Ferrellgas Partners LP Management Discusses Q4 2013 Results - Earnings Call Transcript

Sep.26.13 | About: Ferrellgas Partners (FGP)

Ferrellgas Partners LP (NYSE:FGP)

Q4 2013 Earnings Call

September 26, 2013 10:00 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

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

Analysts

Theresa Chen - Barclays Capital, Research Division

Operator

Good morning. My name is Kirk, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Fiscal Year 2013 Earnings Call. [Operator Instructions] Thank you. Mr. Ryan VanWinkle, Executive Vice President and Chief Financial Officer, you may begin your conference.

James Ryan VanWinkle

Think you, Kirk, and good morning, everyone. Welcome to the Ferrellgas Partners Fiscal 2013 Earnings Conference Call. I'm Ryan VanWinkle, Executive Vice President and Chief Financial Officer. And with me today is Steve Wambold, President and Chief Executive Officer; and Boyd McGathey, Executive Vice President and Chief Operating Officer.

Before we get started, I'd like to remind you all that some of the statements made during the call may 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 operating performance and then turn the call back over to me to discuss our financial performance for the year. After that, we'll open the phone lines and answer any questions that you may have.

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

Stephen L. Wambold

Okay. Thank you, Ryan. And as usual, Ryan will return a bit later to provide details on the fiscal year and fourth quarter results, as well as the ongoing improvement of our balance sheet. Tod Brown was scheduled to be here today to discuss Blue Rhino's performance and plans. However, a family matter has arisen and Tod will not be able to participate today. So I will pinch-hit for Tod and provide an update on Blue Rhino. And then after Ryan's presentation, as usual, we'll be happy to take any questions that you may have.

First, I'll provide a little perspective on fiscal '13s results and give a glimpse into our expectations for '14. My initial thought, while preparing for the call, was what an incredible difference a year makes. And on this call a year ago, you may recall I said, without fear of any contradiction, that fiscal '12 may have been the most challenging year for the propane industry. The warm winter weather has certainly been etched into our memory. And nonetheless, I did indicate a year ago that our management team was far from discouraged. Not only did we view that winter as an aberration, but we had already seen signs of positive momentum in that year's fourth quarter. And while we didn't have a crystal ball, we knew that we had strong underlying fundamentals and that those would serve as catalysts for a very good fiscal '13. And we pointed out that if mother nature cooperated, results for the year could be exceptional, and indeed, they were. We posted records in several key metrics, and Ryan will certainly have those details for you.

Driving our improved results was the simple fact that we really stayed true to our well-established game plan of organic growth, acquisitions and kept a tight rein on our cost. Obviously, playing a major role in this success was a sharply honed emphasis on customer retention and profitability.

It's a little early for us to give specific guidance for the current fiscal year, but we do have a reason to be optimistic. It's clear that fiscal '13 demonstrated the impact that successfully executing our strategy can have in a near-normal environment. Under similar conditions in fiscal '14, we would certainly expect to move the needle up further.

So switching gears now to propane acquisitions. We certainly see some nice opportunities framing up. The large-scale mergers in our industry mean less competition to buy attractive regional and local companies. Even so, we will remain picky, only targeting accretive deals. This discipline has served us well as every acquisition in the past 3 years has exceeded our performance.

Although our acquisition thrust, again, will remain disciplined, we will continue to be opportunistic. We have become more interested in diversification, but only when potential acquisitions are complementary and fit within our structure.

Mr. Bar-B-Q, acquired in last year's third quarter, is a perfect example. Since it markets everything related to barbecuing but the grill, Mr. Bar-B-Q is a great fit with Blue Rhino. Its financial performance has far exceeded our expectations, and we project more cross-selling opportunities between Bar-B-Q and Blue Rhino.

Speaking of Blue Rhino, we also expect to keep reaping the benefits of consolidating its operations with our traditional retail propane business. Blue Rhino is well suited to capitalize on its market leadership, which includes more than 46,000 selling locations and the highest customer brand awareness in its space. And a few more comments on Blue Rhino, its performance in fiscal '13, specifically. Cooler spring weather did result in a strong finish for our retail business, but conversely, it caused a slower-than-normal start to the grilling season. And that shouldn't come a surprise -- as a surprise to any of you since the 2 businesses, as you know, are counter-seasonal. Blue Rhino did experience more normalized business by the July 4 holiday. Although the cooler weather, combined with more rainfall than usual, did adversely affect volume, gross margin for the year, however, was moderately ahead of budget, and we added more than 1,000 selling locations in fiscal '13. We do have further expansion projected, and we are encouraged with the start for Blue Rhino in 2014.

Okay, I'm going to turn it over to Ryan for the financial detail.

James Ryan VanWinkle

All right. Thanks, Steve. As mentioned, our record year and fourth quarter performances reflect improved margins, increased sales volumes and operating efficiencies. With cooler temperatures compared to the prior year, we were able to execute a near-perfect operational strategy focused on improving our profitability and our customer service. Record gross profit, adjusted EBITDA and distributable cash flow for both the year and fourth quarter put an exclamation point on a triumphant year of change for Ferrellgas and provides us the tools and experience to carry forward these successes into fiscal 2014. Our distributable cash flow coverage nearly doubled to 1.13x, matching our fiscal 2010 performance, which is our best since 2002. These improved results across the board have allowed us to lower our operating partnership leverage to more historic levels, below 3.6x, providing for a lower cost of capital. This will provide us more flexibility for liquidity and opportunistic access to capital and capital markets going forward.

