Ferrellgas Partners L.P. (NYSE:FGP)
Q1 2018 Earnings Conference Call
December 07, 2017 10:00 PM ET
Doran Schwartz - CFO and SVP
Jim Ferrell - Chairman, Interim CEO and President
Ben Brownlow - Raymond James
Mike Gyure - Janney Montgomery Scott LLC
Good morning. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2018 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.
Doran Schwartz, Chief Financial Officer, you may begin your conference.
Thank you, and welcome to our earnings call. Thank you for joining us and welcome from a cold morning here in Liberty, Missouri with temperatures is currently 17 degrees, great, profane weather. I’d like to remind you that some of the statements made during the call may be considered forward-looking, and that the various risks, uncertainties and other factors could cause actual performance to differ materially from anticipated performance. These factors are discussed in our 10-Q file this morning and in other documents filed from time to time with the Securities and Exchange Commission.
I appreciate the opportunity to initiate our first earnings conference call. I’ve enjoyed my first seven weeks with Ferrellgas getting to know the business and its employees. I look forward to working with all of you as well. A bit about my philosophies; first, cost of capital and returns are important, when thinking about investing capital. Capital is precious and it’s finite and needs to be invested carefully. I look for at least a 10% return on projects or acquisitions, with return expectations scaled up or down against that minimum threshold depending on risk profile.
Second, a stronger balance sheet provides lower capital cost and flexibility to take advantage of more opportunities as they arise. Our balance sheet carries high levels of debt and I, we are committed to de-levering over a reasonable period of time. Third, all costs are to be scrutinized and reduced where possible. Fourth, we are only as good as the team members around us; we need to continue to develop our people. And fifth, I would say that my approach would be based on an optimistic view of our business and its future, with a balance basis of realism.
We’ve done good work here recently and we have more work to do, and you’ll hear about some of that as we go forward. From my perspective, we continue to transition here with me moving in to the role. I’m working well with Al. Al is still here, I appreciate having him here to help me learn the business and transition relationships critical to the position.
I’m also getting to know the team. I would say that since Mr. Ferrell has come back just over a year ago, my view on the employee base here is, it’s filled with talented employees, morale high, we’ve have a very strong team here, and that our team appreciates being led by again Mr. Ferrell coming back as the interim CEO.
Format for the call today, I’ll give some initial remarks as it relates to the economics and financials of first quarter and then you’ll hear from Jim Ferrell and comments that he’ll have. And I think what you’ll hear is some thoughts around initiatives that we are working on. And I think one of the key messages there is that we as the company are not just sitting back and waiting for weather. We are actively looking to improve the business profile without waiting for weather. And then also, we will give you a preliminary view in to not just the first quarter, but also November.
I would just highlight that we’re not going to make a habit out of giving November information. November is not the second quarter; we are not trying to give you an expectation on what the second quarter is going to look like. But, we did feel like it was important today, because again as we go in to second quarter, where we have 50% of our degree heating days versus first quarter whether it’s in a normal year only 9% of degree heating days, that it might be a good opportunity for us to give you a flavor for at where we are starting going in to the second quarter.
So as it relates to our Form 10-Q that we filed this morning in our financial performance for the quarter, our adjusted EBITDA was 26.2 million and that compares to 29 million for the quarter last year. Our adjusted EBITDA for the propane segment was 30.6 million that was positively impacted by higher volumes, propane sales up 6%. This partially offset the effects from lower gross margins partially caused by a rising recent cost of commodity price environment for propane and increased operating expenses we continue to focus on increasing or market share.
So let’s take a more detailed look in to our Q1 fiscal year ’18 numbers. Again as I mentioned, propane sales volumes for the first quarter were just under 173 million gallons that’s up 6% from the 163 million gallons a year ago. When you look at the gross profit line, total gross profit for the quarter was a 153 million and that is basically unchanged from where we are at in the prior year comparable quarter.
