AmeriGas Partners, L.P. (NYSE:APU)
Wells Fargo 2013 Pipeline, MLP and Energy Symposium
December 10, 2013 11:00 AM ET
Jerry Sheridan – President and CEO
Next up to present this morning, we have AmeriGas with us today. As most of you know, AmeriGas is the country’s largest propane company, so these guys are definitely not complaining about the cold weather outside today. With us today from the company, we have Jerry Sheridan, President and CEO. Also on the audience we have Hugh Gallagher, CFO and Simon Bowman, Manager of Investor Relations.
Thank you, James [ph]. And good late morning, everyone. And yes, it’s a nice snowy day for us, so as a propane company, nothing could be better. And we’re really pleased to share with you where – how far we’ve come with the acquisition of Heritage Propane which you’ll remember was a company that was really half our size, probably the most coveted acquisition on the list of things we were chasing.
But the integration is complete and we’re happy that most of our financial statistics are really back where they were prior to the deal given the significance of what we’ve been through. So our normal disclaimer.
So this is our footprint now across America. AmeriGas is now a very large company, over 1 billion gallons sold. One nice thing about the business is we have lots and lots of customers, so over 2 million customers. We have a barbecue cylinder business that can be serviced from 47,000 locations nationally; 8,500 employees. We have over 2,500 service points through which we can serve our customers in all 50 states. And this is by far the best distribution footprint in the industry.
Our competitive advantages and I’ll go through these in a little more detail. But from top to bottom, we have a geographic diversity. That means a lot of things, but certainly it means for delivery efficiency, we have lots of good customer density. So if our truck is out in the neighborhood, a lot of our customers are there too, so that provides operational efficiency. But we’re also in so many different parts of the country that the notion of it’s always cold somewhere helps us.
Our end-use diversity, I’ll go through that but we are not a typical home-heating company only. We have lots and lots of different kinds of commercial businesses. Significant scale benefits, so we buy lots and lots of tanks with [ph] lots and parts of fittings, so our procurement benefits are obvious given that we have a 15% mortgage share and by far the largest purchaser of those items.
And we have a very strong track record of integrating acquisitions. It’s really part of the DNA of the company. AmeriGas was built on over 100 acquisitions, Heritage only being the latest of them. But this is something that’s really in the blood and the story around AmeriGas is a roll-up in a very fragmented industry.
We’ve got the AmeriGas Cylinder Exchange which is a barbecue cylinder business. It’s counter-seasonal. It’s typically a summer business. This is summer grilling, so that really helps level set our driver utilization. And we have some non-volume related revenue streams, specifically fees around deliveries, we have tank rent when we have tank control, things that have nothing to do with volume. They’re really just delivery charges.
And a strong balance sheet which allows us to continue to do deals and also weather warm ears when that occurs. A little more on geographic diversity, so we just kind of split the United States into four quadrants and looked to where is our volume. And it turns out we’re equally dispersed in each of the four quadrants of the United States.
So benefits us three ways. One, it’s always cold somewhere in the winter time. We don’t have to endure being a regional player that could have a very bad year simply because it’s cold in the southeast or something. We participate in all of the economies throughout the country, so if unemployment is higher or lower, we benefit from that.
And then finally, as we continue to do acquisitions, there probably are very few deals where we’re not going to have a lot of synergy. So we’re going to have a store that’s in that neighborhood close to the acquisition target, allow us to combine the two stores. So as an acquirer, it gives us a lot of advantage.
End-use diversity. I said we’re not just a home-heating business. This breaks down where our end-use for propane goes with our customers. 47% is residential heat, but the rest are a variety of different commercial uses, whether it be a restaurant, it might be heating a building. It could be fueling a school bus which is one of the more exciting new end-uses where thousands of new school buses are being built specifically to run on propane.
Margin management. So this is another one of the key strengths of the company along with acquisition integration. It’s our ability to, no matter what the cost of propane is, continue to grow our margins at inflation.
