Suburban Propane Partners, L.P.

Good morning, ladies and gentlemen, and welcome to the Suburban Propane Partners Fourth Quarter and Fiscal Year-End Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, November 14, 2024. I would now like to turn the conference over to Devin D'Ambrosio, Vice President, And Treasurer, please go ahead.

Thank you, Emily. Good morning, everyone. Thank you for joining us this morning for our fiscal 2024 fourth quarter and full year earnings conference call. Joining me this morning are Mike Stavala, our President and Chief Executive Officer, Mike Coogland, Chief Financial Officer, Steve Boyd, Chief Operating Officer, and Alex Centeno, our Senior Vice President of Operations. This morning, we will review our fourth quarter 2024 fourth quarter and full year financial results, along with our current outlook for the business. Once we've concluded our prepared remarks, we will open the session to question. 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 condition and results of operations. These forward-looking statements involve certain risks and uncertainties. We've 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 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. Our annual report on Form 10-K for the fiscal year ended September 28, 2024, which contains additional disclosure regarding forward-looking statements and risk factors, will be filed on or about November 27. Once filed, copies may be obtained by contact in the partnership or the SEC. Third non-GAAP measures will be discussed on this call. We've 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 this time, I will turn the call over to Mike Stavala for some opening remarks. Mike?

Thanks, Davin, and thank you all for joining us this morning. Before I discuss our performance and accomplishments for fiscal 2024, I'd like to take a moment to comment on the two hurricanes that hit the Southeast Territory in late September and early October within two weeks of each other. Hurricanes Helene and Milton delivered historic devastation and sadly significant losses of life and homes, especially in Western North Carolina where we have a very strong market presence. In the face of some horrific operating conditions and in many instances personal challenges at home, The dedication of our safety personnel, our drivers, service technicians, customer service reps, and local management teams was nothing short of remarkable. I'm so proud of how our employees executed our emergency preparedness and response plan to assess the situation, secure our assets, and quickly deploy to serve our customers and local communities in the immediate aftermath of the storms. I'm also proud of the area leadership team for the thoughtful preparation in advance of the storms to relocate all of our vehicles to higher ground, which helped protect our fleet and prepare us to serve our customers when it was safe to do so. We also had numerous drivers and technicians from around the country volunteer to travel into the affected areas to help our local teams meet the increased demand for propane deliveries and related service work. The dedication of our people is reflective of our culture, and is a true testament to the resiliency of our operating model, our commitment to excellence, and our unwavering focus on serving our customers when they need us most. We also work closely with our long-term partner, the American Red Cross, to support their disaster relief efforts in Florida and North Carolina. While the devastation from these hurricanes was unthinkable, and our hearts certainly go out to those that lost loved ones or experienced major damage, the efforts of our teams have truly been inspiring, and I want to thank everyone for their incredible work. And on one final note, the increased demand for propane in the aftermath of these storms is recognition of the resilient power of propane as a versatile, portable, clean, and truly on-demand energy source that is relied upon to help communities recover across critical applications, including backup power generation, heating local shelters, powering vehicles and equipment, and supporting local food distribution to communities in need. Now looking at our performance for fiscal 2024, which ended at the end of September, the past year was categorized by unseasonably warm temperatures during the peak heating months that continued into the third quarter with periods of extreme heat in certain parts of the country. While the warm weather negatively impacted customer demand for heating purposes, we were once again able to leverage our experience in managing our business through a challenging heating season, and our operating personnel did an outstanding job of managing the things they can control, namely keeping safety as their highest priority, providing exceptional service to our customers, managing selling prices and controlling expenses. In addition, benefits of our customer-based growth and retention initiatives, particularly in our counter-seasonal customer segments over the past several years, combined with recent high-quality propane acquisitions, contributed to net customer-based growth that helped offset some of the shortfall in heat-related demand. As