Moving to the operating and general and administrative expense line, operating expense for the quarter was a 111 million, up from a 105 million during the quarter last year. The increase is primarily due to the incremental expenses associated with our increase in gallons sold. General and administrative expense for the quarter was also up slightly to 13.2 million compared to 12.5 million last year.
We look at expense for the quarter was 40.8 million and that’s up from 35.4 million a year ago. This is primarily due to the higher interest rate incurred on the 175 million of MLP notes issued this past January, compared to the rates incurred for borrowing under the secured credit facility, as well as increased rates on the secured credit facility itself.
Distributable cash flow or DCF on a trailing 12 months basis was 64 million. That equates to a covered ratio of 1.61 times. Based on our forecast, as we look forward, we would expect the coverage ratio to increase as we increase cash flows, maintain our distribution at its current level for the foreseeable future, and execute on our current focus to de-lever the balance sheet.
A bit on liquidity and credit metrics for where we are at, at October 31. At the end of the first quarter, the company’s fiscal year, its leverage ratio was 7.57 times. That reflects peak time of the year for annual working capital needs. This level was lower than the 7.75 times limit allowed under the secured credit facility and accounts receivable securitization facility, as amended in April 2017. Based on the company’s current forecast, the leverage ratio is expected to continue to strengthen and decrease throughout the fiscal year.
Now a brief update on the bank facility, we believe our current credit facility will provide us with sufficient capacity to fund our working capital needs through the years heating season. We have started the process of renewing the bank facility, conversations with banks and bond holders have commenced and we expect that significant progress will be made starting here in December.
I’ll just say, I’m pleased with where we are at. We are having constructive positive conversations focused on solutions with our bank group and initial conversations with our bond holders. As to all of our investors and banks, we feel very good about the relationships that we have there and again very pleased with where we are at in the process. We’re exploring many options for the renewed facility and we remain confident that we will get a renewed facility in place in the first half calendar ’18.
At this point, I’m going to turn the call over to Jim for comments from him. Jim?
Thanks Doran. Good morning everyone. If there’s one key takeaway for you from our earnings release or our comments today, it is that it is a new day at Ferrellgas, and we are not sitting on our hands waiting on colder weather. We are working many initiatives that are or will grow EBITDA, without the benefit of colder weather.
Based on our analysis the following initiatives, some completed or others in process increased EBITDA from last year’s 230 million, which was a year with a record warm winter to an adjusted level of 250 to 260, once fully implemented. Again that would assume whether it’s the same level as last year as disastrously record warm temperatures.
Colder weather would incrementally drive EBITDA higher from that level. So here is a summary of some of the current initiatives; at Bridger that business is stabilized, now focused on growth. We have a 179 oil trucks deployed with key customers like [Oxy], recent wins including Marathon and Oklahoma. It holds 7.9 million of barrels of oil in Q1 up 17% from prior year. They have significant opportunity for additional growth with a limiting factor finding drivers.
Our emphasis is on recruiting, finding creative ways to pay them. We are growing our sand and salt water hauling business and our disposal business as well. In the first quarter we resolved an issue related to a barge that was used to move oil to the Monroe facility at the end of the rail line, [clean] oil from the Bakken. We are evaluating under-performing assets. We have about 1,000 model 1232 railcars that are in storage and costing us about $1.2 million a year. We have another model 117 rail cars that are under contract pulling ethanol under a multi-year contract.
We are evaluating our tractor trailer fleet for at units in access of current and anticipated demand over the next 12 months, the rest can be sold. Also we are reducing our credit usage of Bridger, which may reduce EBITDA slightly, however, that is offset by interest and surety cost associated with this part of the Bridger business. We are evaluating all assets, highest and most productive use whether with our company or outside, possibly a sale.
Blue Rhino, cost of a Blue Rhino tank is the cost to fill it, a freight to get it to and from and exchange location. We are building two plants. [Technical Difficulty].
Okay, we lost Jim. Let me just take off from where Jim was as it relates to Blue Rhino. So you heard about some of the initiatives on Bridger. Apologies, Jim is actually off sight today, so we may have some technical difficulties there.
