Ferrellgas Partners LP Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: Ferrellgas Partners (FGP)

Ferrellgas Partners LP (NYSE:FGP)

Q2 2013 Earnings Call

March 07, 2013 8:30 am ET


James Ryan VanWinkle - Chief Financial Officer of Ferrellgas Inc, Principal Accounting Officer of Ferrellgas Inc, Executive Vice President of Ferrellgas Inc and Treasurer of Ferrellgas Inc

Stephen L. Wambold - Chief Executive Officer of Ferrellgas Inc, President of Ferrellgas Inc and Director of Ferrellgas Inc

Tod D. Brown - Executive Vice President of Ferrellgas and President of Blue Rhino


Kelly J. Krenger - BofA Merrill Lynch, Research Division

Jeremy Tonet - JP Morgan Chase & Co, Research Division


Good morning, my name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter fiscal year 2013 earnings call. [Operator Instructions] I would now like to turn the call over to Mr. Ryan VanWinkle, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

James Ryan VanWinkle

Thank you, Michelle, and good morning, everyone. Welcome to the Ferrellgas Partners Fiscal 2013 Second Quarter Earnings Conference Call. I'm Ryan VanWinkle, Executive Vice President and Chief Financial Officer. And with me today is Steve Wambold, our President and Chief Executive Officer; and Tod Brown, Executive Vice President and President of our Blue Rhino operations.

Before we get started, we'd like to remind everyone that statements may be considered forward-looking and that various risks and uncertainties and other factors could cause actual performance to differ materially from anticipated performance. These factors are discussed in our Form 10-K and other documents filed from time to time with the SEC.

Steve will open the call with comments about the second quarter performance, and then turn the call over to Tod and I to discuss our Blue Rhino operations and our financial performance. And after that, we'd like to open the call up for any questions you may have.

So with that, I'll turn the call over to Steve Wambold.

Stephen L. Wambold

Okay, thank you, Ryan. I appreciate that. The quarter did begin, as it always does every year, with high hopes of cold temperatures. But as you know by now, our hopes were quickly dashed for the second year in a row.

The quarter did end up cooler than the prior year by about 6%. But as you'll hear later, it was much warmer than normal. And December, which is a very big month for us, as you know, on its own, was actually 1% warmer than the prior year, which seemed impossible to us. But it was 15% warmer than normal. However, our team once again did meet the challenge in a very difficult environment. And as I noted on the first quarter call, we didn't really feel hostage to winter this year. We made significant moves last year on the expense side. And operationally, we knew we'd execute well. As such, our positive momentum, which did begin in the third quarter of last year, has continued on.

Adjusted EBITDA grew 33%. Net earnings are up 60%. And most importantly, our coverage ratio has improved 50% from the end of the last fiscal year.

And of course, along the way, we did indeed enjoy some cooler temperatures towards the latter half of January -- excuse me, latter half of December and early part of January, and that was very nice. Strategically, we remain laser-focused on adding and retaining customers to our base, both organically and through acquisition. And as we've noted previously, the environment is very ripe for both opportunities. We're pleased with our organic net gain numbers at the halfway point, and we secured 3 immediately accretive deals this fiscal year. There are several more deals in the pipeline, and we hope to announce a few more this quarter before it closes out.

So as we look forward to the rest of this fiscal year, we remain very confident and very optimistic that our momentum will carry through this fiscal year, and quite frankly into next fiscal year, '14.

I'm so happy to share that February was a solid month, and March has sped out of the gates quite quickly. And before we know it, Blue Rhino's season will be upon us, and Tod will discuss it in more detail. But Rhino is well prepared and looking forward to taking advantage of its industry-leading position again.

So as such, we do have increased confidence in our full year projection and are actually raising it to a range of $245 million to $260 million. Okay, I'm going to turn it over to Tod for some updates on Blue Rhino and corporate development.

Tod D. Brown

Thank you, Steve. As was mentioned previously, the Blue Rhino organization continues to drive industry-leading results as we progress towards the upcoming summer grilling season. Just as with the retail side of Ferrellgas, Blue Rhino focuses on driving operational efficiency throughout the delivery process. We do this, in part, by ensuring that we have high-volume selling locations in high-density markets, and we target delivering to our locations when the inventory is between 60% and 80% of capacity needing replenishment.

We're able to do that through our technology platform that each delivery driver has available to them and with the assistance of our customers' POS systems. That way, we're able to keep our retail partners in stock and selling when consumer demand is at its peak.

The second quarter is considered the off season for Blue Rhino. But I'm pleased to say that during the second quarter, we experienced overall sales increases of 4.5% versus second quarter 2012. The variance versus prior year was a result of same-store sales growth of over 4% during the quarter, led by our home centers and grocery channels. As we approach the selling season, our sales team is focused on increasing selling locations that will benefit us this coming summer.