a result, volumes for the fiscal 2024 were down just 3% compared to the prior year when you exclude the impact of the additional week of operations in fiscal 2023. Adjusted EBITDA for fiscal 2024 was $250 million compared to $275 million in the prior year. Notwithstanding the unfavorable weather and the lower earnings compared to the prior year, we had a number of key accomplishments in fiscal 2024 in support of our long-term strategic growth initiatives. I'll highlight a few. We deployed capital to enhance the efficiency and operating performance of our RNG production facility in Stanfield, Arizona, driving a culture of operational excellence and safety in the RNG platform that we are known for within our propane business. Our efforts have resulted in increased RNG production levels, reaching a peak daily injection of 1,535 MMBTUs. RNG injection for fiscal 2024 overall averaged 1,049 MMBTUs per day, representing an increase of 20% compared to the prior year. We also advanced our capital projects to install RNG upgrade equipment at our Columbus, Ohio facility, and engineering and construction activities for our anaerobic digester in upstate New York. Although we experienced some minor delays with air permitting and zoning, we continue to expect both facilities to be fully operational in the second half of 2025. Once all three RNG facilities are operating at run rate capacity, we expect to be generating revenues from tipping fees, RNG sales on approximately 850,000 MMBTUs per year, environmental attribute credits, and fertilizer sales. In addition, assuming the provisions of the Inflation Reduction Act remain in place under the new administration in Washington, our RNG sales will be eligible for production tax credits starting in January 2025, and the construction costs for the Upstate New York facility will be partially offset by investment tax credits. We also continue to support our unconsolidated subsidiaries Oberon Fuels and Independence Hydrogen as they make progress towards scaling their platforms. We are the only retailer in the United States that is delivering low carbon propane plus RDME, which we are currently delivering at a 4% blend level to our forklift customers in Southern California. And we continue to test forklift engines at a higher blend level to further lower the carbon footprint. In our core propane business, we acquired and successfully integrated three well-run propane businesses in strategic markets in Florida, Nevada, and Texas. for total consideration of approximately $14 million. Just last week, we closed on a larger propane acquisition to expand our service territories in New Mexico and Arizona, investing $53 million, inclusive of future non-compete payments, to acquire more than 14,000 new customers and welcoming 65 employees into the suburban propane family. We also continue to foster the growth of our greenfield market expansion efforts and increased the number of active expansions in different parts of the country from 9 in fiscal 2023 to 18 in fiscal 2024. We continue to focus on our renewable energy platform, part of which is to offer a lower carbon renewable propane alternative for customers to maintain their existing propane infrastructure while lowering their overall carbon footprint. We secured additional contracts for incremental renewable propane gallons as they come online in 2025. And we also have a number of exciting technology initiatives in our propane business to drive additional operating efficiencies and further enhance the overall customer experience. With the excess cashflow generating capacity that our core propane business provides, we were able to fund our capital projects and the investments in strategic propane acquisitions with a modest increase in debt of $19 million. Finally, our efforts on a number of fronts received tremendous recognition in 2024. We were recognized as a top company for women to work in transportation by the Women in Trucking Association for our culture that fosters gender diversity and career development opportunities. For the second year in a row, we were named one of the best employers for veterans for 2024 by Military Times, in recognition of our commitment to supporting service members, veterans, and their families. For the third year in a row, we were one of 10 finalists in the Energy Transition Liquid Gases category of the S&P Global Energy Awards for our strategic investments in renewable energy. And our Suburban Cares platform received several prestigious awards, including as a finalist in the Corporate Impact category of the S&P Global Energy Awards for the fourth time in five years. So despite the challenges presented by unseasonably warm weather, we had a very successful fiscal 2024. We are executing on our long-term strategic growth plan to foster the growth of our core propane business while making strategic investments in the energy transition to lower carbon renewable energy alternatives. And we remain patient and disciplined in order to maintain a strong balance sheet. A little later, I will provide some closing remarks. However, at this point, let me turn it over to Mike Coogland, who will discuss our full year and fourth quarter results in more detail. Mike?

