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Ferrellgas Partners LP (NYSE:FGP)

Q3 2013 Earnings Call

June 06, 2013 8:30 am ET

Executives

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

Boyd H. McGathey - Chief Operating Officer of Ferrellgas Inc and Executive Vice President of Ferrellgas Inc

Analysts

Darren Horowitz - Raymond James & Associates, Inc., Research Division

James Spicer - Wells Fargo Securities, LLC, Research Division

Operator

Good morning. My name is Denise, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Ferrellgas Partners Third Quarter Earnings Conference Call. [Operator Instructions] Ryan VanWinkle, Executive Vice President and Chief Financial Officer, you may begin your conference.

James Ryan VanWinkle

All right. Thank you, Denise, and good morning to everyone. Welcome to the Ferrellgas Partners Fiscal 2013 Third Quarter Earnings Conference Call. I'm Ryan VanWinkle, Executive Vice President and Chief Financial Officer. And joining me today is Steve Wambold, President and Chief Executive Officer; Tod Brown, Executive Vice President and President of our Blue Rhino Operations; and Boyd McGathey, Executive Vice President and Chief Operating Officer. Before we get started, I'd like to remind all of you that some of the statements made during the call can be considered forward-looking, and that various risks, uncertainties and other factors could cause actual performance to differ materially from anticipated results. 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 our third quarter performance, then, turn the call over to Tod and myself to discuss our Blue Rhino operations and our financial performance. After that, we'll open the phone lines and answer any questions you may have.

So with that, I'll turn the call over to Steve Wambold, President and Chief Executive Officer.

Stephen L. Wambold

Okay, thank you, Ryan. And thank you all for joining us this morning. As Ryan said, I'll be providing a little bit of perspective on the quarter just ended, and we'll talk a little bit about the future, the current quarter end and maybe a little bit beyond that. Tod will take it from there, talk about Rhino and Corporate Development. And then, we'll get back to Ryan on the financial details.

So if I were to sum up the fiscal third quarter and have to title it, I guess, I would call it a grand slam, and honestly, with regards to every measurable statistic. A year ago, as I'm sure you'll recall, we spent considerable time and energy on controlling what we could control. And that was a very harsh lesson learned from the winter of 2012, which, as you know, was incredibly warm. We knew that coming into this fiscal year, that our earnings and our coverage would improve dramatically even without the help of Mother Nature. And I think we've spent quite a bit of time discussing this with you previously. But the icing on the cake showed up in the form of cold temperatures in this quarter, and clearly, the combination really worked.

A year ago, in this quarter, temperatures were 24% warmer than normal. This year, the same quarter produced temperatures that were 6% colder than normal. So as such, the business is, indeed, back on solid footing. Propane sales volumes were up significantly, along with adjusted EBITDA, gross profit, DCF, several other metrics. And many of these numbers set new records for us in the quarter. Our focus on improving efficiencies and customer retention and growth have paid off, and we believe they will continue to do so. Most importantly, our 12-month DCF coverage through April now stands at 1.08x. So back on solid footing, but honestly, anything but satisfied. We still have a tremendous amount of work to do. Everything we do is aimed at improving the bottom line metrics, while also growing the top line smartly. We're very committed to the future and our commitments and our long-term, including investing in the business to position it properly. As always, we will continue to focus on organic and acquisitive growth, and our performance has really been stellar in both of these categories. We're really starting to use Blue Rhino as well to diversify our lines a bit. You'll recall our recent purchase of Mr. Bar-B-Q is one example. Tod will have a couple more details here.

So as we look forward to the rest of this fiscal year, we do remain confident and optimistic that our momentum will carry through this year and get us off to a strong start, honestly, into fiscal '14. I'm happy to report that May was a solid month, June is off to a strong start, and it's now officially Rhino time. Blue Rhino's properly positioned to take advantage of its industry-leading position. And as such, we are raising our adjusted EBITDA guidance for fiscal '13 to a range of $270 million to $275 million, which should translate with DCF coverage of about 1.1x or better.

Okay, Tod, I'm going to turn it over to you so you can talk about Rhino and Corporate Development.

Tod D. Brown

Thank you, Steve. As the industry leader, Blue Rhino is well-positioned to perform during the all-important summer season. With more than 950 additional selling locations than this time last year, and a sharply improved cost structure from both a product cost and a total SG&A perspective, I'm feeling very good going into our selling season. But if you look at it from a macroeconomic perspective, the economy is more stable than in the past couple of summer months or in previous years due to unemployment has come down, although it's still hovering around 7.5%. But also with gas prices, which have come down in the recent months, consumers have more money in their pockets as they're planning their summer weekend activities. At Blue Rhino, we're looking forward to executing our plan and delivering a very successful season.

