Ferrellgas Partners L.P (FGP) Q2 2018 Earnings Conference Call March 8, 2018 10:00 AM ET
Doran Schwartz - CFO and SVP
Jim Ferrell - Chairman, Interim CEO and President
Tarek Hamid - JPMorgan
James Spicer - Wells Fargo
Mike Gyure - Janney
Good morning. My name is Sherrill, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second 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.
Mr. Doran Schwartz, Chief Financial Officer, you may begin your conference.
Thank you, Sherrill and welcome to our second quarter earnings call. Thank you for joining us. I expect that everyone has seen our press release announcing our second quarter earnings and operational results. I'd like to remind all of you that some statements made during this 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. The risks associated with forward-looking statements have been outlined in the earnings press release and our SEC filings and we incorporate those for this call.
This conference call will also contain non-GAAP financial measures. The reconciliation schedules for these non-GAAP measures as comparable to GAAP measures can be found on our earnings press release which is available on our website.
We are excited to report significant progress on our strategies of growing our business and our cash flows, while deleveraging and strengthening our balance sheet. Highlights include, our internal cost reduction and customer growth initiatives, coupled with favorable weather compared to last year in November and January have grown cash flows with our trailing 12 month EBITDA increasing by $15.6 million and now is at $243 million over the past 12 months.
With respect to deleveraging, we recently reported execution of the sales of both Bridger energy and 1072 railcars of Bridger rail. Since January 1 our outstanding debt and letters of credit on our credit facility have been reduced by approximately 150 million, primarily through the effects of asset sales and stronger company performance.
Our credit metrics are trending stronger. Our leverage ratios strengthened from 7.57 times at the end of Q1 to 6.96 times currently and our interest coverage ratio improved to 2.14 times compared to 1.93 times at Q1. Significant progress in only one quarter.
As we look at the positioning of our company to build on our current momentum in the future there is no greater priority in our capital structure right now than our focus on completing the replacement and/or renewal of our cash flow revolver and AR securitization working capital facilities.
Now we've not yet completed these transactions. However, we have made significant progress and we have confidence that we will come to you very soon with a multi-year solution that will provide the company with significant liquidity, more flexible covenants and letter of credit and revolver capabilities as we enjoy today.
The actions we are taking now in fiscal 2018 will continue to strengthen the balance sheet, provide us with a foundation of liquidity and access to capital allowing for focus on growth and creating shareholder value over the long-term.
So let's talk a little bit about the consolidated results. As detailed in our Form 10-Q, that was filed this morning, our second quarter adjusted EBITDA was up over 15% to $120.6 million compared to $105 million for the comparable quarter last year.
Adjusted EBITDA for our propane segment was $130.5 million and was positively impacted by 16% growth in gallant sold, volumes benefited also from our strategy to grow our customer base and market share and weather that was 12% colder than the prior year period.
Propane margins improved from the first quarter and only slightly lag those of the prior period despite the wholesale cost of propane averaging approximately 45% more than the prior year period.
Total operating expenses rose driven by activity to deliver significantly more gallons of propane. However decreased doneness cents per gallon basis from $0.48 TPG to $0.46 TPG reflecting efficiency in our operations.
On the volume side, propane sales volumes for the second quarter were 310 million gallons, up 42.3 million gallons or 16% from the 267.7 million gallons a year ago. As to our gross profit, total gross profit for the quarter was $264.4 million, up almost 12% compared to the $236.5 million in the prior year's first quarter, second quarter, sorry.
Operating and general administrative expenses, our operating expense for the quarter was a $123.7 million, up from the $112.5 million during the quarter last year, primarily due to the incremental expenses associated with the increase in gallons sold. But again, lower on TPG basis as we focus on providing world class customer service on an increasingly more efficient basis.
Interest expense, interest expense for the quarter was $42.7 million, that's up from $36.8 million a year ago, similar to last quarter. This is primarily due to the higher interest rate incurred from the $175 million of MLP notes issued last January.