Thanks, Mike, and good morning, everyone. I will start by focusing on our full year results, which included 52 weeks of operations in fiscal 2024, compared to 53 weeks in the prior year, to get some color on the fourth quarter toward the end of my remarks. To be consistent with previous reporting, I am excluding the impact of unrealized non-cash mark-to-market adjustments on our commodity hedges, which resulted in an unrealized loss of $14.6 million in fiscal 2024 compared to an unrealized loss of $3.7 million in the prior year, along with certain other non-cash items and acquisition-related transaction costs in the prior year. Including these items, net income for fiscal 2024 was $107.7 million or $1.68 per common unit compared to $138.4 million or $2.17 per common unit in the prior year. Adjusted EBITDA for fiscal 2024 was $250 million compared to $275 million in the prior year. As Mike mentioned, our earnings for fiscal 2024 were impacted by lower heat-related demand resulting from warm weather during most of the heating season but benefited from growth in our customer base, unit margin expansion, controlling our operating expenses, and greater contributions from our R&G operations. Retail propane gallons sold in fiscal 2024 were 378 million gallons, which was 4.6% lower than the prior year, primarily due to the impact of widespread warmer weather throughout much of the heating season. In addition, the year-over-year comparison of our volumes was impacted by the additional week of operations in the fourth quarter of fiscal 2023, which contributed approximately 5.5 million gallons to the prior year. With respect to the weather, average temperatures for fiscal 2024 were 10% warmer than normal and 2% warmer than the prior year. The weather pattern during the critical months of the eating season reflected average temperatures for the month of December that were 10% warmer than both normal and the prior year, followed by January which was 4% warmer than normal, albeit cooler than the prior year, to a brief burst of extremely cold temperatures in the middle of the month, followed by February, which was 12% warmer than normal and 1% warmer than the prior year. From a commodity perspective, wholesale propane prices during much of the first half of fiscal 2024 were generally lower than the same period last year, but trended higher than the prior year in the second half and resulted in average wholesale prices for the full year of 75 cents per gallon basis Mount Bellevue being essentially flat compared to the prior year. According to the most recent report from the Energy Information Administration, U.S. propane inventories at the end of last week were at 101 million barrels, which is 2% higher than the prior year and 8% higher than historical averages for this time of the year. Excluding the impact of the mark-to-market adjustments on our commodity hedges that I mentioned earlier, total gross margin of $819.6 million for fiscal 2024 decreased $23.2 million, or 2.7%, compared to the prior year, primarily due to lower propane volume sold, all set to an extent by slightly higher propane unit margins and higher margin contribution from our RNG operations. Excluding the impact of the unrealized market-to-market adjustments, propane unit margins for fiscal 2024 increased two cents per gallon or 1.3 percent due to effective selling price management are shall set by volume mix resulting from a higher concentration of commercial and industrial volumes that tend to be less weather sensitive than residential volumes with respect to expenses excluding a non-cash pension settlement charge reported in operating expenses of six hundred thousand dollars during fiscal 2024 an acquisition related cost of 4.7 million dollars reported in general and administrative expenses during fiscal 2023, buying operating and G&A expenses increased $1.2 million or 0.2% compared to their prior year. The nominal increase in expenses was primarily due to higher payroll and benefit related costs and higher self insurance costs substantially offset by lower volume related variable operating costs, lower variable compensation, and the impact of one less week of operations in fiscal 2024. That interest expense of $74.6 million for fiscal 2024 increased $1.2 million compared to the prior year due to a higher level of average outstanding borrowings under our revolving credit facility. Total capital spending for fiscal 2024 of $59.4 million was $14.5 million higher than the prior year, primarily due to growth capital associated with improving operating performance and RNG production at our facility in Stanfield, Arizona, and from advancing construction efforts at our facilities in Columbus, Ohio, and upstate New York. For fiscal 2025, capital spending for our propane operations is expected to be consistent with historical levels, which is between $40 and $45 million, and CapEx for the R&G projects is expected to range between $35 to $45 million, excluding the potential benefit of investment tax credits. We expect the capital spending at our RNG facility in upstate New York to qualify for the investment tax credit at a rate of 30%, which equates to a range of $6 to $9 million in tax credits and will be earned when the asset is placed in service. We anticipate monetizing investment tax credits and production tax credits in the tax credit transfer market. Turning to our fourth quarter of fiscal 2024 results, as I mentioned earlier, given the nature of our fiscal calendar, The fourth quarter of fiscal 2024 included 13 weeks of operations compared to 14 weeks in the prior year. Consistent with the seasonality of our business, we typically report a net loss for the fourth quarter. With that said, and excluding the effects of certain items in both years, we reported a net loss of $35 million for the fourth quarter, or 54 cents per common unit, compared to a net loss of $33.2 million, or 52 cents per common unit, in the prior year. Just EBITDA for the fourth quarter was $800,000 compared to $3 million in the prior year. Retail propane gallons sold during the fourth quarter decreased 8.1% compared to the prior year. However, excluding the impact of the additional week of operations in the fourth quarter of fiscal 2023, propane volumes were flat compared to the prior year. Total gross margins decreased $13.1 million, or 9.1%, primarily due to lower volume sold. Combined operating and G&A expenses decreased $11 million, or 7.8%, primarily due to lower volume-related variable operating costs, lower variable compensation, and the impact of one less week of operations. Turning to our balance sheet, during the fiscal year, we utilized a combination of cash flows from operating activities and borrowings under our revolving credit facility to fund three strategic propane acquisitions, for a total consideration of $14.3 million, as well as our growth capital expenditures to advance deconstruction activities at our RNG production facilities and to make additional investments in our unconsolidated subsidiaries. Total debt outstanding at the end of fiscal 2024 increased $19 million compared to September 2023, and our consolidated leverage ratio at the end of the fiscal year was 4.76 times. Although the leverage metric remains elevated relative to our historical levels following the RNG acquisition, and from the impact of warm weather on earnings, we remain well within our debt covenant requirement of 5.75 times and continue to remain focused on strengthening the balance sheet. Our business generates a substantial amount of free cash flow, even under warm weather scenarios, and will continue to remain focused on utilizing excess cash flows to fund the planned growth capital within our RNG platform, as well as to strengthen the balance sheet and as opportunities arise to fund the strategic growth of our core propane business and our renewable energy portfolio. We have more than ample borrowing capacity under our revolver to support our capital expansion plans and ongoing strategic growth initiatives. As we continue to focus on the execution of our long-term strategic goals, we also stay focused on maintaining a strong balance sheet. With that, I'll turn it back to Mike.