Now briefly shifting our focus and attention to the acquisition environment. I'm pleased to say that our disciplined strategy continues to deliver results. Without exception, the performance of all of our recent acquisitions have exceeded their pro formas, and we feel very confident that they'll continue that trend. We continue to look for complementary deals that are immediately accretive and strengthen our propane footprint. This year, we've adjusted our acquisition strategy. We've become more interested in diversification, which, really, after careful scrutiny, is paying off. Most notably, and as Steve had referenced earlier, in April of this year, we acquired Mr. Bar-B-Q, which markets everything but the grill. A natural fit to complement our Blue Rhino products business, which consist of grills, smokers, outdoor fire pits, patio heaters and other outdoor entertainment type of items. This acquisition brings us new sales opportunities for the full product line at a time when retailers are looking to consolidate their supplier networks. Initial results from Mr. Bar-B-Q have exceeded our expectations and we continue to work through the integration process. That concludes my comments this morning for the third quarter performance.

And with that, I'll pass the call back over to our CFO, Ryan VanWinkle.

James Ryan VanWinkle

All right. Thanks, Tom. As mentioned, our third quarter performance does reflect record results as measured by most all key metrics: gross margin, gross profit, adjusted EBITDA and distributable cash flow. All increases in sales volumes and improved margins drove these impressive results, our continued focus on trimming fixed overhead and improving our operating efficiencies, certainly benefited us this quarter. As a result, gross profit or gross margin grew 26%, gross profit grew 25%, adjusted EBITDA grew 39% and most importantly, our distributable cash flow grew 59% this quarter, leading us to a trailing 12-month coverage of 1.08x. Through April, our trailing 12 months adjusted EBITDA sits at a near record $264 million, compared to $193 million achieved in fiscal 2012. And as Steve mentioned, we continue to see the positive trends of 2013 carry over into our fiscal fourth quarter. As such, we are looking to raise our guidance of adjusted EBITDA.

Based on current business trends, we're comfortable raising this guidance for fiscal 2013 to a range of $270 million to $275 million, taking our distributable cash flow coverage above 1.1x by the end of the fiscal year. Further, liquidity remains in line with prior year and we have significantly reduced our financial leverage at the operating partnership level from approximately 5x to 3.5x adjusted EBITDA. As such, in recent weeks, you may have noticed credit upgrades from both Moody's and S&P, with Moody's adjusting the rating to a positive outlook, while S&P both increased the Operating Partnership's credit from B- to B and further upgraded the outlook from stable to positive.

While this year's financial performance has certainly benefited from the return of more normal winter heating season temperatures, we believe that our efforts to improve customer pricing, customer retention and lower fixed overhead have positioned us to, once again, achieve record financial results in fiscal 2013.

Our third such record in the last 5, and 5 out of the last 8 years, while at the same time, puts us in a great position for the future. Now before we turn the call over for questions from the analyst group, I'll spend just a few moments reviewing the financial statements, addressing the highlights for both the quarter and the year-to-date period.

Propane sales grew 18% for the quarter to 267 million gallons reflecting temperatures, as Steve mentioned, 6% colder the normal. Additionally, we believe that these sales reflect the organization's focus on customer retention and organic growth. As we continue to focus on the right mix of sales demand and margin management for the overall benefit of the partnership.

Year-to-date, sales volumes are 745 million gallons reflecting a 2% increase over the same 9-month period a year ago. Year-to-date, while certainly colder than last year, nationwide temperatures remained 4% warmer than normal. The increase in sales volume this quarter, coupled with the more historic margins we have achieved this year, drove record gross profit results of $223 million compared to $179 million achieved last year.

For the quarter, margins improved a modest 5% growing to $0.84 per gallon sold. Year-to-date, gross profit of $598 million reflects a 17% increase to last year's results on business trends that are similar to those driving the quarter's performance.

Operating expense for the quarter was $107 million, up from $96 million in the prior year results, while G&A cost for the quarter were $13 million compared to $9 million in the prior year quarter. That said, performance-based incentive accruals significantly impacted the quarter's results, as excluding these costs, our operating expense would have decreased 12% on a cent-per-gallon sold basis to $0.37, and our G&A expense would have decreased more than 3% to $8.6 million.

For the year-to-date period, the operating efficiency generated by both our operating expense and G&A were masked by higher performance-based incentive accruals and the costs associated with increased sales. After adjusting for the performance-based incentives, our operating expense of $297.8 million was in line with the prior year despite the 2% increase in sales volumes this year and our G&A expense decreased 10% to $25.5 million. Equipment lease expense was $4.1 million compared to $3.8 million last year. And year-to-date, equipment lease expense is up slightly to $11.8 million compared to $10.8 million in the prior-year period. Interest expense for the third quarter was $22 million, down from $23.5 million in the prior year quarter. And year-to-date, interest expense was $67.1 million, down 5% from $70.9 million in the prior period. Throughout the year, we have continued to benefit from favorable interest rate environment. However, we do believe we are well-positioned for the future in the event interest rates were to rise in the near- to mid-term.