On CapEx, our maintenance CapEx was $4.6 million for the quarter and it's $13.4 million year to date, largely tied to maintaining our vehicle fleet. Growth CapEx was $9 million for the quarter and $19.3 million year to date, primarily related to acquisitions, as well as growth stemming from activity to gain customers at our tank exchange and retail propane businesses.
Distributable cash flow on a trailing 12 month basis was $74.4 million equating to coverage of 1.86 times, that's up from $64 million or 1.61 times at Q1 and based on our forecast we expect the coverage ratio to continue to increase.
Liquidity and credit metrics, at the end of the second quarter the company's fiscal year, as I mentioned it before our leverage ratio improved to 6.96 times reflecting increased cash flows and execution of deleveraging activities. This level was lower than the 7.5 times ratio we reported at Q1. This execution of our plans also positively moved up our interest coverage ratio now at 2.14 times, up from 1.93 times at Q1. Based on our current forecast, the leverage ratio is expected to continue to strengthen and decrease throughout the fiscal year.
At this time, I'll turn the call over to Jim for his comments. Jim?
Morning, everyone. I'm very pleased with our company's performance in the second quarter. Just as important when looking forward we are committed to making the necessary decisions that will strategically and operationally position our company for long-term success.
Customer growth, over the last few years we have focused on growing our customer base, density is important. A truck that can deliver more loads to the neighborhood is more efficient than travelling the same distance to fill one or two orders. It's working.
Our retail customer count is up nearly 9000 or 1.3% over the prior year through both acquisitions, but mostly through organic growth and we continue to see a very strong trend in net tank set activity.
And tank exchange is growing too, as we aggressively go after market share. Our Blue Rhino exchange selling locations have increased by nearly 3100 locations since this time last year.
Volume growth has been impressive with total volumes up over prior year by $42.3 million or 16%. Weather was 12% colder for the quarter, which is a positive factor. But clearly a meaningful piece of this growth relates to our customer growth strategy and tank exchange has increased its volume by 15%.
Margins improved from Q1, however, they were decreased slightly on a cents per gallon versus prior year, one and a half cents per gallon lower. This reflects our strategy to win new customers in a rising propane cost environment.
Customer sales mix matters too. For example, although residential propane margins held last year on higher sales, we experienced a significant increase in agricultural related sales, a good business for us that has a high volume, lower than residential margin profile.
We continue to make progress on tank exchange margin improvement initiatives. Our new Alabama Blue Rhino filling plant is scheduled for opening in fiscal Q4 and will eliminate 9300 mile routes saving 400,000 miles on our delivery fleet annually.
Our California plant is also scheduled to open in Q4 and will eliminate 6300 mile route saving 450,000 miles annually. We expect both plans to save $1 million to $1.5 million annually generating a quick payback on our capital investments.
We're evaluating additional plants in the north east and north central regions that will also deliver similar returns on the CapEx. We are also benefiting from initiatives to buy paint, valves and tanks more effectively and efficiently. We have stabilized and are positioning for growth at our Bridger midstream business.
With the recent momentum of drilling in the key basins we operate in and the company is positioning itself for more oil to be transported more frac sand to be hauled and more salt water to be disposed off. Sand hauling is a relatively new offering for us. Last year in Q2 we hold no sand. This quarter we hold 43 million tons with additional potential for additional expansion as drilling levels increase in Texas and Oklahoma.
You've also seen our execution on debt reduction initiatives. Strategically we have streamlined our midstream operations by selling subsidiaries of Bridger Logistics, although these transactions resulted in a non-cash charge during the quarter. We view the sales as a positive step forward by meaningfully reducing credit requirements of the company with only minimal impact to EBITDA.
The sale of Bridger Energy will reduce our needs for the letters of credit by approximately $80 million and the sale of over a thousand railcars reduced our outstanding debt by nearly $50 million. Both of these transactions actually save us money.
With our EBITDA growth the execution on these transactions improves credit metrics and our balance sheet. We noted this morning in our Form 10-Q that Randy Shaw, our Senior Vice President of Propane Operations has announced that he is retiring. Randy has been with us some 28 years and we thank him for the valuable contributions he's made to the company and we wish him well in the future.
