Ferrellgas Partners, L.P.

Doran Schwartz - SVP and CFO James E. Ferrell - Chairman, Interim CEO and President

Tarek Hamid - J.P. Morgan Gregg Brody - Bank of America

Thank you and welcome to our fourth quarter and fiscal year-end 2018 earnings call. Thanks for joining us today.

Before we get started, I'd like to remind all of you that some statements made during this call may be considered forward-looking, and that 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 Securities and Exchange Commission.

So, moving onto our results, as detailed in our earnings release and Form 10-K that were filed this morning, full-year consolidated adjusted EBITDA was $242 million, a 5% increase over last year's $230 million. Exclusive of results from the non-strategic asset sales completed during the year, adjusted EBITDA was $227 million, an increase from $219 million the prior year.

For the fourth quarter, our adjusted EBITDA was $8.1 million compared to $19.2 million for the comparable prior-year quarter, reflecting our push for market share. As the volumes and margins for the year, we grew our propane business.

Adjusted EBITDA for our propane segment was $276 million and was positively impacted by 11% growth in volumes, with sales of 877 million gallons, compared to 791 million gallons a year ago. Volumes benefitted from our strategy to grow our customer base and market share and weather which was 17% colder than prior year yet 4% warmer than normal.

We estimate that approximately one-third of our gallon sales growth is due to weather with the balance due to growth in our retail customer base and in our tank exchange business. Propane margins were lower than prior year by 3.3 cents per gallon.

Residential margins were higher however, more than offset by lower industrial commercial and tank exchange margins. In addition to effects on our margins from competing for market share, margins were also affected during the year by wholesale cost of propane which averaged 44% higher at Mt.

Belvieu, Texas and 37% higher at Conway, Kansas when compared to the prior year. Propane sales volumes for fourth quarter FY 2018, typically our lowest volume quarter, were 148 million gallons, nearly unchanged from the 148 million gallons a year ago.

Tank exchange volumes were 6% higher for the year, reflecting over 5,000 new exchange locations. This increase was offset by lower retail sales volumes, primarily residential, which reflects a colder April this year that pulled sales volumes into the third quarter when we compare that to results from last year.

Gross profit, total gross profit for 2018 was $775.5 million compared to $739.4 million for the prior year. And for the fourth quarter, gross profit was $136.8 million compared to $147.9 million for the prior year's fourth quarter.

Operating and general administrative expenses on a consolidated basis are, operating expenses for the year were $471.7 million compared to $431.8 million for the prior year. Those balances would include approximately $30 million of OpEx that went with the Bridger sale and $15 million of OpEx that went with the Global Products sale.

Net of those amounts, the $471 million would be approximately $425 million for FY 2018. Now the increase in OpEx is primarily due to additional expense associated with the increase in trucks, drivers, and customer service resources to deliver the 11% higher gallons sold in 2018 and also grow market share.

For the quarter, operating expenses were $121.1 million, up from $109.5 million for the comparable prior year quarter, and this increase relates to our initiative to grow our customer base. We are reversing a previous strategy to consolidate many of our selling locations, now opening up some of the previously closed service units, so that more current and potential customers see our name, our trucks, and our people in the communities that they live in.

Jim will talk a bit more about that later. For the fiscal year 2018, general and administrative expense was $54.4 million, compared to FY 2017 of $47 million.

This increase is primarily associated with incurred legal fees. Net of those fees, our G&A costs were down 7.5% year over year, reflecting recent cost reduction efforts, primarily at the executive level.

And for the fourth quarter, G&A expense was $14.7 million compared to $13.1 million last year, again reflecting increased legal fees in the current year. Interest expense for the year was $168.5 million compared to $152.5 million in the prior year.

The increase is due primarily to full year effects of the $175 million of 8.625% MLP bonds we issued in January of 2017 and higher rates associated with our new working capital facility. This includes the effects of the recent upward trend in LIBOR rates as well.

For the quarter, interest expense was $44.6 million, up from $40.4 million a year ago. On the CapEx front, our maintenance CapEx was $27.6 million for the year and $8.3 million for the quarter.

For the year, the largest contributor to maintenance capital was tied to maintaining our vehicle fleet. Growth capital expenditures were $52.5 million for the year and $16.4 million for the quarter.

Acquisitions accounted for another $18 million of capital investment. For the year, growth CapEx was primarily related to five accretive acquisitions, investment into two new tank exchange cylinder plants, required investment related to adding over 14,000 new retail customers, and investment into an additional 5,000-plus new tank exchange locations that were set during the year.

