Amerigas' (APU) CEO Jerry Sheridan on Q1 2016 Results - Earnings Call Transcript

| About: AmeriGas Partners (APU)

AmeriGas Partners LP (NYSE:APU)

Q1 2016 Earnings Conference Call

February 02, 2016 09:00 AM ET

Executives

John Walsh - President, Chief Executive Officer, UGI

Kirk Oliver - Chief Financial Officer, UGI

Jerry Sheridan – President and Chief Executive Officer, Amerigas

Hugh Gallagher - Chief Financial Officer, Amerigas

William Ruthrauff - Director, Investor Relations

Analysts

Nathan Judge - Janney

Chris Sighinolfi - Jefferies

Robert Balsamo - UBS

John Edwards - Credit Suisse

Operator

Good morning. My name is Shawn and I will be your conference operator today. At this time, I would like to welcome everyone to the UGI Amerigas First Quarter 2016 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. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. If you’d like to withdraw your question, please press the pound key. Thank you.

Mr. Ruthrauff, Director of Investor Relations, please go ahead, sir.

William Ruthrauff

Thank you, Shawn. As we begin, let me remind you that our comments today will include certain forward-looking statements which management of UGI and Amerigas believe to be reasonable as of today’s date only. Actual results may differ significantly because of risks and uncertainties that are difficult to predict. Please read our earnings release and our annual report on Form 10-K for an extensive list of factors that could affect results. We assume no duty to update or revise forward-looking statements to reflect events or circumstances that are different from expectations.

We will also describe our business using certain non-GAAP financial measures. Reconcilations to the comparable GAAP measures are available in the appendix of our presentation.

With me today are Hugh Gallagher, CFO of Amerigas, Kirk Oliver, CFO of UGI, Jerry Sheridan, President and CEO of Amerigas, and your host, President and CEO of UGI Corporation, John Walsh. John?

John Walsh

Thanks Will. Good morning and welcome to our call. I trust that you’ve all had a chance to review our press releases reporting Q1 results for UGI and Amerigas. As noted in our releases, this was a quarter marked by extreme weather; however, unlike the past two winters, our extreme weather in Q1 featured temperatures nearing 70 degrees during the Christmas season. Given the major challenges presented by the weather, we were very pleased with the quality of our earnings in the quarter.

On an adjusted basis, our EPS fell just below the EPS delivered in Q1 fiscal ’15 with the contributions from several of our recent major investments being the key to a very solid quarterly performance. Although demand was clearly dampened by the weather, we saw continued strong weather-adjusted demand in each of our businesses. I’ll comment on our key activities and market developments in the first quarter, then I’ll turn it over to Kirk who will provide you with a detailed overview of UGI’s financial performance. Jerry will review Q1 for Amerigas, and I’ll wrap up with an update on our strategic initiatives.

Our Q1 adjusted EPS was $0.64, just below the $0.68 delivered in fiscal ’15. Both quarters have been adjusted for the mark-to-market valuation of unsettled hedges and for the acquisition and transition costs associated with the Total Gas, now rebranded as Finagaz acquisition. Our adjusted EPS reflects the earnings strength of our businesses during one of the warmest first quarters in UGI’s history.

While the extremely warm weather had a significant negative impact on our quarterly performance, our results clearly reflect the positive contributions from our Finagaz acquisition as well as the contributions from our new LNG and pipeline assets that came onstream in midstream and marketing. It’s important to note - and this is something we often remind ourselves - the positive or negative effect of weather is temporary, while the impact from successful new investments is long-term. Kirk will comment in more detail on our first quarter performance in a few minutes.