So the grey bars here show you the cost of propane in Mont Belvieu since 2005 and of course it’s jumping all over the place. We had the run-up in ‘08, the crash in ‘09. We were very stable in ’13 and of course, it’s run back up now in ‘14. But the red line shows you our margin per gallon. So our pricing power is such that we’re able to continue to raise margins at inflation pace over time regardless of the cost of the underlying product.
Just a little bit on the Propane Industry which is changing very fast. This whole conference, we’re hearing lots and lots about all the shale plays and that is a great story for propane supply. Lots and lots of propane hopefully in the long term means lower prices although there are so many companies here in this building that are raising to export propane as fast as they can given the spread between the domestic price and the European price.
On the demand side, we do see a decline due to structural conservation. So structural conservation would be defined as a better roof, an automatic thermostat, better insulation. Those kinds of things will never stop. And the chart that’s on the right-hand side is really a study of our own customer.
So we have 400,000 customers that we track year over year and all the years shown there. Weather-adjusted, what is their consumption? And we really do find that there’s about a 1.5% decline in the use of propane by typical residential heat customers for all the reasons I’ve just described around structural conservation.
Then there is an element of economic conservation. So with 70% unemployment higher in other parts of the country, you’ll have families looking at every bill at the kitchen table and those are the sorts of things that drive additional conservation where you might have a space heater that would eliminate some use for propane. But overall, it looks to be kind of a 2% to 3% decline on the base business not affecting really our three growth thrusts.
Just to comment on natural gas because we do get a lot of questions and we’ve gotten several this morning. What’s natural gas doing to your business? And the quick answer is really nothing. Our customers tend to be pretty far away from the main. It’s kind of a business that operates far from hubs and centers and utilities then cannot reach that far.
But if you want to look at hard data, AmeriGas last year lost 2,500 customers to natural gas. So that’s 0.1% of our 2 million customer base. We also have a sister company in Pennsylvania, UGI Utilities, which has been adding a lot of customers moving, however, from fuel oil to natural gas. So they added 15,000 customers last year but less than 200 were from propane.
And then finally, if you look at just the two charts at the bottom, and this is heating census data. In 1990, utility gas, which is the grey slice on the right, was 44%. In 2010, it was 51%. If you look at LP gas, which is the small blue slice, that actually grew from 2% to 4%. So the entire gain that natural gas has experienced all came from fuel oil, which is the red slice, declining from 38% to 30%.
So you can see where it’s coming directly out of the height of fuel oil. And so far, propane really has not experienced any loss associated with natural gas being cheap.
Okay. So we have a business that has the headwinds of kind of natural decline with conservation, so how does AmeriGas continue to grow earnings and continue to support as we have for over seven years, a 5% increase in our distribution every single year? And it’s really these three growth for us – so National Accounts, AmeriGas Cylinder Exchange which is our barbecue offering, and Acquisitions. So let me just go through those in turn.
First, AmeriGas Cylinder Exchange. I mentioned this is counter-seasonal. This is a summer business, but it is truly a growth business. It’s a convenience item where you can come to a store, give us your old cylinder, we’ll give you what looks like a completely brand new one that’s full. This has 3% same store sales growth year-over-year. We have great marketing efforts that we work with our retail customers to move that same store sales growth up because it’s good for them, it’s good for us. And it grows at a rate of 4% to 6% EBITDA which is greater than our overall company goal of 3% to 4% growth in EBITDA to support the 5% distribution growth.
National Accounts. This is where we have large sale customers with lots of locations all over the country. They want us to deliver to all of their locations, but give them one bill. That eliminates a lot of administrative work on their side. It gives them one throat to choke, meaning that they can call one of our individuals in our headquarters and say, we’ve got a problem with a store and it could be anywhere in the country and they get someone that can solve the problem quickly.
This is a great competitive weapon. Most of our competitors are the thousands of independents, mom-and-pop propane companies all over the country. With a stroke of a pen, with the national contract, they will lose some of their best customers if – think Wal-Mart, think of Dollar General. They may have served for 10 years and with a national contract, it’s ours.
