the SEC. Sir, 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 plead this information to be useful in our Form 8-K, which was furnished to the SEC this morning. The Form 8-K will be available through a link in the Investor Relations section of our website. At this point, we'll turn the call over to Mike Stavola for some opening remarks.

Mike? Thanks, Evan. Good morning, and thank you all for joining us today. In the face of many challenges in the broader economy creating headwinds for our business and the propane industry as a whole, we delivered strong operating performance and advanced several strategic growth initiatives in the third quarter, both in our base propane segment and with our recently launched renewable energy platform. Some of the operating challenges included high and volatile commodity prices driving customer conservation, and challenges managing price risk associated with inventories and future supply, tightness in the labor market, in particular for qualified CDL drivers and service technicians, creating hiring challenges and higher labor costs, inflationary factors increasing the cost of vehicles, tanks, diesel fuel, and many other operating costs, and the impact of overall inflation on the consumer, which is delaying collection efforts as customers are managing their household spending budgets. Our continued strong performance in the face of these challenges is a testament to our unique, flexible, and nimble business model, which has consistently set us apart from our peers. I'm extremely proud of our operating personnel who continue to do an outstanding job in safely meeting the needs of our customers and staying focused on our customer-based growth and retention initiatives while effectively managing selling prices, manpower levels, and expenses. Additionally, our supply and risk management teams continue to do a great job ensuring adequate supplies of inventory and managing price volatility through our risk management activities, which have supported our overall margin performance and ability to offset some of the inflationary factors. As a result, adjusted EBITDA for the third quarter was $29.2 million, an improvement of nearly $6 million compared to the prior year. With the improvement in earnings, we used excess cash flows to reduce debt by more than $43 million, bringing our consolidated leverage ratio down to 3.64 times from 3.96 times at the end of the prior year third quarter, and a continued improvement from the prior sequential quarter, which was 3.87 times. In addition to the improvement in earnings, we had a very active quarter on the strategic front as we continued to advance the build-out of our renewable energy platform in support of the country's ongoing energy transition towards a lower carbon future. Specifically, at the end of April, we had a ribbon-cutting ceremony at our customer service center located in Anaheim, California, as we launched the first-ever commercial sales of propane plus RDME, which combines the clean, versatile, and abundantly available propane with low-carbon benefits of renewable dimethyl ether which is produced by Oberon Fuels, our minority-owned subsidiary. We are now selling this new product to several of our forklift customers in Southern California. We also made additional investments in Oberon Fuels to support their efforts to accelerate the commercialization of propane plus RDME. In May, we announced a collaboration agreement with Iwatani Corporation of America, a wholly-owned subsidiary of Iwatani Corporation, Japan's largest distributor of propane and only fully integrated supplier of hydrogen. We will work together to help accelerate the adoption of propane plus RDME both here in the U.S. and in Japan, and to explore opportunities to advance investments in the hydrogen infrastructure in the United States. In June, we announced a new investment through our suburban renewables platform with an agreement reached with Adirondack Farms, a family-owned dairy farm, in upstate New York to construct, own, and operate an anaerobic digester system for the production of renewable natural gas from dairy cow manure. These strategic initiatives are on the heels of our $30 million investment for a 25% equity stake in Independence Hydrogen, which was announced at the end of the second quarter. Independence Hydrogen continues to make great strides in executing on their business plans toward the build-out of a hydrogen ecosystem. We also remain focused on the growth of our propane operations, and in July, subsequent to the end of the quarter, we completed an acquisition of a well-run propane business in northern New Mexico, which will expand our presence in this growing market and provide synergy opportunities to support our best-in-class propane operations. Therefore, as we have stated over the course of the past several years, we continue to utilize excess cash flow in a balanced way to make investments in our long-term strategic growth initiatives and to further strengthen our balance sheet. In a moment, I'll come back for some closing remarks and provide added color on our strategic initiatives. However, now I'll let Mike Coogan give you our third quarter results in more detail. Mike?