In addition to the Blue Rhino tank exchange business, we also have the Blue Rhino global sourcing portion of the operation, which sells grills, outdoor fire pits, patio heaters and fireplace accessories to retailers across the United States and around the world. The global sourcing unit is well positioned to have one of its best selling seasons in many years. This is due to the fact that many of its retailers have depleted excess inventories that had remained from a soft selling season in 2012 but are poised for growth this coming year due to positive consumer spending trends that are being projected and the increased consumer confidence that we're seeing in the economy.

In addition to the Blue Rhino business, I'm also accountable for the Ferrellgas Corporate Development team, which leads our acquisition activity across the company. We're encouraged by the robust activity year-to-date. It's one of the most attractive acquisition environments we've experienced in some years. As previously reported, we made 3 acquisitions this year, with each meeting our strict criteria, which includes being immediately accretive to the business. It's important to note that all 5 acquisitions that we made last year outperformed their pro formas in EBITDA and DCF.

Of course, it's often pointed out that our highly fragmented industry is ripe for consolidation. Just because that observation has become commonplace doesn't mean it's any less valid. There are fewer buyers in the market for an increased number of potential sellers. We like that math, and moreover, we're working hard to be recognized as the acquirer of choice.

That concludes my comments for the second quarter performance. And with that, I'll pass the call back over to our CFO, Ryan VanWinkle.

James Ryan VanWinkle

All right. Thank you, Tod. As anticipated, we continue to see quarter-over-quarter improvement, both in our operations and our financial results. In fact, I'm pleased to announce for the third quarter in a row, we're reporting double-digit increases in both adjusted EBITDA and distributable cash flow. Lower wholesale propane cost and efficiency initiatives implemented this time last year helped to drive these results, despite of mother nature who at least to [ph] January wasn't all that cooperative.

Adjusted EBITDA did rise 33%. Distributable cash flow improved 50% this quarter on stable sales volumes, cost containment and margins that were more a return to our historical norms. As Steve mentioned, temperatures during the quarter were cooler than the prior year. However, they remained significantly warmer than normal. Our focus on improving delivery efficiencies for the benefit of our consumers and our cost structure helped to offset these impacts of warmer than normal temperatures.

And while we continue to focus on what I'll call blocking and tackling, which we anticipate will provide further financial improvement in the quarters to come, we do continue to seek opportunities for growth, both organically through sales and marketing and through acquisitions. As we continue to meet and exceed our operational goals this year, with a strong February earnings now behind us and a great start to March, we remain very optimistic, as Steve said, with respect to our fiscal 2013 earnings. As Steve mentioned in his comments, we are raising our guidance at this time to an EBITDA range of $245 million to $260 million, slightly more than our previous guidance.

Retail propane sales for the quarter were 222 million gallons, off less than 1% to prior year performance. On temperatures, they were more than 10% warmer than normal. And while in line with our prior year results, sales this quarter were heavily impacted by December temperatures that were nearly 15% warmer than normal and 1% warmer than the prior year.

Gross profit rose this quarter by 15% to $235 million on stable sales volumes and a return of more historical margins. Benefiting margins and the consumer has been the lower wholesale cost of propane, which for the quarter and year-to-date, are down nearly 40%.

For the quarter, margins were $0.79 per gallon sold, in line with both our 6- and 12-month performance. And driven by second quarter performance, our year-to-date gross profit grew by 13% to $375 million.

Operating expense for the quarter was $105.6 million, and general and administrative expense was $10.2 million. Absent performance-based incentive accruals, the total OpEx and G&A expenses were down nearly $1 million from prior year and in line on a cent-per-gallon basis sold. Year-to-date, total operating expense is down 1%, and G&A expense is down 4% to prior year and again, in line with prior year on a cent-per-gallon basis sold. Equipment lease expense for the quarter was $3.8 million and year-to-date, $7.8 million, each a slight increase to the prior year expense. As we continue to look for opportunities to improve our delivery efficiencies, we do seek to remove excess fleet and replace aging active fleet with more efficient vehicles. These actions will continue to improve our all-in cost of delivery to our consumers.

Interest expense for the second quarter was $22.6 million, down from $24 million in the prior year fiscal quarter. The decrease is attributable to both interest rate savings and the lower working capital borrowings, driven by the lower wholesale cost of propane. As a result of these inventory costs, the -- and the increase in our distributable cash flow in the last 12 months, we currently have over $235 million of availability on our credit facility, a significant improvement over this time last year. Year-to-date, interest expense was $45.1 million, down from $47.4 million in the prior year period.

And as said earlier, the adjusted EBITDA for the second quarter increased 33% to $116 million compared to prior year performance of $87 million. And net earnings increased 60% to $58.8 million compared to $37 million a year ago.

On a trailing 12-month basis, adjusted EBITDA of $237 million compares to $188 million during the same 12-month period ending January of 2012. And DCF increased to $146 million compared to $87 million in the prior year. This improvement in DCF provides us a DCF coverage ratio of 0.9x, a 50% improvement in just the last 6 months. And with the strong February performance now in the books and a great start to March, we take yet another step closer to reaching 1x coverage by the end of the fiscal year.

