Ferrellgas Partners LP (NYSE:FGP)
Q3 2014 Results Earnings Conference Call
June 9, 2014 9:00 AM ET
Ryan VanWinkle - Executive Vice President and CFO
Steve Wambold - President and CEO
Boyd McGathey - Executive Vice President and COO
Tod Brown - Executive Vice President and President, Blue Rhino Operations
Theresa Chen - Barclays Capital
Good morning. My name is Jack, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Third Quarter Fiscal Year 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)
Thank you. Mr. Ryan VanWinkle, Executive Vice President and Chief Financial Officer, you may begin your conference.
Thank you, Jack, and good morning, everyone. Welcome to the Ferrellgas Partners, L.P. fiscal 2014 third quarter conference call. My name is Ryan VanWinkle, Executive Vice President and Chief Financial Officer. Joining me today is Steve Wambold, President and Chief Executive Officer; Boyd McGathey, Executive Vice President and Chief Operating Officer, and Tod Brown, Executive Vice President and President of our Blue Rhino Operations.
Before we get started, I'd like to remind all of you that some of the statements made during this call be considered forward-looking, and that various risks, uncertainties and other factors could cause actual performance to materially differ 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, I will turn the call over to Steve Wambold, President and Chief Executive Officer for his comments.
Okay. Thank you, Ryan. Ryan [will come back] little bit as he usually does to provide details on the results for the third quarter and nine months, and he will also report on our finance activities that continue to improve the balance sheet.
As part of his new duties as President of our Midstream division he will also discuss the significance of that recent formed unit. Before Ryan’s presentation, Tod will discuss Rhino’s third quarter performance and the outlook for the future. Tod will also talk about the current acquisition environment in the propane field and then after Ryan's presentation we will take any questions that you may have.
I will spend a couple minutes providing perspective on the Q3 results, as well as commenting on the outlook for the remainder of our fiscal year and as I get in the second quarter call, I will spend quite a bit of time discussing the M&A environment.
At the time, you may recall, I had pointed out that we are laser focused on expanding our propane footprint and diversifying strategically into non-propane fields. Obviously the paramount criteria being that the acquisitions must be immediately accretive to earnings.
Literally after the end of third quarter On May 1 we did make our initial major non-propane acquisition, Sable Environmental, fast-growing fluid logistics provider in the Eagle Ford Shale down in South Texas.
We do view this acquisition as a bit of a watershed event demonstrating our commitment to strategic diversification and growing our cash flows. Sable's management then hit the ground running and immediately added a sixth salt water disposal well and they are currently in the process of building a seventh.
We do project that Sable will add $25 million of adjusted EBITDA into fiscal ‘15. We also believe that Sable is just beginning to scratch the surface for significant growth opportunities and Sable's management demonstrated to agree with this optimism by immediately purchasing $50 million of Ferrellgas equity after being acquired.
Also in the month of May, we did make our fourth propane acquisition during the current fiscal year that was called Viking Propane. It enhanced our strong and growing position in California and you may recall on the second quarter call, I indicated that the list of propane opportunities had never been longer, noting happened in the third quarter to change our minds their, the list is continuing to grow with propane opportunities.
And speaking of the third quarter the most appropriate adjective to describe it is just challenging, the severity of the winter weather through much of the U.S. is well known. Temperatures were 5% colder than the prior, 10% colder than normal. The resulting challenges included supply and logistic issues that triggered volatility in our industry that none of us had ever experienced.
Nonetheless, base with this challenges our operations team performed wonderfully. They provided great customer service to our customers. In fact, they added customers because of service failures of other propane providers. I am very happy and thankful with the performance of our operations team during the quarter.
I am also happy to report strong results for the third quarter overall. Adjusted EBITDA and gross profit both reached record levels, our coverage is 1.2 times, it’s the same level we achieved in January, it’s the highest in over a decade.
As I mentioned, Tod, will discuss Rhino in more detail and I wanted to point out that Blue Rhino’s Q3 performance was simply outstanding. Volumes were up 18%, gains were posted across all classes of trade and Memorial Day volumes were very strong, more details again from Tod later, but we do expect this positive momentum to carry over throughout the summer and also into the fall.
Based on these third quarter results, we are again raising our adjusted EBITDA guidance for fiscal ‘14. This time to a range of $285 million to $290 million, this is up from $275 million to $285 million, we provided after Q2 and then just as a reminder, our record adjusted EBITDA of $272 million was posted in fiscal ‘13.
Okay. I'm going to turn the call over to Tod to talk about Blue Rhino and the propane acquisition environment.