Thanks, Mike. As announced in our October 24th press release, our Board of Supervisors declared our quarterly distribution of 32.5 cents per common unit in respect of the fourth quarter of fiscal 2024, which equates to an annualized rate of $1.30 per common unit. The quarterly distribution was paid on November 12th to our unit holders of record as of November 5th. So just a few closing remarks regarding our long-term strategy. As I've stated many times before, we are uniquely positioned to support our customers and local communities on the journey to a lower carbon energy future, given our core competencies in safety, customer service, and logistics expertise as a critical link in the local distribution of energy. There is much discussion and debate about the energy transition and what is the right solution to lowering greenhouse gas emissions. Many believe the future arrives by completely disrupting the status quo and establishing a new paradigm by pushing electrification as the sole solution to reducing greenhouse gas emissions. We have long contended that the world needs an all of the above approach that leverages the best available technology for the applications to meet the growing energy needs of society in a resilient, affordable, and sustainable way. Suburban propane provides solutions today in the form of traditional, renewable, and RDME blended propane that has immediate benefits to lowering the carbon footprint across many applications. And we are continuing to invest in new, even lower carbon energy solutions that will shape the future. Our legacy is built on reliability. Our future is being shaped by innovation. Our sustainability efforts are not just about environmental responsibility. They are about investing in communities, creating opportunities for our people, and enhancing the long-term value for you, our valued unit holders. Finally, I want to thank the more than 3,200 employees for helping make fiscal 2024 another very successful year for suburban propane, despite the many challenges presented from this past heating season. As always, I hope you and your families remain safe and healthy, and I wish everyone a very happy holiday season. We appreciate your support and attention and would now like to open the call up for questions. So, Emily, you want to help us with that?