Although the warmer than normal weather led to results that were a bit below our expectations, our underlying performance reflects the strength of our diversified businesses. While we typically hold back from commenting too much on weather during these calls since it’s beyond our control, the magnitude of the warmth in the quarter justifies a bit more discussion than normal. Weather as measured by heating degree days was approximately 25% warmer than normal for utilities, 20% warmer for Amerigas, and 22% warmer for UGI France. Quarters like this offer major challenges to our businesses as we strive to optimize our performance while maintaining our focus on the key activities that provide the foundation for future growth. Our teams did outstanding work in Q1 on that front. There were two keys to our solid performance in the quarter: our focus on the fundamentals for consistent long-term performance, unit margin management, working capital management, and control of operating expenses; and secondly the positive contributions from new investments that also provide the foundation for future growth.

We achieved some noteworthy strategic milestones in Q1. Midstream to marketing continues to expand our LNG peaking capabilities. We took advantage of our increased LNG liquefaction capacity at Temple to grow LNG sales and win new peaking contracts in the quarter. We’re also making good progress on our new liquefaction facility in Manning, Pennsylvania. We completed the foundation work for the LNG storage tank last month and we’re on schedule to complete the project, which will double our liquefaction capacity by the end of the calendar year.

We continued to add to our customer base at our gas utility, although the rate of growth has been impacted by the shrinking spread between natural gas and heating oil. We added over 5,400 new residential heating and commercial customers in Q1. Our infrastructure replacement program for cast iron and bare steel remains on pace with almost 68 miles replaced during calendar 2015.

The other item of note for our utilities occurred just after the close of Q1 with the filing of our first UGI gas rate case in 21 years. The $58.6 million request was submitted in mid-January and we expect the process to conclude by the end of the year.

Our propane distribution businesses delivered a solid performance given the extreme weather conditions. As is always the case, we focused on unit margins, working capital and opex management to help offset the impact of the warm weather. In France, we continue to closely monitor our progress on the Finagaz acquisition. We were very pleased with the financial performance of the business in Q1 and we made excellent progress on our integration efforts. Amerigas also had a very solid quarter with EBITDA falling only 6% versus prior year despite weather that was 17% warmer.

I’d like to take a minute to comment on the broader environment in the quarter. There was considerable volatility and uncertainty in the energy capital markets with investors concerned with the dramatic drop in commodity costs. It’s important to note that for UGI and Amerigas, as energy distribution companies, this drop is a positive development for the company and our customers. The lower energy costs will be appreciated by our customers and will encourage demand. The lower costs also reduce our working capital needs, thereby freeing up additional cash for reinvestment in growth.

I’ll return later in the call to comment on our strategic initiatives, but I’d like to turn it over to Kirk at this point for the financial review. Kirk?

Kirk Oliver

Thanks John. Good morning everybody. This table lays out our GAAP and adjusted earnings per share for this quarter compared to the same for Q1 of last year. As you can see, adjusted results exclude the impact of mark-to-market changes in commodity hedging instruments and acquisition and transition costs associated with the integration of Finagaz.

Our adjusted earnings of $0.64 per share for the quarter is down only $0.04 from last year in spite of nearly record warm temperatures in all of our service territories. As you can see from this slide, we experienced warmer than normal weather in all of our businesses this quarter. Weather in the international businesses, while much warmer than normal, is fairly consistent with the warm weather we experienced there last year; however, weather in the U.S. as experienced in our utility business and Amerigas was much warmer than last year. The warmer weather experienced in the U.S. resulted in negative variances to earnings in the U.S. businesses but was measurably offset by strong results in Europe, largely due to the accretive acquisition of Finagaz in France. I’ll run through the results for each business and then spend a few minutes reviewing the results for this Q1 compared to the results of our last very warm weather period in Q1 of 2012.

As mentioned earlier, Amerigas experienced much warmer weather this quarter. Volume was down 13% on weather that was 17% warmer than normal, and we still delivered operating income of $130 million, which is down only 7% versus last year. This represents a decrease of $10 million versus the first quarter of last year, where we experienced weather that was only 4% warmer than normal.

