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Ferrellgas Partners L.P. (NYSE:FGP)

Q4 2012 Earnings Call

October 1, 2012 10:00 am ET

Executives

Stephen Wambold – President, Chief Executive Officer

Ryan Van Winkle – Executive Vice President, Chief Financial Officer

Analysts

James Fizer – Wells Fargo

Sambir Waldekur (phon) – Raymond James

Jarren Holder (phon) – Barclays

Operator

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Fiscal 2012 Earnings 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 this time, simply press star and then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you.

I would now like to turn the call over to Ryan Van Winkle, Chief Financial Officer. You may begin your conference.

Ryan Van Winkle

Thank you and good morning everyone. Welcome to the Ferrellgas Partners L.P. Fiscal 2012 Fourth Quarter Earnings call. I’m Ryan Van Winkle, Chief Financial Officer, and with me today is President and Chief Executive Officer, Steve Wambold.

As usual, I’m required to start with Safe Harbor language. Some statements made during this call are considered forward-looking and various risks, uncertainties and other factors could cause actual 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.

Now with that out of the way, I will turn the call over to Steve Wambold.

Stephen Wambold

Okay, thank you Ryan, and I’d like to provide some perspective on our fourth quarter results as well as give you some insight into our near term outlook and the execution of our growth strategies. As usual, Ryan will follow by discussing in detail the income statement and then we’ll certainly be glad to answer any questions that you may have.

As you know by now and you’re well aware, the fourth quarter again reflected unseasonably warm weather. In fact, this may have been the most challenging year ever for our industry. There was practically zero winter this past winter season and temperatures in our fourth quarter were 38% warmer than in the year-ago period. However, the positive momentum that we had cited in the third quarter carried over into our fourth quarter, which drove continued and expected strong results.

Our fourth quarter propane gallon sales were up modestly, which was no small accomplishment in light of industry trends, which included double-digit decreases in some instances. It’s important to point out that our fourth quarter volume represented almost entirely organic growth.

During the fourth quarter, adjusted EBITDA climbed 78% to a record 18.1 million from 10.1 million the year before. The previous Q4 record had been 15 million, which we posted in 2010, and we exceeded that quite handily. While this strong performance reflected a sharp decline in wholesale propane prices, outstanding operating execution also played a key role. Gross profit was up 3% to a near record. Our seasonal net los was $0.08 per common unit better than in the year-ago quarter, and contributing to our improvement was our well established trend of keeping a tight rein on costs, most notably G&A expense did decline nearly 35%.

You probably will recall we had indicated earlier that we expected to achieve cost savings of $20 million during fiscal ’13. I’m happy to report that we are increasingly confident based on current trends that that figure will end up being north of $20 million.

Our tank exchange operations did have mixed results for the year. While the absence of a harsh winter helped demand get off to an early start, the extreme heat in the late spring and summer adversely did affect our revenues; however even so, for the year our volume was up roughly 4%. Looking ahead, the outlook for this year’s grilling season looks bright due to a number of favorable operating conditions and planned expansion at several of our large retailers.

Looking forward here to fiscal ’13, I’m especially encouraged by the start that we’ve seen. The early results in this new year are trending substantially ahead of the prior year. Also encouraging was the acquisition in early September of Sacramento-based Capital City Propane, which mirrored our strategy of strengthening our presence in key markets, and I will say that acquisition activity does seem to be heating up after a lull throughout fiscal ’12. We’re currently reviewing several opportunities while of course sticking to our strict criteria, such as acquiring businesses that are immediately accretive to our earnings.

Before turning the call over to Ryan, I’d like to summarize our near-term outlook. The fiscal first quarter is off to an excellent start and we expect strong improvement over the year-ago first quarter. In addition, we think it’s reasonable to project that underlying fundamentals will certainly be the catalyst for a very good fiscal ’13. Moreover, if Mother Nature decides at all to cooperate this year with somewhat normal temperatures, results this year could be exceptional. As we’ve pointed out before, the odds of another winter similar to last year’s seem to be quite low, and for what it’s worth, the often-quoted Farmer’s Almanac and other various forecasters are looking at a more normal winter.

Okay, now I’d like to turn the call over to Ryan for a detailed financial review.

Ryan Van Winkle

All right, thank you Steve. As Steve mentioned, we did post record fourth quarter results reflecting our continued focus on expense control and profitable growth. These record results were achieved despite temperatures that were 38% warmer than in the prior year quarter. As we had discussed all year, record warm nationwide temperatures along with the highly volatile commodity price environment put significant stress on our industry this year; however, we believe that our fourth quarter results along with a very impressive start to fiscal 2013 provide an indication that we have taken significant steps to address these concerns while at the same time position us well for the upcoming winter heating season.

