Suburban Propane Partners, L.P. (SPH) Earnings Call Transcript & Summary

Hello, and thank you for standing by. My name is Lacey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Suburban Propane Partners Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Davin D'Ambrosio, Vice President and Treasurer. Please go ahead, sir.

Thank you, Lacey. Good morning, and thank you for joining us for our fiscal 2026 third quarter earnings conference call. I'm here with Mike Stivala, our President and Chief Executive Officer; Mike Kuglin, Chief Financial Officer; and Alex Centeno, Senior Vice President of Operations. This morning, we will review our third quarter results, along with our current outlook for 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, related to the partnership's future business expectations and predictions, financial condition 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 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 Form 10-Q for the quarter period ended June 27, 2026, which will be filed by the end of business today, contains additional disclosures 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. The 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 Stivala for some opening remarks. Mike?

Thanks, Davin. Good morning and thank you all for joining us today. Following a solid first half, we experienced sustained cold weather in the eastern half of the United States and extremely warm weather in the West. The third quarter started out slow. Near-record warm temperatures across our footprint during the shoulder month of April reduced heat-related demand, while residential customer tank levels entering the third quarter were elevated due to the timing of deliveries in the second quarter when demand was particularly strong. Despite the slow start, volumes for the quarter benefited from continued growth in our counter-seasonal customer base, which substantially offset the impact of warmer weather as volumes in both May and June exceeded prior year levels. As always, our operating personnel did an outstanding job delivering exceptional customer service to our customers, managing selling prices in a rising and volatile commodity price environment, and maintaining discipline over operating costs. In our renewable natural gas operations, average daily RNG injection for the third quarter was essentially flat compared to the prior year as increases in manure-based D3 injections were offset by lower food waste D5 injection. However, revenues from RNG injection benefited from higher prices for environmental attributes, including a 31% year-over-year increase in California LCFS credit prices and an 8% year-over-year increase in D3 RIN prices. Subsequent to the end of the third quarter, we placed our new anaerobic digester facility in Upstate New York into service, which is expected to add approximately 100,000 MMBtu of annual D3 RNG injection. And following the completion of our RNG upgrade project at our Columbus, Ohio biogas facility, we expect to be injecting pipeline quality RNG from that facility during the fourth quarter, which is expected to add another nearly 200,000 MMBtu of annual D5 RNG injection. As a result, we will enter fiscal year 2027 with all 3 of our RNG facilities operational and an anticipated level of annual injection in the range of 750,000 to 800,000 MMBtu. We are also focused on opportunities for organic growth and production through continued capacity optimization and increased feedstock intake. During the quarter, we also recognized a benefit of $1.1 million from production tax credits earned under Section 45Z of the Inflation Reduction Act for D3 injections at our Stanfield, Arizona facility. The facility's significant negative carbon intensity score of approximately negative 380, together with compliance with the prevailing wage and apprenticeship requirements allows us to maximize the available credit value under the regulations. With the facility in Upstate New York now online, we expect to earn additional PTCs from RNG injection at that facility in addition to investment tax credits on the capital deployed for construction of the facility. With the New York facility now online and our Ohio facility soon to be online, we will have completed the major capital investments for our existing RNG facilities. As we have stated on a number of occasions, since owning this portfolio of assets, we have been focused on stabilizing production at our Arizona facility, where we had some operational challenges in the early years of ownership, driving operational excellence across the platform, improving plant design to increase the conversion of feedstock to RNG, deploying capital for the new facility in New York and the upgrade equipment in Ohio and building the team to support the long-term growth of the platform. These initiatives were undertaken during a period when environmental credit prices were significantly depressed, with California LCFS credits declining into the low $40 range due to the buildup of excess credits in the market. As we get ready to enter fiscal 2027 with all 3 facilities online, we are encouraged to see credit prices continuing to improve following regulatory actions taken in California that are driving more aggressive emissions targets and helping to rebalance the market. We believe this