Operating and administrative expenses decreased by $16.3 million, down 6.6% versus last year primarily due to lower self-insured casualty and liability expenses, lower vehicle fuel, and other volume-related expenses. Jerry will review Amerigas in more detail later on this call.

UGI International contributed $78.5 million in income before taxes, a $33 million increase over last year driven largely by the acquisition of the Finagaz LPG business in France. Weather in France was 22% warmer than normal and about 3% warmer than last year. Retail volumes sold were up 79 million gallons or 44% due primarily to the addition of Finagaz. Unit margins were also up, resulting from the decline in wholesale prices for propane and butane in Europe, which were down about 22% versus last year.

Operating and administrative expenses were up $48 million, primarily reflecting the effects of the Finagaz acquisition. Finally, with respect to the impact of changes in FX rates, we layer in foreign exchange rate hedges over time which significantly mitigates the impact of the declining value of the euro.

Turning to Slide 11, the gas utility is reporting income before taxes of $38.8 million, down $26 million or 40% versus last year’s quarter. As I mentioned earlier, utilities experienced weather that was 23% warmer than last year. The month of December, the highest heating degree month in the quarter, was 37% warmer than normal. Throughput to core customers was down 25%. Total margin decreased by about $21 million or 15%, reflecting the effects of warmer weather on volumes. Depreciation expense is up $1.3 million, reflecting the increased investment in our distribution system, and other consists primarily of non-recurring charges related to the settlement of litigation and interest on PGC over collections.

Finally, on January 19 we filed a rate request with the Pennsylvania PUC for a $58.6 million base rate increase. We expect the process with the PUC to conclude by the end of this calendar year.

Midstream and marketing income before taxes declined about $3 million to about $42.1 million for the quarter. Total margin declined by $5.6 million or about 7%, primarily reflecting lower margin from capacity management and lower volumes in gas and power marketing, offset by higher gathering margin on our Auburn 3 and Uniondale assets and higher peaking services activity. The lower capacity management margins reflect lower spreads in location basis differentials and less volatility and capacity values between Marcellus and non-Marcellus delivery points.

Operating expenses are down $3.7 million versus the prior year period, where we incurred costs for the planned maintenance outage at Hunlock and Conemaugh.

I’d now like to turn your attention to a brief comparison of this Q1 to fiscal year 2012 quarter one. Fiscal year 2012 was another year where we experienced extremely warm weather across all of our businesses. Here, we compare FY16 to FY12, showing an estimate of the impact of even warmer weather this year versus 2012. This chart shows, as John mentioned earlier, the long-term impact of successful investment and how it has more than offset the impact of much warmer weather.

Just stepping through business by business for a minute, at Amerigas weather this year was much warmer than in fiscal year ’12, resulting in a $4 million weather variance that was more than offset by the $10 million impact from growth in the business, particularly from the acquisition of Heritage. At the utility, the weather was 15% warmer this year but growth offset about 30% of this impact. At UGI International, the negative weather impact of $2 million is driven by the increased size of the business as temperatures were about flat to 2012. Again, this negative impact was more than offset by the $19 million impact of growth driven largely by the Finagaz and BP Poland acquisitions.

Finally, the growth in stable asset base margin due to the investment in our midstream business has significantly offset the impact of weather there. In total, net income from growth investments in the 2012 to 2016 period contributed approximately $47 million in FY16, more than offsetting the estimated $22 million negative impact of weather that was significantly warmer in fiscal year ’16 relative to fiscal year ’12. Said another way, had the weather this quarter been identical to the weather in Q1 of fiscal year ’12, net income this quarter would have been $134 million or over 50% greater than in 2012.

Looking now at liquidity and cash resources, total liquidity by business in the form on cash on hand and available credit capacity are laid out in the table on this slide. You can see from this table that the businesses have sufficient capacity to meet their liquidity needs.

That completes my remarks, and I’ll now turn the call over to Jerry for his report on Amerigas.

