Ferrellgas Partners LP Management Discusses Q1 2014 Results - Earnings Call Transcript

Dec. 6.13 | About: Ferrellgas Partners (FGP)

Ferrellgas Partners LP (NYSE:FGP)

Q1 2014 Earnings Call

December 06, 2013 9:00 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

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

Theresa Chen - Barclays Capital, Research Division

Operator

Good morning, ladies and gentlemen. My name is Ryan, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Fiscal Year 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your Executive Vice President and Chief Financial Officer, Ryan VanWinkle. You may begin.

James Ryan VanWinkle

Thank you, Ryan, and good morning, everyone. Welcome to the Ferrellgas Partners fiscal 2014 first quarter earnings 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 may be considered forward-looking, and that various risks, uncertainties and other factors could cause 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.

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

Stephen L. Wambold

Okay. Thank you, Ryan. As usual, Ryan will be back in a little bit to talk about details on the quarterly financial results and review balance sheet. Before Ryan's presentation, Tod will talk about Rhino's performance and then after Ryan finishes up, we'll be glad to answer any questions that you might have.

I'd like to spend just a couple of minutes providing some perspective on fiscal '14's first quarter results, as well as commenting on the outlook for the key second and third quarters and we will talk a little bit about some of our growth initiatives. The best description, I could come up with for the first quarter was probably solid. It was a solid start, it was especially solid from an operational perspective. And it was solid especially in light of fiscal '13's strong momentum that carried through all 4 quarters, which, as you know, culminated in record adjusted EBITDA, distributable cash flow and gross profits for fiscal '13.

Ryan and Tod will share more details on the ins and outs of the quarter later. And so with that, I would just like to move to the guidance for fiscal '14. You may remember, we weren't particularly comfortable providing guidance on our Q4 call. It was just a little bit too early in the year, but now that we've seen first quarter results. We've seen the weather forecast, we feel like we're very comfortable projecting adjusted EBITDA between $265 million and $275 million for the year. You all know this, but the upper end of that range would match or slightly exceed last year's record $272 million, and in any case, we feel, we are well-positioned to put up solid numbers despite what Mother Nature delivers. And speaking of Mother Nature, if the collection of various winter forecasts are on target, we could have another banner year. The winter outlook for various regions includes phrases such as piercing cold with normal snowfall, biting cold, and snowy bitterly cold, all of these phrases certainly warm the hearts of our team. And in fact today, it is extremely cold. I believe it's about 13 degrees in Kansas City today and cold everywhere and the extended forecast, brings more cold which is fantastic.

One obvious challenge we are facing, the entire industry is facing honestly is higher propane cost, which seems to want to continue to inch up. And we're well hedged to deal with cost spikes moreover, since we basically pass through cost to our open market customers, our overall margins will remain robust.

And contributing to our optimism for FY '14 is the M&A pipeline, which is suddenly filling up after a rather dormant period. And to be sure the expectations of sellers are frequently too high, but we got to deal with these scenarios and our acquisition criteria remains rock solid. The deals must be immediately accretive and they must be an excellent strategic fit.

In late November, we found a deal that fit these criteria. It was our first acquisition of the year, KanGas based in Basehor, Kansas, which may be a quintessential example of what we're looking for. I'm very confident it will not be the last propane acquisition we make this year, as we do plan to remain very active in the market. And additionally, our interest in diversifying our business lines remain strong, and as an update, Mr. Bar-B-Q is operating quite well and in harmony with our Blue Rhino business. Tod will have some details on that later. But we will continue to look for similar strategic fits like Mr. Bar-B-Q that help diversify our business lines.

Later Ryan will talk about our significantly improved long-term debt structure, but it's important to point out that we have increased financial flexibility to help execute these growth strategies that I've just shared with you.

Okay, at this point, I'm going to turn the call over to Tod. So he can give some color on Blue Rhino and acquisitions.

Tod D. Brown

Thank you, Steve. As the industry leader of tank exchange, Blue Rhino once again had a very solid performance during the first quarter of this year. As you're all aware, the first quarter of our fiscal year begins Blue Rhino's off-season. But in reality, our season really doesn't ever end. Our volumes during the quarter saw growth versus prior year quarter due to an increase in selling locations, and an overall comp store sales growth in almost all classes of trade that we have conducted business in. We continue to experience aggressive competitive threats to our business in all areas of the country. But the strength of our brand, the Blue Rhino, along with our total value proposition that we provide our customers, continues to win versus just offering the lowest price in the market.