Absolutely. Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. And your first question comes from Gabe Maureen from Mizuho. Please go ahead.

Hey, good morning, everyone. Mike, maybe I can start out in asking about the recent acquisition that you made in Arizona and New Mexico, just wondering the genesis of that transaction, since it seems a little bit larger than some of your recent tuck-ins. Anything in particular about those markets that you're seeing attractive? And then also, you know, how things are looking on the third-party M&A front from a propane standpoint, whether you expect to maybe engage further?

Sure. Thanks, Gabe. New Mexico has been a market that we've actually been expanding in a bit, some of which was from – it started from market expansion efforts. We did do a smaller acquisition a couple years ago to begin to establish a bigger footprint, and then this acquisition came – came to us which really fills in a good part of new mexico and and what we're seeing in new mexico is just you know population growth um and and generally a a market that is that is expanding embracing uh propane and so um so it was a really attractive uh business very very well run as you could see a a good size 14 000 customers it's our largest acquisition since the energy our largest single acquisition since the energy deal in 2012, which demonstrates the confidence we have in the quality of this business. And it really establishes a significant footprint down in a market that's been demonstrating real good growth. As far as other M&A, you know, part of our long-term strategy, We are not deviating from our core propane business. Our strategy is two-pronged, continue to invest in growth in propane, while we also invest in the future with our investments in renewable energy. And I think we're doing it in a pretty balanced and patient way. So we're definitely active, and we're continuing to look at opportunities that make good sense.

Thanks, Mike. Appreciate that. Maybe if I can also ask about expectations for kind of cost inflation at the underlying propane business and how things are trending. It seems like you really got a handle on cost this past year. I'm just wondering if there's more to go and how the outlook is there.

Yeah, I think we've seen a pretty good stabilization of the cost infrastructure. I think this year, fiscal 2024, was a remarkable effort on the part of our field to think about the kind of performance that we had, tough weather scenario, and to only have a 0.2% increase in overall operating and G&A expenses is really a tremendous testament to our operating model to be able to flex when weather doesn't cooperate and to flex up as we get opportunities with weather. So I think it's a lot of what you've Probably been accustomed to seeing in suburban propane to be able to manage the business in whatever comes our way.

Got it. And then if I could just follow up with maybe a bigger picture question. With the administration changing here in D.C. shortly, just wondering how you're viewing the outlook for tax credits and the like impacting the R&G business, whether you see any opportunities or see any risks out there. Just curious your thoughts.

Yeah, I think it's still a little early to predict. Obviously, I do think one of the benefits that I see is perhaps a little bit less focus on mandating things like EVs, despite the fact that that doesn't mean we won't have continued investment in EV activity as a country. But I think maybe opening up the conversation to a more all of the above approach, which I think benefits us as propane really is and should continue to be viewed as a genuine solution to lowering carbon today. And as we innovate for even lower carbon solutions in the coming three to five years, it allows society to maintain their current infrastructure without making dramatic investments just to get to a lower carbon footprint. So I think on that front, I think there seems to be a benefit. On the production tax credits in the IRA, that remains to be seen. I'm a firm believer that there's a lot of projects that are already out there that are embraced by both red and blue states. And frankly, it's going to be hard to unwind. that law altogether, and I would expect to see that certain aspects, including the production tax credits, I would expect to see that continue. But we'll see what happens. I think that's our prognostication at this point.

Got it.

Thanks, Mike. Appreciate the call. Thank you, Gabe.

Once again, if you have any questions, press star followed by the one. At this time, we have no other questions. I will turn the call back to Mike Stevala for any closing remarks.

Great. Thank you, Emily. Again, I hope everybody has a safe and happy holiday season. We look forward to talking with you again in February after our first quarter results. So, thank you.

Ladies and gentlemen, this concludes the conference.

You may now disconnect your lines.