As Jim was saying the cost of a Blue Rhino tank is really the cost to fill it and the freight to get it to and from the exchange location. We’re building two plants and plan to build two more in 2018 and 2019. Each plant will reduce cost by between 1 million to 1.5 million. That’s an approximate three year payback on the investment. So a very high returns, and certainly provides us with the opportunity to grow our margins as a result.
We’ve also grown our tank exchange business by increasing sale locations by 2300 over past year, and we continue to add locations since quarter end. That’s a high growth business for us and we’re buying smart. So for this business we are taking a look at the key cost components of around valves, replacing the tanks, paint, sleeves, all are being evaluated. Changes are being made and those will continue to add to EBITDA from a lowered cost basis.
We’re closing on an acquisition in Michigan that will add nearly 600,000 tank exchange transactions to our overall tank exchange business that did 20 million tank exchange transactions last year. Expected IRR from that acquisition significantly exceeds our cost of capital.
This is a business that’s less dependent on weather. It’s more predictable in terms of demand and we like that. So again not waiting for weather, we are trying to grow in areas where we are less weather dependent. Bolton acquisitions, as we think about the retail propane side of the business we completed three accretive acquisitions in the first quarter that are adding to EBITDA.
In the past year, we’ve also again renewed our efforts to gain market share. I referenced that earlier in terms of our efforts on operating expenses. We are aggressively competing for new customers and customer density and we’re seeing wins. Our customer accounts are increasing up over last year replacing tanks and replacing our competition.
Our management structure is another area where we focused on in terms of an initiative. It’s structured in the flatter and leaner way, as we’ve restructured the organization over this past year. We spread responsibilities and are operating well with a seasoned and strong team that has fewer executive level positions than a year ago.
And again, what we can control risk management, we’re taking risk off the table. Our procurement group for propane has hedged 85% of our retail fixed propane customer demand and has secured that at approximately $0.60 a gallon, compared to the current market of around a $1. They’ve also secured a 100% Blue Rhino needs for fiscal 2018 and two-thirds of 2019s’ anticipated demand secured at again approximately $0.60 a gallon.
We believe that these and other initiatives are and will continue to make a difference in our ability to drive cash flow growth, and we think its showing off already. Typically, we would not again give results for the first month of the following quarter on this earnings call, but for today we thought, it was important that we did so. Again these are results that come from the company that have not reviewed by our external auditor, but again they would come from the same systems that ultimately show up in the Q1 information that you’d see in our Form 10-Q.
As we look at November, it was a strong month. So as we move in to second quarter, what we saw in the first month of that quarter, we sold over 69 million gallons of propane, that’s almost 50 million gallons more than last year’s November, exclusive of wholesale gallons.
Margins per gallons were $0.728 for the month, that’s approximately a nickel less than last year’s November level. However the trend over the last 20 days of the month, showed a consistent trend of strengthening in margins per gallon. We like the trend.
Gross margin dollars were approximately 50 million that’s nearly 8 million more than last year. So again, November a very strong month, doesn’t make a quarter or second quarter, but again off to a strong start and it was broad based all regions contributed. The positive results we’ve seen are not isolated to any one region.
So again, we are not waiting for colder weather. We are doing things in areas that we can control. So that our future is less dependent on needing a colder winter, and we are making progress on our initiatives each of which will grow EBITDA from the 230 million that we recorded last year. And again that assumes no effects from colder weather this year of last year’s levels. Colder weather would be upside with what we are currently accomplishing with these initiatives.
So in summary, we are pleased with a strong start to our second quarter. We’re working on many initiatives that are EBITDA accretive, even without the benefit of weather. All of our employees have positive morale, they are focused on moving forward and growing cash flow to the benefit of our lenders and shareholders. And we are setting a foundation that will position the company for a success in fiscal 2018 and beyond.
Here at Ferrellgas, we believe in our business and our future providing essential must have, but not nice to have products that keep people warm, keep their families fed and support transportation of goods that contribute to our economy.
And with that, that completes our comments and we have Jim back on too. We’d be open to Q&A at this time.