This again is a growth business. Last year was fantastic. The volume was up 30%. We added 50 new accounts. We have a very deep pipeline of potential national and also large regional accounts, but this is a nice growth business again, 4% to 6% EBITDA. So this is again, two of the legs of the stool where we are able to overcome whatever decline we see on the base business due to natural attrition.
So if you look at what’s happened to the EBITDA of AmeriGas – I call it the old AmeriGas, prior to the Heritage deal which was truly transformational for our business within that kind of $340 million range. And this past year, we delivered the $618 million EBITDA. The midpoint of our guidance for 2014 is $660 million.
So a step change in so many aspects of the company, we realized $60 million of synergy, the thesis [ph] of the deal is $50 million. We went through all the employees. I think our management team is stronger by taking the best of both our organizations. I think we truly have a new company. And that’s the way it feels on the inside.
Our distribution metrics are good and really either back to historical levels. You see from left to right, distributable cash flow is a significant step change there to $403 million. I mentioned we grow our distribution 5% a year. I meant that is something that we are committed to. And we want to keep a strong balance sheet. We want to keep great distribution coverage because if a warm year comes along, that should not be a reason not to pay the 5% increase.
And if we have a fantastically cold year, that is not a reason to pay a 6% or 7% increase. We are going to pay 5% increase in the distribution. And you can see, we have done that every single year since 2007. And finally, our coverage on the right. You see, it’s totally returned to historical levels even after a $3 billion acquisition like Heritage Propane.
Leverage-wise, we have returned our interest coverage to 3.7, our business plan this year is to return it to 4. Our objective is to keep interest coverage of 4 or greater.
On the right hand side, our debt to EBITDA, our goal is to have that in the 3.5 range. We brought it down from last year following a deal and the borrowings associated with that to 3.9, and this year’s business plan has this at 3.6. So again, if you look at the history, we are basically back to the historical levels, really just one year after a very large transaction and integration.
So these are the building blocks. Again, in order to provide a 5% increase in our distribution which we have every single year, we need to grow EBITDA 3% to 4%, and that will allow us to meet every obligation that meets the distribution increase. It meets all our capital needs, it meets all our interest cost and it allows us to purchase up to $40 million of acquisitions all funded through internal cash flow, no leverage.
And these are really the building blocks. Of course, the frontline in the base business, we have to have a great customer service experience. We spent a lot of time with our sales force. We’ve got the biggest sales force in the industry. Getting a return on that sales force is a high priority. And then of course, the three building blocks at the top – AmeriGas Cylinder Exchange, National Accounts, and now that we fully integrated Heritage, we will come back to acquisitions, and there’s 3,500 targets out there for us to pursue.
Our goals again, 5% increase in the distribution, 3% to 4% increase in EBITDA. Our track record stands at – the distribution has grown to 5.4% since 2006. And our EBITDA growth rate from 2002 to 2011 is 5.3.
We didn’t want to show you the 2006 to 2013 because the Heritage deal is really skewed and that compound growth rate is about 13%. But a more representative is that – we truly are delivering a 5 in 5 [ph] against the goals that we’ve established. And we are very committed to keeping a very strong balance sheet. We know that we have to weather warm years if we have to.
So I mentioned the credit statistics that we’re after. And our liquidity is very good. We’ve got a nice revolver, the $525 million at any time that we need for just spikes during seasonal business with a need to working capital. So that concludes my presentation.
Certainly, we want to open it up for questions. I think we have a microphone if anyone has a question out to AmeriGas. And we just have to wait till we get the mic to you.
Just a quick question. In the past, you had a slide showing the market share of you and your competitors. You’re at 15. Can you give us a sense about your competitors in the next two or three-year market share-wise now?
They’re in the 6% and 5% range. So there aren’t a lot of big companies in this industry as it stands now and it goes down significantly from there, I mean as big step change down. If we can find a regional competitor, we’re 1.2 billion gallons. A large regional might have 30 million or 40 million gallons.