Jerry Sheridan

All right, thanks Kirk. Good morning everyone. For Amerigas, adjusted EBITDA in the first quarter was $178 million or 6% below the $189 million we reported in the first quarter of fiscal 2015. As you’ve heard, weather is the story of the quarter. Q1 degree days came in 20% warmer than normal nationally, and the month of December alone was 24% warmer than normal. Volume was down 13% for Amerigas in the quarter on weather that was 17% warmer than last year.

A continued positive note is that the propane cost environment was significantly lower than in the prior year and continued to fall during the quarter, with pricing at Mont Belvieu of $0.42 for the quarter or 45% below the $0.77 per gallon last year. As a result of this falling cost environment, we were able to manage a $0.10 improvement in margin for the quarter versus last year. Early in the quarter, we moved into our warm weather operational plan and were able to keep our expenses $16 million or 6% below last year.

One good example of our expense management efforts can be found in a program we refer to as Amerigas Airborne. In response to colder temperatures that we saw in the west, we were able to flex staffing during the quarter and relocate drivers on a rotating basis from the eastern part of the country, where we were experiencing record warmth, over to the west. This enabled us to meet peak day service needs in the west while more fully utilizing our delivery reps and eliminating the need for overtime. All in all, given 17% warmer weather and the 13% weather-induced reduction in volume, we were pleased that our expense and margin management resulted in EBITDA that was only 6% below the prior year.

Given our results so far, it’s clear that we will not meet our initial fiscal ’16 guidance of $660 million to $690 million in adjusted EBITDA; however, given the importance of the second quarter results and the fact that this quarter marks the peak of the heating season, we’re refraining from issuing additional guidance until after the completion of this quarter.

Now just some comments on our strategic thrusts. Amerigas Cylinder Exchange, our barbecue cylinder program, reported volumes just slightly below last year; however, the cylinder exchange team also secured new customers that will add approximately 2,500 new locations in Q2 and Q3. Our national accounts program volume was down 6% on warmer weather; however, the team added 21 new customer contracts and 11 customers renewed in the quarter. We also closed on three propane acquisitions in the quarter that will add about 6 million gallons annually.

Finally, I’d like to share just a few additional comments, given the turbulent investment environment for MLPs these last three months. Amerigas is a bit unique in the MLP space in that lower crude and propane costs are actually good for our company. Our customers receive smaller bills, customer satisfaction usually improves, and price-related conservation wanes. In addition, our working capital needs and collection costs improve, so while many other MLPs are negatively affected by lower commodity prices, we have always welcomed it as good for our customers and therefore good for the business.

Despite the warmer weather, our liquidity and leverage statistics are strong and our cost structure is clearly built to flex in these times of warm weather. In addition, we want to be clear with the investment community that Amerigas has no intention of raising equity, securing new debt, or reducing our distribution, again a somewhat unique set of facts among MLPs. Our capital requirements are relatively modest by MLP standards, and we’re confident that we can self-fund growth projects, even give the impact of warmer weather. This is not something new to us but something we have done for many years.

That concludes my comments. I’ll turn the call back over to John.

John Walsh

Thanks Jerry. As I mentioned in my opening remarks, we were pleased with the solid financial performance in our weather-challenged Q1. We were also encouraged with the progress on our portfolio’s strategic investments. The PennEast and Sunbury pipeline projects continue to move through the FERC approval process. These projects provide critically needed pipeline infrastructure to serve the increasing demand for natural gas in our region. Sunbury is expected to be completed early in fiscal ’17 and PennEast is targeting completion at the end of calendar ’17.

I mentioned the rate case submission by UGI Gas earlier on the call. This is a milestone for us following a two decade period of growth and investment in our systems. That process should conclude this fall and we’ll keep you updated on our progress.

Our integration planning work for the Finagaz acquisition is clearly reaping benefits. We’ve made exceptionally good progress over the past eight months. The business more than met our expectations in Q1 despite the warm weather. We’ve added a talented team of people, a strong customer base and a network of high quality assets to our largest business in Europe. As noted on our prior call, we expect this acquisition to be highly accretive in fiscal ’16 and beyond.