Additionally, industry consolidation has created a very favorable environment for organic grow to flourish, and we continue to look for strategic additions to add to our company, with the newest addition coming this quarter in Capital City Propane in Sacramento, California. Equally, we progressed towards driving significant cost savings in our business as evidenced by significant reductions in our general and administrative expense, both this quarter and year-to-date. As previously committed, we believe these cost-cutting measures will result in at least 20 million of annualized savings by fiscal 2013.

Now before we open the call for questions, I’ll provide a brief overview of the financials for the quarter and fiscal year-end. Despite one of the warmest years on record, our volumes were off only 2% to prior year. Sales for the year were 878 million gallons compared to 900 million gallons sold in the prior year, reflecting the effect of warmer temperatures and continuing poor economic conditions on customer demand. For the year, nationwide temperatures were 18% warmer than last and 19% warmer than normal. Propane sales for the quarter were up slightly to 151 million gallons despite the extreme nationwide temperatures experienced this summer.

Fiscal 2012 gross profit was 642 million, down from 689 million in fiscal ’11, reflecting the higher wholesale prices on margins last winter heating season and lesser weather sensitive sales volumes. However, for the quarter gross profit was a near-record 130 million, up 3% over the prior fourth quarter results as we successfully balances sales volumes and margins in a declining wholesale price environment.

Operating expense year-to-date was held consistent on a cent-per-gallon basis with the prior year while equipment lease expense rose slightly to 14.6 million. For the quarter, operating expense was materially the same at 100 million despite the slight increase in sales volumes, and consistent with annual results equipment lease expense was up slightly to 3.8 million.

G&A expense for the year decreased an impressive 29% to 37 million compared to 52 million in fiscal ’11. While 10 million of this decrease was attributable to tank exchange litigation recorded in the prior year, the remainder is attributable to back office synergies implemented as part of our cost-cutting initiative. Most notably for the quarter, G&A expense decreased 35% to 8.4 million compared to 12.9 in the fourth quarter of last year, reflecting the significant efforts to lower our cost structure going forward.

Interest expense for the fourth quarter was down nearly 6% to 22 million compared to 24 million in the prior year fourth quarter, and year-to-date interest expense was 93 million, down more than 8% from 102 million in fiscal ’11, due in part to the successful refinancing completed in the prior year.

As mentioned earlier, we are very pleased to deliver record adjusted EBITDA of 18 million this quarter, reflecting a nearly 80% increase from the 10 million achieved in the prior year’s quarter. For the year, adjusted EBITDA came in at 193 million compared to 228 million last year.

As we look to fiscal 2013, we are very pleased by the changes our company and industry have gone through over the last 12 months. We believe that with the successful implementation of our expense reduction initiative, focus on organic growth opportunities, and prior year refinancings, we are best positioned for these opportunities that lie ahead in fiscal 2013.

This concludes my comments on the financial performance of the company, and at this time we would like to open the call for questions.

Question and Answer Session

Operator

[Operator instructions]

Your first question comes from the line of James Fizer from Wells Fargo. Your line is now open.

James Fizer – Wells Fargo

Hi, good morning. It looks like you had a nice increase in your retail gross margin during the quarter on a per-unit basis, but compared to the fourth quarter last year it looks like your wholesale margin declined. I’m just wondering if you could speak about that a little bit.

Ryan Van Winkle

I’m sorry – what was your question, James?

James Fizer – Wells Fargo

The decline in wholesale margin on a dollar-per-gallon basis.

Ryan Van Winkle

You’re curious about the increase and how it was achieved, or what?

James Fizer – Wells Fargo

Well, I’m curious as to—it looks like your retail gross margin increased on a year-over-year basis while your wholesale margin decreased on a year-over-year basis.

Ryan Van Winkle

I think from a wholesale perspective, it’s more just a timing issue. From a retail perspective, what we’ve seen is a pretty dramatic decrease in the wholesale price environment, and we did a pretty good job this quarter and we enter the first quarter of fiscal 2013 both lowering the end-price to the consumer while at the same time expanding the margin, and we would continue to expect to see that throughout this fiscal year.

James Fizer – Wells Fargo

And can you just clarify why it’s the case that that same dynamic wouldn’t be true for the wholesale side?

Ryan Van Winkle

It’s just the timing of the consumers that we sold to in the fourth quarter.

James Fizer – Wells Fargo

Okay, so when you say timing, I guess that implies that maybe in the Q1 ’13, you would get some of that back?