improving price environment presents a good tailwind for revenue enhancement in our RNG platform. With all of these efforts over the past 3-plus years, we have also maintained our focus on strengthening the balance sheet and allocating capital in a disciplined manner. Following the strong first half performance, cash flow generation in the fiscal third quarter benefited from the seasonal collection of receivables. During the quarter, we used excess cash flows supplemented by proceeds from the issuance of common units under our ATM equity sales program to reduce debt by more than $36 million. In a moment, I'll come back with some closing remarks. However, at this point, I'll turn the call over to Mike Kuglin to discuss the 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 unrealized gain of $700,000 in the third quarter of fiscal 2026 compared to unrealized loss of $2.9 million in the prior year third quarter, along with certain other noncash items. Given the seasonal nature of our business, we typically experience a net loss in the third quarter of our fiscal year. With that said, adjusted net loss for the third quarter was $17.7 million or $0.27 per common unit compared to adjusted net loss of $10.8 million or $0.17 per common unit in the prior year. Adjusted EBITDA for the third quarter was $18 million compared to $27 million in the prior year. Retail propane gallons sold in the third quarter were 70.6 million gallons, a decrease of 1.8% compared to the prior year, primarily due to the impact of seasonably warm weather in April on heat-related demand, which substantially offset the customer base growth in our agricultural, industrial and national accounts customer segments. With respect to the weather, average temperatures across our service territories during the third quarter were 17% warmer than normal and 3% warmer than the prior year third quarter. For the month of April, average temperatures were 24% warmer than normal and 11% warmer than April 2025 and ranked as the second warmest April on record. From a commodity perspective, U.S. propane inventories remained strong during the quarter, with June 2026 inventory levels approximately 21% above both June 2025 and historical averages for this time of the year. Despite elevated inventory levels, posted propane prices were volatile and traded between $0.70 and $0.90 per gallon basis Mont Belvieu due to geopolitical tensions in the Middle East and strong export demand. Overall, average wholesale prices for the quarter increased 3.6% compared to the prior year third quarter. In early part of the fourth quarter, wholesale prices have generally been in the $0.70 to $0.75 per gallon range, which is flat compared to the same time last year. Excluding the impact of the mark-to-market adjustments on our commodity hedges that I mentioned earlier, total gross margins for the third quarter were $159.6 million, a decrease of 2.4% compared to the prior year, primarily due to lower volumes sold as propane unit margins remained steady. With respect to expenses, combined operating and G&A expenses of $141.4 million for the third quarter were $5.2 million or 3.8% higher than the prior year. The increase was primarily attributable to higher payroll and benefit-related expenses and higher fuel and vehicle maintenance costs, partially offset by lower variable compensation costs and a benefit of $1.1 million from production tax credits earned for the current year quarter from RNG injections. Operating expenses for the third quarter of fiscal 2025 include a $2 million gain from insurance recovery related to Hurricane Helene, reduced prior year operating expenses and a pension settlement charge of $500,000, which was excluded from adjusted EBITDA. Net interest expense of $18.8 million for the third quarter was flat to the prior year as lower benchmark interest rates on borrowings under our revolving credit facility were offset by a higher interest rate for a tranche of senior notes that were refinanced in the first quarter of fiscal 2026. Total capital spending for the quarter was $21.4 million, which included $15.1 million of growth capital. Capital spending increased $6.8 million compared to the prior year, primarily due to the construction efforts at our Columbus, Ohio and Upstate New York RNG facilities. On a year-to-date basis, our total growth CapEx for our RNG facilities was $28.7 million, and our full year capital spending estimate for the existing RNG projects is approximately $35 million, which is at the low end of the previously communicated range of $35 million to $40 million. Turning to our balance sheet. During the third quarter, we utilized cash flows from operating activities and net proceeds of $6.6 million from the issuance of common units under our ATM program to repay $36.2 million of borrowings under the revolver. Our consolidated leverage ratio for the trailing 12-month period ended June 2026 was 4.35x, which is flat compared to June 2025. With a significant portion of capital spending on the RNG platform launch complete, we expect to generate increasing financial flexibility. We will remain focused on utilizing excess cash flows and proceeds received from the ATM program to further strengthen the balance sheet and as opportunities arise to fund strategic growth. With that, I'll turn the call back to Michael.