As Jerry just noted, Amerigas is a strong MLP with no exposure to commodity prices and no need to access the capital markets to meet its growth objectives. We continue to leverage Amerigas’ scale as the largest LPG distributor in the U.S. In Q1, Amerigas grew its customer base in both national accounts and cylinder exchange and completed three highly profitable acquisitions.

In midstream and marketing, we remain committed to pursuing and developing investment opportunities in the Marcellus. While most of our activity over the past three to five years has been focused on the development of new projects, we will also pursue opportunities to purchase existing midstream assets that would enhance our overall network in the region.

I’d like to close out by emphasizing some critical points about our businesses. We’re an energy distributor and marketer, and our business can perform well at virtually any point in the energy cycle. The current environment of low commodity costs is positive for UGI and Amerigas, and we’re excited about the prospects of providing our customers with efficient, low-cost energy solutions. Our performance in the first quarter demonstrates the strong underlying growth that we have achieved over the past three to four years. The comparison versus Q1 fiscal ’12 that Kirk took you through clearly shows the major contributions from a series of investments made over the past 48 months.

Our portfolio of potential investments remains strong and we are in a great position to continue to build our foundation for future growth. We continue to generate free cash and our balance sheets are in great shape with significant capacity for future growth and investment. We look forward to keeping you updated on our progress.

With that, I’ll turn the call back over to Shawn, who will open it up for questions.

Question-and-Answer Session

Operator

[Operator instructions]

Your first question comes from the line of Nathan Judge from Janney. Your line is now open.

Nathan Judge

Good morning all. Just wanted to ask a little bit more about the improvement at margins, specifically in the European markets. As you see them today, there were some nice improvements. Could you kind of dissect the improvement from mix? I know you’ve obviously done the acquisitions, but also just pure uplift from lower propane or LPG prices.

John Walsh

Sure Nathan. I think primarily what you’re saying--as you know, there’s a little bit of mix effect, although the weather being the same, virtually the same this quarter as last year, the mix hasn’t changed too much. We did add the Finagaz volume, which was important and kind of mirrors what we already had in France. I think primarily what you’re seeing is a little bit of the parachute effect with costs dropping, which enables us to enhance margins. Over time they’ll tend to normalize but still be on an upward trajectory. I think the supply environment--the biggest change in Europe over the last two or three years is the supply environment, which is crucial. As a distributor, increased availability of LPGs for Europe, with the U.S. now being a major exporter and additional LPG volumes coming onstream elsewhere in West Africa and in the Middle East, it’s really enhanced our options for supply in Europe, and we’re seeing less volatility in our underlying costs and we’re seeing premiums that are paid for delivered or landed costs in Europe coming off what were all-time highs if you go back three or four years ago.

So we’re really pleased with, from our standpoint, the improved supply environment in Europe. We benefited from the parachute effect, but we’re really excited to have a sounder and lower volatility supply environment right now for Europe which is really conducive to positive results for our distribution business.

Nathan Judge

Thank you. Just on the UGI utilities rate case, could you just provide a few details, in particular what your last 12 months’ earned ROE was on a comparable basis to what you filed and what you’re asking for, and what that represents as far as a percentage increase in base rates?

John Walsh

Yes, in terms of the increase itself, the increase that we requested represents about a $10 a month increase in total bill, total average monthly bill for a UGI residential customer. That’s about a 19% increase. That should be put in context, though. If you look at the total average monthly gas bill of our average residential customer, that’s dropped probably close to 50% since 2008, so it’s a much lower base. It’s a 19% increase, so those are the basics of the rate request.

I think our reported ROEs, you have actual and adjusted ROEs. Clearly, our adjusted ROEs, which are the basis for the rate case, are well below the targeted level, right around 5%, and the big adjustment there, Nathan, is that it’s a projected test year, so that has a pretty big impact on it.