During the past selling season, we executed sharper marketing initiatives at over 20,000 different selling locations throughout the U.S. that help drive store traffic to those participating chains and increasing their volume overall. These trends and programs don't end with the summer selling season. We focus our programs around key holidays such as Thanksgiving, Black Friday, and Christmas as well. Grilling out is becoming year-round activity with family and friends. So I'm pleased to say that the Blue Rhino performance continues to be on track during the first quarter and we look forward to continued strength throughout the balance of the fiscal year.

Now shifting our focus 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-forma expectations. As Steve mentioned in his opening comments, we just closed on another propane acquisition November 22. KanGas is blending well into our existing operations in the area, and at the very opportune time for us with the weather coming in. Our Mr. Bar-B-Q acquisition, which was completed in April this year continues to perform very well. During the first quarter, Mr. Bar-B-Q's performance more than doubled the planned budget set for the business for that time period. This is truly a result of new business opportunities that it surfaced due to the combined organization and operational synergies that we're finding while we're consolidating our product businesses.

We're continuing to look for complementary deals that are immediately accretive and strengthen our propane footprint as we continue on into fiscal 2014. Stay tuned for additional acquisitions potentially being closed prior to the calendar year end. That concludes my comments for the first quarter performance. And with that, I'll pass the call back over to our CFO, Ryan VanWinkle.

James Ryan VanWinkle

All right. Thanks, Tod. As I'm sure you took from Steve and Tod's comments, fiscal 2014 is certainly off to a strong start. Propane sales volumes increased for the first quarter, thanks to the seasonally cold start to the year and the wet harvest season, resulting in a 6% increase in our propane sales. And in spite of wholesale costs that, on average, increased 20% quarter-over-quarter, we were able to post near-record gross profit results of $143 million. Our adjusted EBITDA performance for the quarter of $26 million came in just short of our anticipated performance, mostly attributable to the timing of litigation reserves. Operationally, we executed to plan, and based on current weather forecasting conditions, now we do anticipate adjusted EBITDA results in the range of $265 million to $275 million for year producing distributable cash flow coverage average [ph] exceeding 1.1x coverage in 2014.

From a liquidity standpoint, we are positioned very well for growth following our recent financing transactions. In October, we issued $325 million of senior notes at 6 3/4%, due 2022, replacing 9 1/8% senior notes due 2017.

In conjunction with these transactions, we terminated $140 million interest rate swap on these refinanced notes, capturing net savings from that swap transaction. Additionally, we extended our credit facility to mature in 2018, upsizing its capacity by $100 million, while lowering the borrowing rates on that facility by 25 basis points. We anticipate that these 2 transactions will reduce fiscal 2014 interest expense by $3 million and interest expense by $1 million annually thereafter.

Overall, we're very pleased by the start to the fiscal year. We look forward to executing our operational growth plans throughout the remainder of the fiscal year.

Now for a brief overview of the key metrics. As mentioned, sales volumes for the first quarter did increase 6% to 191 million gallons, namely attributable to increased wholesale propane sales and agricultural demand resulting from the wet harvest season.

As a result of increased sales, gross profit rose 2% to a near-record $143 million from $140 million last year. The quarter's increased sales volume more than offset the anticipated impact of higher wholesale propane prices on retail margins. As sales increased, operating expenses also increased to $103 million up from $96 million in the first quarter of last year. However, on an operating cent per gallon basis they remain constant at $0.54 per gallon sold. General and administrative expense was $9.5 million compared to $8.1 million in the first quarter of last year, both excluding nonrecurring litigation reserve and related legal fees totaling $1.3 million and $700,000 respectively. Into the quarter, equipment lease expense was $4.1 million compared to $3.9 million in the first quarter of 2013. Interest expense did slightly improve to $22.1 million, down from $22.4 million in the prior year quarter. Interest expense for the quarter was lower on favorable borrowing rates offset by increased borrowings largely attributable to a higher wholesale cost of propane.