Thank you, Steve. As an industry leader of tank exchange, Blue Rhino once again delivered a strong performance during the third quarter as Steve referenced earlier. As you are all aware, this quarter begins our spring selling season at Blue Rhino and I'm pleased to say that our third quarter performance and our performance year-to-date have been nothing short of stellar.
Year-to-date, we’ve delivered 1.3 million more tanks than to the same period of 2013. In the third quarter continued our winning streak by going over 18% transactions versus prior year period. The volume is coming from modest new location growth, but is really being driven by the strong comp store sales trends that we've seen consistently across all classes of trade.
Last year, we experienced the wet and cool beginning the spring, whereas this year, our retailers have seen double-digit comp store sales trend, kicking spring off to a stronger start than prior year.
The tag onto that line of discussion and as Steve referenced in his opening, very pleased to share with you that the Memorial Day holiday at the end of May provided three of our highest single delivery days in the history of Blue Rhino and actually the two-week window around Memorial Day was the strongest that we have had on record, beating the previous by almost 10%.
I'm looking very forward based on our current trends to see how the summer unfolds that I had fully anticipated a strong finish to our fiscal year within Blue Rhino. Now shifting our attention to the propane acquisition environment, very 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 and expectation.
I'm happy to say that we've experienced above normal contacts from potential sellers better as we go into our last quarter of the fiscal year. So we’re getting a lot of calls, there’s a lot of activity out there and we’re getting our fair share.
To date we've closed four propane acquisitions through the third quarter. Since our last call, we've actually closed one additional acquisition Viking Propane of the Northern California. At this time, we have an above average number of deals that are scheduled to close between now and the end of our fiscal year.
The robust activity is a result of coming off of two back-to-back strong winter season where our sellers have been able to the deliver against more normalized weather conditions and in turn, has strengthened their core business metrics, allowing them to consider putting their businesses on the market. I look forward to reporting against many more closed acquisitions during our fourth quarter conference call.
That concludes my comments for the third quarter performance. And with that, I'll pass the call back over to our CFO, Ryan Vanwinkle.
All right. Thank you, Tod. And we’re once again pleased to report record gross profit and adjusted EBITDA for the quarter. As Steve mentioned distributable cash flow coverage for the trailing 12 months ended April 30th was 1.2 times, which is unchanged from the prior quarter and continues to be the highest since fiscal 2003.
Correspondingly our equity cost of capital has materially improved over the last 12 months now sitting at roughly 7.5%, compared to approximately 10% this time last year. Since the end of the quarter, we’ve made several material announcements, including as later this morning that we believe enhanced their value and partnership.
On May 1st, we announced the acquisition of Sable Environmental, a fast-growing privately held fluid logistics provider in Eagle Ford Shale region of South Texas. Sable which originally consisted of five salt water disposal sites subsequent to our acquisition, acquired a sixth site and is currently in a process of constructing a seventh site.
As a result of this expansion of project, we increased our adjusted EBITDA estimates from these operations from $20 million to $25 million in fiscal 2015. I am proud to have been named President of Midstream Operations. And I look forward to overseeing the expansion of Sable operations as well as adding other diversified operations to our Midstream segment in the future.
On May 20th, Standard & Poor’s announced they had raised their corporate federal rating on us to B+ from B, noting the continued strong continued strong financial performance, reduced leverage, increased distributable cash flow coverage and increased cash flows from diversified assets. And lastly, this morning we announced that we had exercised the $100 million accordion feature, increasing the size of this facility from $500 million to $600 million.
In connection with this, we further admit the facility to allow us greater flexibility in light of recent acquisitions and associated business diversification. I am happy to say that we had a full support of our existing bank group, both in the upsizing of the facility and the amendments thereto.
Our borrowing capacity on the amended line of credit currently sits at nearly $300 million, which gives us ample flexibility in managing future acquisition opportunities and working capital needs.
On that note, you will see that on April 30th, we maintained a significant cash balance. These funds were drawn on the credit facility on the last day of the month to facilitate our acquisition of Sable Environmental in the morning of May 1st.
Given effect to these borrowings, the acquisition of Sable, and the subsequent issuance of $50 million of Ferrellgas Partners common units to the former owner of the Sable, our operating partnership maintains financial leverage up to 3.4 times, significantly below the operating partnership’s debt covenants of 5.5 times and our interval peak maintains financial leverage of approximately 4 times. I believe this is important to clarify because I assume at least one analyst write up recently that indicated financial leverage materially higher than actual performance.
Before moving into the specific numbers for the quarter, I do want to reiterate that based on our strong results thus far in 2014 and the inclusion of one quarter results from our Sable operations, we are raising our adjusted EBITDA guidance to a range of $285 million to $290 million from our previous guidance of $275 million to $285 million.