So, now as we look forward to FY 2019, I want to give you just some perspectives as we're seeing things now that we've reset the Company post sale of the Midstream and Global Products business as a single industry propane company. We're using – if we use the 228 million FY 2018 adjusted EBITDA from our go-forward operations as a starting point, looking at FY 2019 and beyond we're focused on growth and continuing to gain market share.

We had success again in exiting Midstream and Global Products and we're focused on being a propane-only company again. Our assumptions in our forecast for the weather, we're now using a 10-year NOAA average.

This is a change from the past where we used a 30 year average. We found that the 10-year average correlates better with weather in recent years.

And based on this assumption, weather in our forecast would be relatively consistent with what we saw in FY 2018. We're forecasting retail customer growth in the 2% range.

That's similar to the growth that we saw in FY 2018, which was 2.2%. And then also we're seeing tank exchange volume growth driven by additional tank exchange location set in FY 2019.

For margins, we are forecasting a similar margin per gallon to what we realized in FY 2018. That said, I would say margins are affected by several factors that we'll have to keep you informed on as we go through the year, including the wholesale cost of propane which as I mentioned is significantly higher entering FY 2019 than it was at this time last year.

It's also affected by customer sales mix and the fact that we operate in a very competitive industry to keep existing customers and continue winning new customer business. Capital expenditures are forecasted in the $50 million to $60 million range.

Our forecast does not include any capital associated with acquisitions. That would be incremental to our forecast assumptions.

So, that's a sneak peek at what we're seeing as we look at FY 2019. And at this time, I'll turn the call over to Jim for his comments.

Jim?

Good morning. FY 2018 was a year of significant progress for the Company.

We had an enormous amount of activity and many achievements during the year. First, as Doran said, we have executed our strategic decision to return to being a propane distribution company.

The sale of our Midstream operations and the Global Sourcing business helped us raise approximately $160 million of cash over the course of the year and reduced our outstanding letters of credit by $80 million. The majority of the Midstream operations were closed on July 31 for approximately $60 million and the Global Sourcing transaction closed on July 27 generating about $27 million.

We have $120 million of cash on the balance sheet. This coupled with closing of our two working capital facilities in the fourth quarter leaves our liquidity as good as it has been in years.

This positions us well for the future. Customer growth continued to be an area of focus.

This year we grew by over 14,000 customers or 2.2%. We continue to focus on adding customers and improving our density, so that we don't have to travel as far between stops.

Our regions are looking at routes where we could expand our market share and where we will work with sales and marketing departments to reach out to prospective customers in those areas. As you have heard, operating expenses were higher in the fourth quarter as a result of this effort.

We are making decisions to open new locations in certain markets, some of which we have historically closed. These locations require trucks and drivers and customer service reps.

There is a balance to the number of locations we have relative to the operating expenses required however to support each local customer base, and we are mindful of that. However, being in front of more potential customers by setting up shop in the communities in which they live, we'll build our customer base over time and deliver growth and value to the Company.

And we continue to see growth in the tank exchange business. Blue Rhino is the only real brand in the industry and we continue to push that.

We grew the volumes by 6% to 7% during the year and we are forecasting continual growth in the FY 2019. In the short term, we are focused on margins in this competitive business.

However, our margins are strong relative to other customer categories. We are seeing trends in the price of wholesale propane, as Doran mentioned, that could impact margins but our initiatives of building new plants will help boost net margins because we will reduce our operating expense.

The plants in California and Alabama are now online and put us closer to the customers and their service territories. We have an additional two plants that are being planned for FY 2019 that will help us reduce costs and become more efficient in the Northeast and Midwest areas.

For the long term, this business is strategic and being positioned for long-term growth. We want to continue being a consolidator in what we know as a very fragmented industry.

We were successful in 2018 in acquiring five accretive businesses but we need to buy more, and integrating those companies is something we do very well. We've bought over 300 companies into the Ferrellgas family over time.

The opportunity for future growth through acquisition is significant. We are the second largest propane distributor in the country with a good footprint and with an estimated 8% market share.

There is significant opportunity here that will accelerate our growth rate. Now I'd like to give you an update on the refinancing activities because we have credit facilities, called bonds, as well as other considerations like the cash distribution to unitholders.

First, I will highlight that we closed on two working capital facilities during the fourth quarter. Our five-year $575 million secured credit facility closed on May 4 and our upsized $250 million accounts receivable securitization facility closed on the 14th of May.

Both work together to provide us with access to working capital that we need to run and grow our business. And we continue to work on refinancing options related to our bonds.

We are evaluating several options including an exchange of our MLP bonds for OLP bonds, funding secured debt at the OLP to refinance MLP bonds, or even broader refinancing solutions that include more of our capital structure. As you know, we have not reached an agreeable solution with our MLP bondholders, so our work continues there.