We have eight regional - seasoned regional vice presidents who previously reported to Randy will now report to me. This great group of veterans collectively have almost 160 years of experience with power company. They will continue to do what they have been doing all year, grow our business, serve our customers, develop their teams and ultimately generate value by growing cash flows. After this call I'm going right back into the last day of a weeklong meeting with them. I'm pretty sure if you asked they would tell you that we're on a roll.
In closing, I would like to emphasize that our company has momentum. We are making the necessary decisions to position ourselves for the long-term. We are executing well on the plan, but there is always more to do. Morale is high. Employees are working hard to serve our customers and to grow our business.
At this time I'll turn the call back over to the moderators, so you can address any questions that might come from the group. Thank you.
Thank you. [Operator Instructions] Our first question comes from Tarek Hamid, JPMorgan. Your line is open.
Yeah. Revolver refinancing, could you talk a little bit more about your plans. You know, is plan to go with an AVL facility plus the term loan or secured bond or as the plan to kind of stay with the existing revolver structure?
Yeah, the plan is to move forward with renewal of the AR securitization facility. We like that facility. It's in place, the infrastructure build-out, provides us with low cost access to - access to low cost capital. So our plan is to continue to move forward with that facility.
And then in terms of the current revolver that we have, that will likely take shape in the form of a revolver component that will provide LC capacity and daily settlements like we enjoy today and then there will likely also be a term loan component which proceeds from that would be utilized to repay outstanding borrowings on our current credit facility.
Got it. That's helpful. And then you also have been very successful on the Astill [ph] front in the last few months kind of anything else on the docket that we should be thinking about in term of source of proceeds or you mostly done at this point?
I'd highlight the progress we've made has been significant. We talked last quarter about global products and that's a related business on our propane side of the business that is currently in the market. We are marketing that business right now, so we are executing on. We talked about first quarter there.
And so you know, really I'd highlight that it at this point that we continue to move down the path of making sure the assets that may be underperforming or non-strategic that we're taking a look at terms of helping us with our deleveraging efforts and streamlining the strategic story of the company.
Got it. Just last one from me, those G&A picked up slightly this quarter, was that temporary or is that function of hiring over the last year or so?
Yeah. So we view it as temporary, it's really tied to some of the legal cases that we have that we're working on, also as those cases wrap up and you would have seen in the reconciliation of our net income to adjusted EBITDA that we had netted out, some expenses which would essentially explain much of the increase there.
That those legal expenses would essentially become not recurring, it just be one time. So it's primarily tied to that. Outside of that actually from a DNA perspective, we are down from last year.
Got it. That's very helpful. Thanks for taking my questions.
You bet. Thank you.
Thank you. Our next question comes from James Spicer, Wells Fargo. Your line is open.
Hey. Good morning. You announced the sale of Bridger Energy back in January and you talked about the benefit of the reduction in letters of credit. It looks like you actually had a quarter over quarter increase to $188 million in letters of credit at the end of the fiscal quarter. So just wondering if there's a timing issue there, you know when we're going to see that LC benefit?
Great question. It is a timing consideration. So we closed on Bridger Energy in January and essentially with letters of credit that that are tied to oil purchases and settlements on the oil side for January activity happened in February. Obviously after the balance sheet date. So the 188 million has come down significantly.
We continue to work on it, we're not quite there. We're going to reduce by $80 million eventually at the time we've eliminated all LCs tied to Bridger Energy. We're over halfway there now. So we've reduced over $40 million of $80 million outstanding in February.
Okay, that's very helpful. And then presumably freeing up that LC capacity allows you to run the business with a smaller revolver. And you talked a little bit about sort of what the strategy was there. But just wondering if you could provide any color as to what size of facility you think you need to run the business?
Yes, that's a great question. We've had a lot of conversations internally working with Jim and the team as well as the board to try and right size that. So we think about it you know, to the extent that we can secure liquidity, we are going to secure it. And to the extent that we can do that at a reasonable cost, we're going to secure it.