Ryan Van Winkle

We would expect to see wholesale margins improve in fiscal 2013, starting in the first quarter, yes.

James Fizer – Wells Fargo

Okay, great. And then I guess secondly, in your prepared comments you talked several times about an impressive start to the year, and I was just wondering if you could elaborate a little bit more on what specifically you’re referring to when you talk about that.

Ryan Van Winkle

Yeah, without talking specific numbers because a lot of the accruals and things of that nature happen at quarter-end, what we continue to see is what we experienced in the fourth quarter, which is relatively strong volumes, relatively strong margins, especially year-over-year. We continue to see expense savings kind of in line with what we saw in the fourth quarter as well, so just the fundamental things that have changed in our business. You know, we’ve got industry consolidation so there is a lot of organic growth, so you’ve got that filling in on the volume side, margins impacted by wholesale prices being down, and then this 20 to 25 million of expense cuts for the most part started happening back in December, January and February of fiscal 2012. Those were partially offset with some severance costs late in the fiscal year, but now in the fourth quarter as we move into the first quarter of this year, those things have all flushed through. So kind of right down the P&L, we continue to see the benefits of all that we’ve worked on very hard over the last 12 months.

James Fizer – Wells Fargo

Great. That’s good color, thanks. Last one from me – the Capital City Propane transaction, can you tell us was that sort of in line with your traditional acquisition in terms of size?

Stephen Wambold

Yes, it was. It was.

James Fizer – Wells Fargo

Okay, thank you.

Operator

Your next question comes from the line of Sambir Waldekur (phon) from Raymond James. Your line is now open.

Sambir Waldekur – Raymond James

Congrats on a good quarter. In terms of the Capital City Propane acquisition, was that—the EBITDA multiple, was that in line with the previous acquisitions?

Stephen Wambold

Yeah, right in line, right in the wheelhouse of deals that we like to acquire – near existing operations, well-run business, immediately accretive.

Sambir Waldekur – Raymond James

Okay. And you mentioned that acquisition activity has picked up in the quarter so far. Is that also in the same range?

Stephen Wambold

Yeah. Yes, there is some deals opening up, potential deals that might be larger than what we’ve seen in the past. Nothing earth-shattering that would excite you, but seems to be a whole handful of deals starting to come alive versus last year where we were at this point. People were kind of shut down.

Sambir Waldekur – Raymond James

Okay, all right. Yeah, that’s very helpful. All right, yeah, those are my questions. Thanks.

Operator

Your next question comes from the line of Jarren Holder (phon) from Barclays. Your line is now open.

Jarren Holder – Barclays

Good morning. At the beginning of September, you guys issued an 8-K about changing your auditors. Can you comment on that a little bit more, please?

Ryan Van Winkle

Yeah, this is Ryan. We had a longstanding relationship with Deloitte & Touche, and then continue to serve us from a K1 tax preparation standpoint. At this point, there is no decision on whether that will continue or not. The price related to audit services has changed, the competitive marketplace, and we did do a full RFP on the auditor and had some other opportunities with some other firms that had lost some similar client sales through M&A transactions. That switch in auditor will save us roughly $750,000 a year going forward, so purely an economic decision, one we thought was meaningful to our shareholders. But Deloitte served us great for the last 30 years, and like I say, they continue to be a provider for us on the tax side.

Jarren Holder – Barclays

Got it, okay. And during the fourth quarter, your gain on disposable assets was a bit higher than, I guess, the previous quarters. Is that mainly due to your cost-savings initiatives, and would you expect to have some volume reductions related to those asset sales?

Ryan Van Winkle

No, no volume losses, and literally just the timing of which we got some things sold in the fiscal year.

Jarren Holder – Barclays

Okay, okay thank you.

Stephen Wambold

Non-core assets.

Operator

There are no further questions in queue at this time. I turn the call back to the presenters.

Stephen Wambold

Okay, thanks Melissa. As always, we appreciate your participation on the call and your interest in Ferrell Gas. We are confident we have solid reasons for being optimistic about our current fiscal year. As you heard, we’re projecting improved margins as we continue to grow organically, and we will continue to increase our market share. In addition, we expect to enhance our earnings through our acquisitions and not only will we continue to keep a tight rein on costs but we plan to benefit from the full-year impact of fiscal ‘12’s restructuring and expense savings initiatives.

In summary, we remain committed to a laser-like focus on controlling what we can control. Our team is well positioned to continue capitalizing on this positive momentum, which as I said earlier could well accelerate if we get anything close to normal this upcoming winter.

So thank you again. We look forward to reporting our first quarter results in a few months, and we hope you have a great week.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.

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