[Operator Instructions] and our first question comes from the line of Jeremy [Jonane] from JP Morgan. Your line is open.
This is Charlie in for Jeremy. Sounds like you’ve made some pretty good strides on growing your market share. Could you just elaborate on kind of where you’re winning this market share and how you kind of balance that with respect to your margins? And then going further, where you’re targeting future growth in respect to cost and some of the new facilities you are putting in place to lower those cost.
Well I can probably take that Doran. It’s a broad based, what we talk about, broad based push or more customers who will pay the bills, that’s the way I put it. And so we can do that with the same equipment, same truck, same plant, same everything. The reason for the Rhino plant is that we’re going to be able to save money. These original plants that we had and still do have and that is operating today, are very large plants that cause long hauls for the first drop point.
In other words, we put them in box very (inaudible), take them out and put them down on the ground. That cost us a lot of money, because we are centralized, more centralized than these big plants. The small plants will cut that cost significantly. So that’s basically what we are spending money on. The other thing we’re doing is probably what you would say were costing ourselves money by setting more customers up. And I’m not too worried about that.
So it’s a broad based, everybody onboard, or as high. Everybody loves this program, it’s going to work and just have to watch it do that.
How do you even know these, I know that’s kind of a smaller portion of your footprint. Is that pretty heavily concentrated area to win market share or is that somewhere where you’re looking at.
You’re talking about the northeast?
Yeah, we don’t have any part of the country out of our picture right now, including the middle part of the country where (inaudible). But there are a lot more people on the east coast and a lot more people on the west coast and we know that. So we’re just going after customers, and I can’t tell you exactly how that’s going to work. But we are not holding back.
And our next question comes from the line of Ben Brownlow from Raymond James. Your line is open.
I just wanted to touch on the midstream segment. The elimination of the barge lease, can you get a little bit more around the timing of that and kind of savings that you expect?
Jim I could take that one. The barge transaction essentially recall that when we were railing crude from the Bakken out to the east coast the last leg of that was ultimately to put that oil on to a barge down the Delaware river and ultimately get it to the Monroe facility. That lease, once that program essentially went away, that lease presented us with a $7 million EBITDA headwind. So we were able to negotiate out of that starting in the first quarter, which will obviously be an economic benefit to the Bridger business in terms of avoiding that EBITDA headwind by exiting that lease. So having in the first quarter, the 7 million I referenced would be included and reflected in that $230 million number that we had last year, that will be a part of our improvement this year that we are referencing earlier in the call.
Just thinking about within the midstream segment that gross profit around a barrel, the crude sold in the quarter and kind of that gross profit per barrel falling year-over-year, can you just talk about that dynamic there?
I’m sorry, can you repeat the question.
Yeah, on the crude barrel sold in the quarter, just thinking about the decline in gross profit on this barrel sold. Can you just talk about the pricing dynamic and what led that year-over-year decline?
Basically it’s going to be a reflection of the commodity price environment. A lot of what we saw there was at the Bridger Energy business, and has to do with that business where they are buying crude and selling crude and making money off of each barrel. And based in the current commodity price environment where commodity prices are where they are today, we’re just seeing skinnier margins on that side of the business.
And just one last one from me. On the maintenance CapEx of 8.7, I know some of that was pointed out in the 10-Q as being the delivery of new trucks. Can you just talk about expectations going forward around maintenance CapEx. Thanks.
We can, first of all I can tell you that the fleet, people on the field appreciate the new trucks. I know we’ve received cars, Mr. (inaudible) see the car from one individual that was basically said thank you for the new truck and its helping us be more efficient in terms of getting the right kind of truck in the right market. So, for example, in areas like Denver where it might be more urbanized having the right trucks, smaller truck, more maneuverable truck to make us more efficient, and things like Blue Rhino. I mean that’s the type of thing that we are trying to do as well, is not only keep the fleet moderate, but then make sure that the fleet reflects the right kind of truck or the geographic area that they are in.