Thanks, Mike, and good morning, everyone. To be consistent with previous reporting, as I discuss our third quarter results, I'm excluding the impact of unrealized mark-to-market adjustments on our commodity hedges, which resulted in an unrealized loss of $900,000 for the third quarter, compared to an unrealized gain of $11.1 million in the prior year. Excluding these items, as well as the non-cash equity and earnings of Oberon Fuels and Independence Hydrogen, which are unconsolidated subsidiaries accounted for under the equity method, and certain other non-cash charges in both years, our earnings for the third quarter improved from a net loss of $20.9 million, or 33 cents per common unit, in the prior year to break even in the current year. The adjusted EBITDA for the third quarter was $29.2 million, which was $5.9 million, or 25.3%, higher than the prior year. The improvement in earnings was driven by several factors, but most significantly from cooler spring temperatures, continued solid margin management, and a favorable impact of our commodity hedging and risk management strategy in a period of high and volatile commodity prices. Retail propane gallons sold in the third quarter were 75.5 million gallons, which was 1.6% lower than the prior year. While volumes for the quarter were favorably impacted by cooler spring temperatures, the benefit from the cooler weather was more than offset by a considerable level of customer conservation resulting from the high commodity price environment and overall inflationary pressures on consumers' disposable income and buying habits. In addition, volumes in the prior year third quarter benefited from incremental outdoor heating and cooking demand associated with COVID-related government restrictions and more consumers staying at home at that time. With respect to the weather, average temperatures for the third quarter were 4% warmer than normal and 5% cooler than the prior year third quarter. From a commodity perspective, average wholesale propane prices remain elevated, even as they have gradually come down over the last few months due to improving, but still lower than normal, inventory levels across the country. The nation's inventory levels during the third quarter and now into the early part of the fourth quarter have remained around 12% to 15% below the five-year average, which is an improvement from earlier in the fiscal year, but remains below historical averages. as U.S. propane production continues to struggle to keep pace with demand and more significantly strengthen exports. Overall, average wholesale prices basis Montbellevue for the third quarter were $1.25 per gallon, which was 44% higher than the prior year third quarter and 4% lower than the second quarter of fiscal 2022. Excluding the impact of the mark-to-market adjustments on our commodity hedges that I mentioned earlier, Total gross margin of $160.3 million for the third quarter increased $16.4 million, or 11.4%, compared to the prior year. The improvement in gross margin was driven by effective selling price management during a volatile commodity price environment and from the favorable impact of commodity hedges that matured during the period. Consistent with past practices, our hedging and risk management activities are intended to reduce the effect of price volatility associated with forecasted purchases of propane and propane sold on a fixed price basis. The commodity hedges that matured during the third quarter were principally comprised of net long positions that were favorably impacted from a significant rise in commodity prices. With respect to expenses, excluding non-cash pension settlement charges in both periods, combined operating and G&A expenses of $130 million for the third quarter increased $10.4 million, or 8.7%, compared to the prior year, primarily due to inflationary pressures across most areas of the business, including higher payroll and benefit-related expenses and higher vehicle lease and fuel costs. The increase was also attributable to higher accruals for variable compensation due to the increase in earnings and higher provisions for doubtful accounts due to higher selling prices and delays in customer payments. Debt interest expense of $15 million for the third quarter was $1.7 million, or 10.4%, lower than the prior year due to refinancing of two tranches of senior notes at lower rates in the third quarter of fiscal 2021, as well as a lower average level of outstanding debt. Total capital spending for the quarter of $10.9 million was $3.5 million higher than the prior year, primarily due to greenfield market expansion activities and growth markets from the impact of significantly higher steel prices on the purchases of tanks and cylinders to support customer growth. Turning to our balance sheet, as Mike mentioned, during the third quarter, we repaid $43.1 million of borrowings under the revolver with cash flows from operating activities. With the debt repayment, our total debt outstanding as of June 2022 was $60 million lower than June of last year. The combination of the increase in earnings and debt repayment during the third quarter resulted in our consolidated leverage ratio for a trailing 12-month period ended June 2022 improving to 3.64 times. With our debt-to-ebitda ratio trending closer to our target level of 3.5 times, our balance sheet liquidity position is strong. With the continued uncertainty regarding the economy, inflation, and commodity markets, the strength of our financial position allows us to insulate the business from short-term challenges while also supporting our strategic growth as opportunities arise.

Back to you, Mike. Thanks, Mike. As announced on July 21st, our Board of Supervisors declared our quarterly distribution of $0.325 per common unit in respect of our third quarter of fiscal 2022 which equates to an annualized rate of $1.30 per common unit. Our quarterly distribution will be paid on August 9th to our unit holders of record as of August 2nd. So in closing, since the onset of COVID-19 in early 2020, and now with the challenges in the economy as we emerge in a post-COVID environment, we have taken many steps to adapt our business model, protect and invest in our valued employees, and strengthen our balance sheet. all while continuing to support our long-term strategic growth initiatives through our participation in the energy transition to a cleaner energy future. With the investments in Oberon Fuels, Independence Hydrogen, and the most recent agreement to produce renewable natural gas, we have developed an interconnected set of renewable energy assets that are very complementary to our expertise as energy distributors and service providers to local communities. We will continue to focus on the execution of our strategic growth plans to support these and other renewable energy technologies and businesses, while also fostering the growth of our core propane operations. With the strength of our earnings and cash flows through the first nine months of fiscal 2022, our distribution coverage for the trailing 12-month period remains strong at 2.6 times after maintenance capex. We are in a very strong position both operationally and financially, especially as our leverage ratio trends closer to mid-three times, which provides support for our long-term sustainability and growth for you, our valued unit holders. Finally, the foundation of our ongoing success continues to be rooted in our more than 3,200 dedicated employees at Suburban Propane and their hard work and unwavering focus on the safety and comfort of our customers and the communities we serve. I'm extremely proud of all of their efforts. As always, we appreciate your support and attention and would now like to open the call up for questions. Chuck, if you could assist us with that, please.

Yes, sir. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two.

And at this time, we'll pause momentarily to assemble our roster. Again, if you have a question, please press star then one. And this will conclude our question and answer session.

I would like to turn the conference back over to Mr. Mike Stavala for any closing remarks.

Great. Thanks, Chuck. And thank you all again. We look forward to talking to you in November as we close out the end of our fiscal year. We intend to continue to manage the business through these challenges and end the year very strong and continue to focus on our strategic initiatives. So thank you again and have a safe rest of your summer and early fall.

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