So even though if you take a look at our 575 million facility today and you say okay well, you had 190 million of LCs, there's been reduced by 80 million and you know you've sold railcars for $50 million and you know, you add all that together, you're just kind of net that off to the 575.
You could do that, but we are thinking about a facility that's closer to the size of facility that we have today because we're focused on liquidity to position the company going forward be able to run our business with more flexible covenants and breathing room, so that we can take advantage of the opportunities that we see in front of us, as they arise. And so that's how we're thinking about it.
Okay. Great. And you know, another one just on the sort of a debt solution here you talked about a multi-year solution. I'm just wondering whether that you know, that –whether that would include addressing the bonds and any sort of fashion or whether that's really step two at this point?
Yeah, good question step two. I would just say - I would just say that, as we think about the 2020 to 2023 capital maturity the bonds you know, obviously we think a lot about those bondholders. So we want to do what's right for them just like we want to do what's right for the bank community, just like we want to do what's right for the unit holders.
That being said that, that is going to be something that you'll hear about from us as we think about that after we get the working capital facilities renewed, that is priority one. And I will also say that as we think about the future you know, as we grow EBITDA you know, we've got momentum to Jim's point, as we grow EBITDA, and as we delever, and we improve our credit metrics and we strengthen our balance sheet and we streamline the company strategically with underperforming assets having been monetized, as we move forward all that provides additional opportunities for us to be thoughtful about how best to continue to work effectively and constructively with our bondholders, as well as our bank group, as well as our unitholders.
Okay, that's great. I'll leave it there. Thanks very much.
You bet. Thank you.
Thank you. And our next question comes from Merrick Zack [ph] Citigroup Group. Your line is open.
Hi. Good morning, guys. Can you give us a gauge as to how your market share capture - approach has been progressing and maybe what level of customer growth you've seen year-on-year related to that strategy.
And then also when do you think you might shift strategy a bit and start to increase focus on unit margins again and what would you be targeting there?
You know, were after every customer who will pay their bill and every customer who will make us [Technical Difficult] I can tell you we're focused on bucketed margins on what we can make in different groups but we're looking for every customer we can get. And it really helps lower our expenses because we're filling in the routes where we're just thinking more to do with the vehicles with people we've got.
So it's - I don't think you'll see us retreat from that. I mean we've got an active acquisition program as well in the retail side, that's also a fill in where we can actually either - mostly it will be something that probably merges together with what we already have.
We're more interested there in a solid business that we don't have to worry about. We've got a long history of doing those. What we're doing is running a business for the long term and we're looking for - we don't want customers that are not going to pay their bill, but we do want customers who will give us their money and that we believe we can make a profit.
Okay. And related actually to your debt and leverage situation, I just wanted to clarify that. You know, you said you're having conversations with your debt holders and does that include also the 2021, 2022 bondholders as well or this more - I know it's Phase II, but is this more little bit focused on just the 2020s at this point?
Yeah. So just to clarify, I want to make clear because we talked about on the first quarter call referenced to discussions with bondholders. We are not in discussions with bondholders about specific ideas of any changes to how the bond indentures look today you know, that that is not happening.
I'd say we're visiting the bondholders. It might be kind of a general business update of what's going on the company. So I just want to clarify that that comment around discussions with bondholders and what that means from our perspective.
As we think about the different indentures, we would not think about any one any differently from other bond indentures, we think about it collectively from the 2020 all the way to the 2023s.
Okay. Great. Thanks for clarifying that. That's all for me.
Thank you. And our next question comes from Mike Gyure from Janney. Your line is open.
Could you guys maybe touch on kind of the volume or margin trends that you're seeing thus far this quarter, as you move through February?
We talked about that. We've got volumes up nicely and they continue to be up some of it as we said relates to weather. But we've got a lot of activity. It's a matter of more customers, tanks sets. I talked about net tank sets, we always pick up a few. But the question is, are we net setting tanks and we are.
So customer pick up volume, I can tell you that it it's too bad you can't sit in on the regional VP meeting here or either of these guys that are just as fired up as you'll ever see. I mean, they have not been out in the field lately. Business is good. Everybody's happy, even where it's been a little warmer than normal. Business is good.