So in terms of maintenance capital as we go forward, so for the first nine months – first three months we saw it at 8.3 million. I would not expect that it’s going to be that run rate by the end of the year it should be lower, because we’ll end up leasing more in the future as oppose to buying as we did perhaps a bit more than the first quarter.
[Operator Instructions] your next question comes from Mike Gyure from Janney. Your line is open.
Thanks for giving a lot more details on some of the initiatives that are going on. Can you maybe talk a little bit Doran about some of the capital needs you have related to those initiatives and maybe how we should think about that and maybe in connection with this year versus last year or maybe trying to change the metrics around that?
Let’s start with the recent acquisitions that we had here in the first quarter. So we acquired three small propane business, none of which were individually material, but they were accretive, they were above our cost of capital, they were good, solid additions to our geographic foot print. You saw the acquisition capital included in the cash flow statement of the Form 10-Q, and so we’re continuing to look for opportunities like that, that size change to fit kind of where we are at right now.
And then on the Blue Rhino side, with the plants, we think about a plant in California, we think about a plant in Alabama. We are anticipating those two plants that we were talking about previously to come on line and around the May of fiscal 2018 timeframe. Those plants have roughly a three year payback and they might be around 3 million, in Alabama it might be around a little more for that. In California, to get our plant up and running in Northern California to service that area of the market, versus serving all of California or the Southern California today.
Again the payback on that, what I would call reasonable level of capital investment is quite good, and the returns are solid. I would probably highlight those as two of the bigger areas of potential CapEx going forward from a growth perspective.
And then in your initial comments you talked a little bit about sort of goals to reduce debt for a reasonable, over a reasonable period of time. I guess what are, kind of thinking maybe the next 12 months do you think is realistic based on your working capital needs and for your capital needs on some of the growth projects.
So it’s worth thinking about the debt right now. Clearly, priority one is to get the credit facility renewed and then we’re also thinking about things with our bond holders as well, and the maturities that we have starting in 2020. The overall levels themselves, we are focused on decreasing or de-levering over a reasonable period of time. To do that we want to grow cash flows as we’ve talked about, and again seeing progress as we’ve seen here in November.
We’re also, as Jim talked about, taking a look at our asset portfolio to make sure that from our perspective we have highest and best use of our assets, taking a look at things like rail cars or access tractor fleet. Those are going to be opportunities for us to de-lever. As we go forward, we’ve also previously talked about publicly the Global Products business, which is appliances, utensils as it relates to barbecues, patio heaters, for example. We are also looking at that business in terms of marketing it for potential sale.
And then I would also say that we’re looking to reduce the amount of credit that we have that Jim talked about it earlier Bridger Energy. There is a significant amount LC support that’s required by that business to buy crude essentially to support that business, and we are looking at ways to reduce the amount LCs to support that business model right now, and which should bring down obviously our level of debt required in the new credit facility.
So think about the next year, we’re currently at 7.57 times debt-to-EBITDA. We are forecasting that that would continue to strengthen throughout the course of the year. We still have a goal ultimately over a reasonable period of time of getting that down in to the call it 4.5 times ranges or so. And we’ll be working aggressively towards that. But more to come I think on some of the debt reduction initiatives as we make progress here later this year.
There are no further questions at this time. I’ll turn the call back over to the presenters.
Okay. Well with that we will say thank you again for your time and interest in Ferrellgas. Again as you’ve heard today, we have a lot of initiatives and the key message is that you should walk away from today or we’re not sitting back and waiting for a cold winter. We are doing things to increase the level of EBITDA from last year’s EBITDA, without the benefit of weather and we’re seeing some results.
And so as we move forward, again we believe in the company, we believe in the prospects for the company. We are in a must have industry, the product that we sell or the products that we sell and services that we provide and the employees that are behind all of that are all pulling at the same end of the rope and moving forward. We’re looking out the front of the windshield as oppose to the rearview mirror and moving forward. And our morale is high and we are optimistic about a very good fiscal year ’18 and positioning ourselves for what lies beyond.
So with that I complete my remarks. Again thank you for your time and have a good day.
This concludes today’s conference call. You may now disconnect.
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