As of October 31, our operating partnership's financial leverage was less than 4x compared to nearly 4.8x last year. Further, our partnership's distributable cash flow coverage on all outstanding common units stands at just short of 1.1x compared to 0.7x this time last year.

As Steve mentioned, we will continue to look for opportunities to strategically grow our business as evidenced by our acquisition of KanGas, just a couple of weeks ago, and the numerous other opportunities that we were able to review this quarter. We look forward to these and other organic growth opportunities in the months to come.

This concludes my comments on the financial performance of the company. At this time, we would like to open up the call and address any questions our participants may have.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Theresa Chen from Barclays.

Theresa Chen - Barclays Capital, Research Division

Steve, going back to your comments about pricing, just a couple of questions. So do you expect there to be any sort of pressure on the pass-through path [ph] to the retail side? And related to pricing, I guess, just looking at the inventory available to you this winter, exports remain a big theme, prices are up and it looks like we're set for a very cold winter. Do you have any color on your outlook for the inventory that you have access to?

Stephen L. Wambold

Theresa, I've got our Chief Operating Officer, Boyd McGathey here with me. I'm going to let him respond to both of your questions.

Boyd H. McGathey

Well, nationally, inventories stood at about 54 million barrels. So we don't see any immediate concern for supply, although we're already experiencing some allocation along the Dixie pipeline. It's just a matter of throughput capacity that's limiting the ability to keep up with demand. But nationally there is ample inventories, more and more supply coming on with all these shale plays each and every day. [indiscernible] to that, of course, is increased exports as well, but we don't see any concern for supply in general.

Stephen L. Wambold

I would add -- Theresa, I would add to that. We saw what was going to happen, the winter forecasts have been pretty solid for several months. So we hedged properly, we budgeted properly. We hate what this means for our end-user because clearly we have to raise the prices for them. That could potentially lead to some reduced usage down the road. But there is a point in time, when it's so cold, you have to turn the heater on. And I think, this will all be fine. It's just a supply-demand game as you know.

James Ryan VanWinkle

And probably, to put the price kind of in perspective, while it's up to last year, it's still significantly lower than it was 2 years ago. 2 years ago in the quarter the average price was just short of $1.50 wholesale. First quarter of this year was just over $1. So still on a relative basis, it's not near the highs that it was several years ago.

Stephen L. Wambold

We're going to deliver on our margins regardless. That's our plan.

Theresa Chen - Barclays Capital, Research Division

Okay, great. And then on the acquisitions. So following the recent acquisition in Kansas, can you give us just a little color on what you're seeing in the competitive dynamics in the market, any incremental detail on that would be great?

Stephen L. Wambold

Tod, do you want to take that.

Tod D. Brown

Yes, that's fine. We continue to see a much more robust marketplace right now. As we've come out of the summer season and people have recalibrated their expectations going forward. But we're seeing that the multiples continue to be in the range that we've experienced historically. We are just continuing to manage the expectation of the sellers coming off of the strong season this last winter. Some people certainly will value their business stronger, but we just calibrate that back based on our long-term experience that we've had in this. And so really, I don't see any overall dynamics changing other than we just continue to be more aggressive in the marketplace and looking for those accretive acquisitions that we can make. I think, it's critical to the ongoing success that we have here at Ferrellgas. Ryan, anything you'd like to add?

Boyd H. McGathey

No, I think from the competitive landscape, we're trying to be very opportunistic, we're trying to be very strict to our acquisition criteria. We're interested in only things that are accretive day 1. We are interested in those things that blend with what we do today and expand our operations as well. So we will continue to do that. We did a lot of that here in the last year, not all of it culminated in a transaction. But we're positive that as we continue to do that, they certainly will appear in the future.

Operator

[Operator Instructions] We have no questions in queue. I would now like to turn our call back over to our presenters.

Stephen L. Wambold

Okay, thank you, everyone, for dialing in this morning. I appreciate your participation and your interest. Hopefully, you can see, we're enthusiastic about our outlook, the fundamentals remain strong and improving. And we like what's in front of us. We plan to execute our plans and turn in another banner year in fiscal '14. I'd like to wish all of you a very happy holiday season.

Operator

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

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