As we look to 2014, we will continue to use our momentum operationally so we look for opportunities for growth, both organically and through acquisition and complement, as Steve said, our existing business and expand us into new markets. Propane sales for the year were 901 million gallons, up nearly 3% from 878 million gallons sold last year. This reflects the overall effect of colder temperatures and lower commodity prices throughout last winter. For the year, nationwide temperatures in the markets that we serve were 96% of normal as measured by NOAA. Propane sales for the quarter were up nearly 4% to 156 million gallons from 151 million gallons sold in the prior year.

Fiscal 2013 gross profit was a record $738.8 million, up over 15% from $642 million in fiscal 2012. On a cent-per-gallon basis, our gross profit increased over $0.04 per gallon compared to the prior year. And for the quarter, gross profit, too, was a record $140.4 million, up 8% over the prior year fourth quarter.

Operating expense for the year increased slightly to $410 million from $399 million in the prior year. This increase was driven on both increased sales volumes, as well as performance-based incentives. Excluding these incentives, our operating expense on a cent-per-gallon basis improved $0.015 compared to the prior year, resulting from efficiency initiatives and cost-cutting projects that were initiated during 2012.

Equipment lease expense rose slightly to $16 million from $14.6 million in 2012. For the quarter, operating expense was materially in line with our prior year performance at $100.8 million, and equipment lease expense was up slightly to $4.1 million from $3.8 million in the prior year.

G&A expense for the year increased to $42 million compared to $37.1 million in 2012. This increase is largely attributable to performance-based incentives. Excluding these same incentives, G&A expense was down $2.4 million or 6%, benefiting from the prior year cost-cutting initiatives. For the quarter, G&A expense was $9.6 million compared to $8.4 million last year. Consistent with the fiscal year performance, this increase in cost was directly attributable to performance-based incentives.

Interest expense for the fourth quarter was $22 million, down from $22.4 million in the prior fiscal quarter. And for the year, interest expense was $89.1 million, down from $9.3 million (sic) [$93.3 million] on lower borrowing rates.

And as mentioned, our record adjusted EBITDA for both the year and the fourth quarter were $272.2 million and $26 million, respectively, each up 40% to the prior periods.

That concludes my comments on the financial performance. And at this time, we'd like to open the call for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Theresa Chen from Barclays Capital.

Theresa Chen - Barclays Capital, Research Division

I just wanted to ask briefly about the cylinder exchange business in Blue Rhino. Could you give us any color on trends in that? And also, what kind of cost does it take to expand this business? I understand it can require some capital upfront.

Stephen L. Wambold

Well, yes. You know what, we don't think it takes a lot of capital to expand the business. We have all the assets we need to grow the business. The industry itself, there's still quite a bit of capacity to grow it. We certainly have expansion plans. It's not growing at the percentage clip that it was 10 years ago when it was a baby in the business, if you will. But we like the trends. We're off to a great start, and we think we'll see a nice percentage increase this year.

Theresa Chen - Barclays Capital, Research Division

Okay. And then also on acquisitions, I remember you had given the number of $20 million to $30 million per year. Is that like a steady-state, long-term number? And is that still pertinent today?

Stephen L. Wambold

Yes. You know what, we -- that is our target every year. We fell short of that target last year. But the size of our Mr. Bar-B-Q acquisition really was the equivalent of 10 mom-and-pop acquisitions. So look, we're certainly interested in growing the top line of our business but more focused on the bottom line. And the results that Bar-B-Q delivered, again, with the size of 10 mom-and-pop businesses, so we'll certainly say -- we'll certainly stay focused on growing the propane acquisitions but be opportunistic and look for more of those diversified opportunities as well.

Theresa Chen - Barclays Capital, Research Division

Got it. And lastly, would you mind just giving some color about the unit margin trends between retail and wholesale and what you're seeing there?

Stephen L. Wambold

Yes, I'm going to let Boyd, our COO, answer that.

Boyd H. McGathey

If you mean margin expansion or what are the current margins doing, I'm not sure.

Theresa Chen - Barclays Capital, Research Division

Yes, margin expansion and also the year-end trends. It seems that you saw a little bit more strength on the wholesale side.

Boyd H. McGathey

Yes, wholesale product cost has increased probably 20% to 40% over -- year-over-year, yet we've seen the last couple of weeks, it's kind of softened. Feel like that the cost will kind of remain range bound $0.10 or $0.20 from the current levels. And most of our customers read our index or more open market pricing, so we tend to move with the market and with what the market will bear.

Operator

[Operator Instructions] We have no further questions at this time. I'll turn the call back over to the presenters.

Stephen L. Wambold

Okay. Thank you very much for your time. As always, we appreciate your participation on the call, your interest in Ferrellgas. And after recording 5 consecutive quarters of positive momentum, our enthusiasm about the outlook is, obviously, understandable. By remaining laser-focused on executing our strategy, we are confident there is room for further improvements in our financial performance, and we look forward to speaking to you again in what we hope is a very cold early December. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!