Nathan Judge

What are you asking for as far as--in the rate case, as far as your allowed ROE?

John Walsh

Eleven percent is the requested ROE in terms of the rate case submission.

Nathan Judge

And on what kind of equity slice?

John Walsh

Fifty-five percent equity.

Nathan Judge

Great, thank you very much.

John Walsh

Okay, thanks Nathan.

Operator

Your next question comes from the line of Chris Sighinolfi from Jefferies. Your line is now open.

Chris Sighinolfi

Hey John, how are you?

John Walsh

Hey, good. How are you?

Chris Sighinolfi

I’m great, thanks. Just to follow up real quickly on that, anything that you’re anticipating--I mean, it’s been quite some time, as you noted earlier, since you’ve last been in front of the regulators in a formal rate case proceeding. Is there anything, given just the tenure of that time frame, that might be different as we think about this rate case process than a company who maybe is there every three to five years?

John Walsh

No, nothing fundamentally different. I think as your question kind of rightly points out, lots of things change in two decades, so we would anticipate extended discussions around the impact of this increase on the various constituencies, but that’s not abnormal. We have for PNG and CPG, our other two gas utilities, gone through the rate case process within the last five to six years, and we’re very active and engaged with the PUC on a broad range of issues around infrastructure replacement and all of our enhancement in terms of capital spending, so we feel really connected to the PUC in terms of the level of engagement, so we don’t anticipate any surprises. Any rate case is a very substantial process, probably a little bit more so because of the length of time that’s transpired, but our hope, our goal would be a settlement, and typically that’s what we’ve achieved and others have achieved over the course of the spring and summer here.

But nothing unique about this filing, other than it has been a very long time, so you just have to look in detail at each sort of customer segment and the impact, and certainly we’ll work through that with the PUC, their advisors and the various constituents that are part of this process.

Chris Sighinolfi

Okay, that’s helpful. Thanks. I guess switching gears a bit, and I really appreciate Jerry’s slide about the unique attributes of Amerigas, you kind of mentioned in that, obviously, the lack of capital market need for Amerigas, given its self-funding nature. That’s also an attribute largely normally shared by UGI - obviously you have the large capital budget for this year. But I’m just curious, John, with what we have seen transpire broadly speaking with some of your competitors in midstream, in the MLP framework with the fact that some of them found themselves in over-levered positions, we’ve seen some seek to partner on things, seek to divest assets perhaps to shore up their financial positions, is any of that falling your way? Have there been conversations, or are you inclined to want to participate if there is projects in Pennsylvania or things within Amerigas competitors’ slate? Can you just talk about that, given the disconnect in how you’re positioned versus some of the peers?

John Walsh

Sure, absolutely Chris. Yes, we are definitely interested in continuing to invest in assets that would fit within our network in UGI, that could potentially also be a fit for Amerigas on the NGL side. We, as--you know, PennEast is a good example, but we’ve got many other examples in our history. We’re a company that doesn’t hesitate to partner if partnering makes sense on a particular project or around a particular grouping of assets. So yes, we see, or I see and I think the company sees what’s going on in the market as potentially favorable in terms of creating opportunities to acquire assets after having spent the last five years in the midstream segment investing in greenfield assets for the most part, and augmenting our own assets like with the LNG facilities.

So we’ll definitely be focused on any opportunities that arise as things progress here. It’s a challenging time for many. The good news about us is we have very strong balance sheets, we consistently generate cash, so we do have the capacity to take advantage of opportunities as they arise.

Chris Sighinolfi

Just to follow up there quickly, have there been any discussions of that nature with anybody that you’re presently partnered with, or any asset in, let’s say, the Pennsylvania areas where you are presently active?