So when we say, we’re doing to do acquisitions, they tend to be – we might do 8 o 10 deals in a year, each 1 million or 2 million gallons because that’s just the way the landscape is. So that’s why these big deals are so transformative.
Unidentified Audience Member
Could you comment on the usage? Do you think that we’ll level off at any point in time or is 2% to 3% something you foresee for an ongoing basis in terms of just usage of propane?
Just the conservation piece? Yes, so I think the 1.5% is real, baked in forever, is never going to stop, and we just have to manage, assuming that that’s the case.
The other piece which is more economic, if we do see unemployment return to 5% or lower, certainly, that would start to go away because as we’re seeing, it really has more to do with family sitting around the kitchen table talking about every bill, and we just happened to be one of the necessities that they have to buy. Next question there.
On that topic, twofold question. The first is, conflicting news about the economy, journal direction, and the newspapers, could you tell us about your experience in your customers or delinquent accounts or volume per customer on the retail side and how that chives with what we read about the economy? And I have a follow up afterwards.
Okay, so on the – it’s a little different for residential versus commercial as we’re seeing. And so I think from our point of view, we’re starting to see on the commercial side, much more demand. And I always measure it by forklift. So I have a forklift, propane use for forklift, that seems to have a direct correlational with call it GDP or even just producers producing more.
On the residential side, that’s been really just unchanged and we have not had a big problem or decrement in our ability to collect bills from residential customers. At times, we’ve had to put a little more resource into it, but we have not seen a big bad debt issue on the residential side. And it’s much less an issue on commercial. But I’d say from our approach, commercial is stronger now than it was two years ago.
And then a follow up. You’ve done a great job in passing along your propane cost to the customer. But it seems a lot of Richmond [ph] companies here have opened up a lot of other outlets for propane even though there’s a pretty significant supply increase coming down.
Do you think on a go-forward basis that the international markets outcompete you for propane and therefore your cost structure changes from what you’ve seen historically? And do you think you’re able to pass that cost along through just in a customer basis?
Yes. No, I think we’ll always have the ability to pass the cost along simply because it’s a necessity. It is what it costs us. It’s a home heating bill that’s driven strictly by what happens if – so if we were utility for instance, if the cost of natural gas goes up, the price of heating your home goes up.
I have no idea what’s going to happen with the cost of propane itself. It seems that everything we’re hearing is supply will outstrip even the significant investments in export.
But it is confusing that even as we sit here today that the cost of propane is about 70% higher than it was this time last year and the European price is down only 9%. So I think we all expected things to kind of meet in the middle somewhere. But it hasn’t happened yet and the forward curves on propane would suggest it’s really on its way down.
And again, if supply is coming up much faster than export capabilities coming online, you would think the trend will be actually downward which is great for us because it just gives us a lot less tension with customers that have big bills.
True [ph]. I think we have to wait for the recording essay [ph].
Just expand a little bit on the opportunities in transportation.
Transportation. You mentioned the school buses.
Oh yes, okay, good question. Okay, so we have a good relationship with a company that manufactures propane engines for Blue Bird school buses. And since we’ve gotten into that relationship, we’ve started to see more and more companies moving to propane-operated delivery vehicles. So I think DirecTV would be an example.
This is new growth. I mean, this taking from diesel, so this is creating a new propane demand. And just some quick numbers, about 4,000 new school buses will be built using these propane engines. Each one – I mean, these are fuel hogs, consumes about 4,000 gallons a year. So there you’ve got kind of a 16 million gallon new creation of propane demand that just didn’t exist.
So to the degree that we can capture that, that’s almost like several acquisitions if we’re able to get at least our 15% mortgage share of it. And to the degree we can be a leader and get greater than our normal market share, all the better.
But that’s just a really not – this is a very flexible, portable fuel. And new end-uses tend to pop up every once in a while and this is one where emissions are low, burn is clean, its costs are good. But that’s – it’s a real opportunity. We want to see where it goes.
Any final questions?
Okay. Well, hey, I really appreciate your time and your interest in AmeriGas this morning. Thank you.
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