In conclusion, our record adjusted EBITDA for the third quarter was $98.5 million, up 39% compared to $70.8 million in the prior year. And more importantly, our record distributable cash flow was $76.2 million, 59% higher than the prior year results. Net earnings were $45.2 million or $0.56 per share, improving by more than 2x over the prior year quarterly net earnings of $21.1 million.

So with that, that concludes my comments on the financial performance of the quarter. At this time, we'd like to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Darren Horowitz with Raymond James.

Darren Horowitz - Raymond James & Associates, Inc., Research Division

Ryan, I've got a couple of questions for you. But I want to start, if we could, just discussing the leverage and your thoughts around allocating excess cash flow. You talked about the reduction in leverage at the operating partnership level. But when you think about FGP, you guys have about $1.1 billion in long-term debt. So leverage has worked its way down on a TTM basis to about 4.2x, if I'm doing my math correct. And I'm just wondering, at this point, how do you guys think about allocating that excess cash flow either to further reducing debt or possibly accelerating your acquisition growth platform or maybe even starting the consideration of distribution, now that you are almost at 1.1x coverage?

James Ryan VanWinkle

Okay. That's a good question. I mean, certainly at this point, we are generating excess cash flow. I think our very first priority is to fund our growth with that excess cash flow. Today, we spend roughly $20 million to $30 million for acquisitions. That is not part of distributable cash flow. So we'll first use that excess to fund our own growth, both organic and through acquisitions. Beyond that, I think there's a period of time where we'll focus on reducing debt with that. And if we start getting to that 1.3x point in our life cycle, then, I think we can start thinking about doing other things with the excess.

Darren Horowitz - Raymond James & Associates, Inc., Research Division

Where do you want that leverage to be on a forward 12-month basis? I mean, is it normal for us to assume that you guys could possibly get over a 12- to 18-month timeframe down to sub-4x? Or are you more comfortable running somewhere between 4x and 4.5x, recognizing that there's lot of acquisition opportunities out there?

James Ryan VanWinkle

I think it will depend upon what the acquisition environment looks like. I mean, we are, today, 3.5x at the OLP, and I think, 4x, too, is probably a pretty good estimate for the total partnership level. Historically speaking, that is in line or maybe slightly better than our 10-year average. I don't know that we would look to materially reduce leverage because I don't know that it makes economic sense to do that. So we're very comfortable where we're at. I think we could work it down a little bit with excess cash flow, but I don't know that it will change materially, absent more significant M&A activity.

Operator

[Operator Instructions] And your next question comes from James Spicer with Wells Fargo.

James Spicer - Wells Fargo Securities, LLC, Research Division

Just wondering with your -- you've got a bond that's callable about 4 months from now. I'm just wondering if you had any thoughts around that?

James Ryan VanWinkle

Yes, certainly the interest rate environment is very good right now. As you know, we do have an opportunity here because of the call provisions in October. And we'll continue to look at that opportunity as that date approaches. But certainly, it's an interest rates that would lower interest expense materially.

James Spicer - Wells Fargo Securities, LLC, Research Division

Great. And then, also just curious, it seems like the company has benefited here from lower propane prices in terms of just all the propane production going on around the country and lower prices on that being reflected in higher margins for you guys. Just wondering, is there a point at which the benefit of those lower prices starts to get passed through more and more to the customer and margins start to compress even if propane costs stay at the same level?

Stephen L. Wambold

Yes, James. I'm going to turn that question over to Boyd McGathey.

Boyd H. McGathey

Yes, we see the retail sales price to consumers already better than it was prior year, and at the same time, we've been able to maintain or actually improve upon our existing margins through a couple of different strategies, both open market and our -- our hedging program.

James Ryan VanWinkle

And you know what I would add to that, is that this year's margins are pretty much in line with the 5-year average. If you look at our 5- and probably even 7-year average of margins, the last 2 years have been anomalies, where the margins have been lower than normal. So our improvement this quarter of 5% kind of gets us back to our more historical 5-, 10-year average.

Operator

It seems there are no further questions queued up at this time, I'll turn the call back over to the presenters.

Stephen L. Wambold

Okay, thanks for your participation and interest in us today. Hopefully, you took from our call that we're very enthusiastic about our outlook. All of the business lines are operating in harmony. And clearly, the fundamental improvements are starting to pay off. Before I close, I certainly want to thank our hard-working family of employees who continue to do amazing things out there every day. So thank you very much, and we look forward to updating you at the end of our fiscal year.

Operator

This concludes today's conference call. You may now disconnect.

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