Great. And then maybe Doran on a financial question, he segment disclosures in the Q within the propane segment there's a line item other gas sales, it looks like it's about $46 million versus about $21 million last year, what's actually in that? And what's driving the growth I guess.
Okay. Well, we are going to find your answer Mike.
Sorry about that. We take it offline. That's fine.
Yeah. Maybe we do that Mike if you don't mind just - could be helpful to get the page number you're looking at and the like. So…
Yes. Okay, afterwards. And then maybe just an update on kind of your spending goals for the remainder of this year?
Yeah. So maintenance Cap X you know, at the end of the first quarter we talked about that we were at about $9 million in maintenance capital and I think the conversation was is that the run rate for the company going forward I would say and we said no and that's translated In the second quarter we're just above $4 million.
And I would anticipate that you know that we're going to end up from a maintenance capital perspective you know more on a run rate of the second quarter than the first quarter. And that doesn't mean that we're reducing the quality of the fleet, our fleet right now averages around call it nine years on our Bobtail [ph] fleet for example.
And so you know for a truck that last 15 years sometimes that's not a bad age in terms of the fleet, but we're continuing to modernize as well. But largely through leasing programs.
On the growth side, what I would say is, it's going to be somewhat dependent upon our ability to continue to close small bolt-on type transactions throughout the rest of the year. You know, today we spend $19 million on growth capital, portion of that, about half of that is the bolt-on acquisitions we announced in the first quarter.
And then I would also say just our ability to continue to grow on tank exchange with 3100 new locations all of that requires capital, all that requires tanks and units to be able to fill the cages that we're putting into place. So you know, the momentum that we see there is all tied to grow and grow EBITDA that we're seeing and then also just the net tank set activity that we're seeing on the retail side that all takes some capital to get those tanks out into the field set our new customer locations, so the customer growth that we've seen here we're continuing to see strong trends in that tank set activity. And so you know, that will take some capital as well.
So maintenance wise you know, I see it kind of running along what we saw in the second quarter more than the first quarter. The growth is going to be somewhat dependent upon our ability to continue to execute as we have today.
Yeah we were talking about per tank sets, but the Rhino is a big focus for us. Blue Rhino is the brand of tank exchange. It's really the only brand that is separate from the name of a company. So we're pushing that hard. It's not difficult to say. And we are - it's sounds like we've never done that before, but we've grown in what we would say box store sales.
We're growing now in convenience store sales and we're growing in every segment with a renewed focus on sales. We've got - we want that market share back. It's a good profit market share for us. The guys will love it. It's - that we've got a big focus on the fact that. As Doran says cost us little money to set up the cage and the fill the bottles.
Great. Thanks very much guys.
You bet, Mike. Thank you.
Thank you very much. That concludes the questions in the queue at this time. I'll turn the call back over to the presenters.
Well, what I can tell you is that we're about as excited as you can be about the future for the company. And I was just commenting about the regional VPs. They're all seasoned guys. They know what to do. We're building a bench under them. We're redoing a lot of things out there that get them excited. They know how to run this business. We've got great - we've got growth everywhere. So it's all good.
Thank you everybody we appreciate your interest in Ferrellgas. I'd echo Jim's comments, I really think that the company is making a lot of great decisions, a lot of momentum behind the company as we look forward here we've got execution in front of us which we will communicate to you and update you on as we go forward around credit facilities and the like.
Look for that from us. But again, you know positioning for the long term and delivering value back to both our lending community, as well as our equity unit holder community over the long term.
I would remind you that some little over 20% of the company is owned by employees. We intend to restore their value because that we saw it by the decrease in the value of the units and the distribution. We're focused here for them and they know that. It's - we're doing everything we can to have a long term life, some of the things may decrease our - may decrease our earnings. We're not really focused on that. We're focused on the future, that's where we're going. Yeah, focused on today.
Thank you. Thank you, everybody. Operator, at this point we've concluded our remarks. Thank you.
Thank you very much ladies and gentlemen for taking part in today's conference. You may now disconnect.