Sales volumes for the quarter were slightly below those of a year ago, but basically equal to our planned level. Industry-wide storage and transportation issues called wholesale prices to rise from historic levels in certain geographic areas this quarter. Our primary goal in facing these obstacles was to ensure that customers didn’t run out of product. To accomplish this, we intentionally delivered propone in reduced quantities for shortfield, many of our customers due to peak of these challenges. This strategy ensured that we had sufficient inventory to service our customers through the industry event.
All temperatures for the quarter were 5% cooler than those the prior year. We believe that the anticipated return of more evenly spread winter weather during the fiscal and second and third quarter’s combined with the impact of inefficient shortfill deliveries contributed to slight reduction in sales volumes this quarter. Despite the decrease in sales volumes, gross profit for the third quarter did rise to a record $230.5 million, up 3% from the prior year record third quarter.
The volatility in wholesale prices in the quarter certainly proved challenging. The drastic increase in prices earlier in the quarter required us to implement the shortfill strategy I previously discussed. However, once these issues were resolved, the wholesale cost of propane decreased significantly and drastically. For example, our wholesale gallon at one supply point in Conway, Kansas dropped from $2.49 to $1.16 in just the month of February. This rapid decline in wholesale pricing resulted in increased gross margin on certain contracted sales volumes to commercial customers, driving the increase in gross profit and gross profit margin in the quarter.
Operating expense for the quarter was $114 million, up from the prior year expense of $107 million. This increase was due primarily to the negative impact on our efficiently metrics caused by the shortfill strategy I previously discussed. Also for the quarter, general and administrative expense was $12 million. However, excluding the timing of performance-based incentives, we nearly unchanged to prior year quarter.
Equipment lease expense was $4.6 million, compared to $4.1 million in the third quarter of last year and basically in line with our plans to quarters. We continue to address the truck fleet to best manage the overall cost of transportation.
And finally, interest expense for the third quarter was $20.2 million, down from $22.1 million in the prior year’s fiscal quarter, primarily resulting from favorable debt refinancing last fall.
And as stated before, all of these resulted in record adjusted EBITDA for the quarter at $99.8 million, up from a prior year record of $98.5 million. And our trailing 12-month basis, adjusted EBITDA was a record $289 million compared to $264 million to same 12-month period ended April of last year.
We're proud of these results. And we do project that this will be our fourth record year for last six, even before the acquisition of Sable which led to the creation of our Midstream segment. We look forward to the continued improvement for the years to come, both in our propane and Midstream operations.
This concludes my comments on the financial performance of the partnership. So at this time, we’d like to turn the call back over to the moderator and answer any questions that you may have.
(Operator Instructions) There are no questions at this time. Sorry, we do have Theresa Chen from Barclays Capital. Your line is now open.
Theresa Chen - Barclays Capital
Theresa Chen - Barclays Capital
I wanted to ask about other potential Midstream acquisitions out there. What kind of appetite do you have for -- what kind of assets do you have appetite for? And what are you seeing in the market? And can you give us general sense of the competitive advanced state like you’re facing right now in those acquisitions?
Sure. This is Ryan. That's a good question. So we’ve been very, very busy. We hired a gentleman named Todd Soiefer back in January from RBC. I think, his hire are been in the market and certainly our acquisition of Sable has dramatically increased the deal flow. I would tell you that kind of all times, we’re looking at between 10 and 15 actionable opportunities. We’re generally looking at the area of storage, transportation, terminaling fluid logistics and probably to a lesser extent natural gas gathering and processing.
Thus probably, we’ve been most focused in the Eagle Ford, the Permian and the Bakken areas. Here right now for the most part, we’ve got a good balance of things that are for auction and that are private negotiated transactions. So we’re happy with that. And I would say from the deal flow perspective, these are acquisitions that range from $20 million to $80 million EBITDA.
So we’ve been very active. We got a great team here looking for these opportunities. We’ve gone deep in many processes. And for the most part, we’ve probably withdrawn from more processes than we’ve got eliminated just as we’ve learned more about the opportunities. So we’re extremely optimistic about -- and excited about what the future lies.
Theresa Chen - Barclays Capital
Great. Thank you very much.
There are no further questions at this time.
Okay. Thanks for your time this morning. We have a lot of confidence in our game plan and we remain focused on executing our strategies. You can tell, we’re very enthusiastic about propane prospects as well as diversification and we look forward to continuing our positive momentum through Q4 and into fiscal ‘15. We hope all of you have a great summer.
This concludes today’s conference call. You may now disconnect.
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