John Walsh

We’re looking at sort of the nature of our business and our business model and activity. We’re constantly looking at investment opportunities, so I wouldn’t comment specifically about individual assets. The only thing I would say is, and I touched on it in my remarks, I think the market right now and what’s going on has created more realistic opportunities for us to acquire assets than if you go back one or two years, say. So I think the environment has shifted, we’re aware of that, so we’re making sure we just remain active in the course of our normal intensive business development activities to be thinking about and looking at any assets that might come to market.

Chris Sighinolfi

Okay, great.

John Walsh

We’re staying very proactive.

Chris Sighinolfi

Okay. Final question from me, and this is perhaps for Kirk, there was a small footnote to your table, the movement of electric utility and HVAC from corporate to some of the other segments. I was just curious if you had it offhand, the relative magnitude of those different line items.

Kirk Oliver

It’s very small, Chris. I don’t have it on hand what that amount is.

Chris Sighinolfi

Okay, and is there maybe a rationale, just why you did that, or was that something the accountants asked for? Is there better alignment somehow now that you’ve put that into--

Kirk Oliver

Yes, well when you report segments, you tend to try to report the segments according to the way the decision-making around what’s happening in the business works, so the decision-making around HVAC, we moved the key decision-maker there, so it comes under that segment.

John Walsh

Yes, this is John. I just think it’s--the realignment is a better fit with the way we manage the business, where we’re making investments. Just as an example, in the electric utility, income before tax in a quarter was a couple million dollars, so it’s a really small piece of the utility, and to a great extent a lot of the back office activities are purged in common, so we just felt it better reflected the way we manage the business, the way we make our decisions, and enables our investors to focus on the material elements of the business as we [indiscernible].

Chris Sighinolfi

Great, well thanks a lot for the added color today, guys, and congrats on the performance given the weather challenges, which we all could see and feel. Nice job.

John Walsh

Thanks Chris.

Operator

Again, if you have a question, star then one on your telephone keypad. Your next question comes from the line of Robert Balsamo from UBS. Your line is now open.

Robert Balsamo

How you doing? Thanks for taking my question.

John Walsh

Morning.

Robert Balsamo

Just some housekeeping items. On the cost savings at Amerigas, it sounds like that’s almost exclusively tied to efficiencies, given the warm weather. Are any of these savings able to be retained in a more normalized environment, or is it safe to assume that that would increase on a per-gallon basis?

Jerry Sheridan

Some of the things are as a result of the environment itself, so when we have lower prices, we obviously have lower selling prices to our customers. I mentioned that that’s a very good thing, but that does tend to lower our bad debt expense naturally. We’re also experiencing lower diesel costs, so those are things that happened to us and would have happened to us naturally. I think the hard work that we’ve done is try to keep our guys as productive as possible and keep overtime to a minimum, and that’s been the biggest impact on the quarter.

Robert Balsamo

Great. Regarding the new locations for the cylinder exchange, it looks like around 2,500 locations would be about a 5% increase. Is that something I can look at from a modeling perspective that’s almost linear, like proportionate growth in cash flow, or are there other trends there that might be offsetting?

Jerry Sheridan

No, no. You’re accurate in that it’s about a 4 to 5% increase in our number of active locations. When we go into new locations, the number of cylinders, the turns per cage has to ramp up as we improve our marketing with our end customers, so the velocity with which we move cylinders through new cages is a little slower than mature cages, so that’s the only thing to keep an eye out for. But usually, by year two or three, they're up to the normal pace.

Robert Balsamo

Great, that’s all I had. Thanks a lot, guys.

John Walsh

Thank you.

Operator

Your next question comes from the line of John Edwards from Credit Suisse. Your line is now open.

John Edwards

Hey guys, my question was actually just answered. Thanks.

John Walsh

All right.

Operator

There are currently no further questions. I turn the call back to Mr. Walsh for closing remarks.

John Walsh

Okay, thank you very much. Thank you all for your time and attention this morning, and we look forward to talking to you again after our second quarter results are reported. Take care.

Operator

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

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