With that, that concludes my comments on the financial performance for the quarter and year-to-date. And at this time, we'd like to open the call for questions.

Question-and-Answer Session


[Operator Instructions] Your first question comes from Kelly Krenger.

Kelly J. Krenger - BofA Merrill Lynch, Research Division

Just a quick question about what you're seeing in the M&A environment. It sounded like there's a pretty active or robust set of opportunities out there. I'm just kind of curious in terms of the range of things that you're seeing or what you would be interested in, in terms of either size or that sort of thing, location?

Tod D. Brown

I mean, we do continue to see a number of opportunities out there ranging in all sizes, and we're not eliminating any particular items. We continue to look for diversification opportunities throughout the marketplace. And I would just say that it is active due to a number of reasons. Obviously, the warmer winter last year. People were not in a position to go into the marketplace. And I think with some of the tax questions being settled out has opened up those opportunities. So nothing in particular that I could share at this point. But we certainly are seeing a robust number of opportunities that we're pursuing aggressively.

Kelly J. Krenger - BofA Merrill Lynch, Research Division

Okay. And in terms of diversification, is that mostly geographic diversification? Or is there any other product or business line that you guys would be contemplating?

Tod D. Brown

We're open to MLP-able opportunities as we see those fit into our corporate structure and how we could leverage our systems. But we're also not eliminating opportunities outside that could fall into the operations within the Blue Rhino organization, let's say, or potential opportunities within product offerings that could fit within the Blue Rhino organization as well. So we want to make sure that we're keeping an open mind in opportunities, but that it would be accretive as we move into those types of opportunities going forward.


Your next question comes from Jeremy Tonet from JPMorgan.

Jeremy Tonet - JP Morgan Chase & Co, Research Division

Question, some of your peers don't seem as confident with consumer trends out there. I'm wondering if you guys could expand a bit more about what you guys are seeing. It seems like you have a bit more of a positive outlook for -- as far as consumer trends and demand is concerned.

Stephen L. Wambold

Well, I think due to the difference in the reporting quarters, maybe you're not hearing the same information, but I would like to think that the entire industry has benefited from cooler temperatures to the beginning of our respective competitors' second quarter. But really, our optimism comes from the standpoint that, look, supply costs are a lot lower than they've been for the last 3 or 4 years. And as such, we're seeing increased usage on a per-consumer basis for the first time in several years. And we'd like to think that with increased -- with all the well plays that are going on out there, there's a lot of propane, there's still a lot more propane being produced than is being used in the United States, which is why we're a net exporter. But along the way, there's also a lot of new uses for propane being developed. So look, we've got confidence in the future. We think that the housing trends will turn. We believe that manufactured homes will come back to the propane industry over time. And we're optimistic about where we're headed.

James Ryan VanWinkle

I'd say we're really focused on organic growth the last several years, and weather patterns and commodity prices have caused conservation and less usage because of the weather. But that does mask organic customer growth that really has been occurring over the last couple years for us, specifically. So I think with some more seasonable temperatures in January, February, you're starting to see that increasing customer count produce the gallons that you would've anticipated seeing over the last several years.

Stephen L. Wambold

Yes, Jeremy, to that point, January was really the first month this fiscal year that we had temperatures that were within a realistic range of normal. And our customer count performance and our gallon performance was extremely strong in that month. So that gave us hope that if weather does return to some semblance of normal in the future, that performance will be very strong.

Jeremy Tonet - JP Morgan Chase & Co, Research Division

Okay. So would you say even beyond improved weather trends, as far as it comes to the consumer themselves, in their consumption patterns, would you think that there's some improvements there beyond just favorable weather this year?

Stephen L. Wambold

Yes, I would.

Tod D. Brown

I know that some of our retailers, from a consumer traffic perspective, on the -- at least, I'll speak to the Blue Rhino side of the business and our retail partners, are seeing a bit of an uptick in their comp store sales. And so there is some optimism as we're progressing into our season, if you will, of the grill season and the Blue Rhino tank exchange business. So there is some optimism amongst our retail partners relative to the consumer demand. And they are looking forward to an increased comp store sales growth going into 2012 -- or 2013 summer season.


[Operator Instructions] I have no further questions in queue. I turn the call back over to the presenters.

Stephen L. Wambold

Okay, thanks, Michelle. And to the rest of our partners on the call today, we look forward to seeing you today and tomorrow while we're in New York. And I want to thank everybody for the participation and interest in Ferrellgas. I hope you took from our call that we're very enthusiastic about our outlook, and all of our business lines are operating very well, and the fundamental improvements are hopefully obvious to you as they are to us. We're thrilled to see the balance sheet improving, and we certainly plan to stay very focused here until we get back in our comfort zone. And before I close, I certainly want to thank our hard-working family of employees at Ferrellgas, who do amazing things out there for us every day. So thank you very much. We look forward to updating you at the end of our third quarter.


Thank you, everyone. This concludes today's conference call. You may now disconnect.

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