I would add that we are not interested in doing a deal for the sake of doing a deal for those bonds, or for the MLP bonds for that matter, if it doesn't position the Company for the long term. With recent asset sales contributing to cash on the balance sheet at year end of about $120 million, and our fourth quarter closing on our new extended working capital facilities, we have liquidity.

We generate cash flow. We have real opportunities to continue to grow this business.

So it is worth it to us to make sure that we find the right deal on behalf of our employee owners and all of their investors. We have been transparent with the market that our basket in the MLP bond indenture which has allowed us to pay distributions to date is now exhausted.

A distribution payment we made to unitholders a couple of weeks ago on September 14 will be our last one, for a while anyway if we do not find an acceptable solution to the MLP bond covenant. We are focused on finding the right long-term solution for our capital structure.

We will keep you informed as we move forward, and for today I'll just leave it at that. As we transitioned out of FY 2018 and moved into 2019, we have become once again a pure propane distribution company.

This is a great industry and we have a great company. We generate significant cash flow.

We have liquidity. We have opportunities to accelerate our growth organically and in participating in the consolidation of this industry.

We have proud, dedicated, loyal, and hard-working employee owners, who make a big difference with the customers they serve. We need to address our capital structure and we are working on that, but not with short-term band-aids.

We are focused on long-term solutions, even if it impacts the distribution for a period of time. We are not going to do anything that does not benefit the long-term viability of the Company.

Now I'll turn it back over to our moderator, so we can address any questions.

On operating expense, should we kind of expect a similar level in fiscal 2019 to fiscal 2018, at least on the propane business, sort of excluding Midstream? Is that kind of a good way to model that going forward?

That's a great question. So here's how I think about that.

We disclosed a consolidated number of $471 million. Now, Bridger was $30 million of that that went with that asset sale.

So, from a apples to apples basis, you need to net that out. And then also Global Products had approximately $50 million of OpEx in the propane segment.

During the year we closed on that, if you remember, just before July 31. So, to normalize those out would be the right way to think about it.

And then, you go back to the segment footnotes as well that we have in the Form 10-K, and depending on how you want to look at that, if you want to look at it on a per gallon basis, how we see that going forward on a normalized basis, which again net of Bridger and Global Products amounted in the $425 million range, on a per gallon basis what I would tell you is, we will likely see some upward pressure on OpEx in the first quarter because of the efforts that Jim talked about around opening up of new locations, new drivers, bringing in additional resources into the Company to position us for future growth. First quarter I would expect that, but as we think about things longer-term, we would expect as we get more dense in our customer base that OpEx on a per gallon basis would decrease, as we think about our five-year forecast.

I think for the remainder of FY 2019 after Q1, it's really going to depend on how many gallons we sell essentially as we get into the heating season.

Got it. And I guess just as you think about these investments in additional drivers, sites, et cetera, sort of what kind of payback period or sort of threshold assumptions are you making as you make those investments?

When we're talking about investments, I mean basically we're bringing in people. So, as you think about, we have an opportunity to, off of FY 2016 and 2017 where we were running extremely lean, to find some additional drivers to get our employment levels a bit more normalized off very lean years in 2016 and 2017, that was a piece of it.

We also ran extremely lean during a period of time where we sold 11% more gallons last year than we did the year before, last year being FY 2018, than we did in FY 2017. So, essentially, we are challenging our field operations then as we bring in new drivers to ultimately in terms of the return on investments, it's going to boil down to those drivers delivering incremental gallons above and beyond what we sold in the past.

Again, like I say, that will not come through in only one quarter, that will take a period of time, and we'll probably have a much better handle on that as we get into the heating season. But we are clearly positioning for additional gallons being delivered with a driver fleet, and quite frankly, it's tough to find drivers.

So, to have an opportunity to add drivers to our payroll is certainly something we saw as being a positive to position us again for more gallons delivered in FY 2019 and beyond.

This is Jim Ferrell. Let me add one thing.

We are driven by making money. And if we had something that doesn't give us a return we expect, we're going to have a problem with that.

So, it's being watched very carefully. We're not into selling more gallons or delivering more anything.

We're into making money. And that's the way we start every conversation here.

Fair enough. And just on the refinancing, can you maybe just talk a little bit about sort of where you would expect the likely mix of kind of cash versus second liens to hold cos to look like, even just in sort of general terms kind of help us think about it, and sort of how do you weigh that versus just the broader refinancing?

So, here's how I'd frame that up, is since the last time we talked at the end of the fiscal third quarter on that call, we've obviously been working to find a solution to the MLP bonds in the next maturity. To Jim's point, we haven't announced anything on that yet.

So we have not been able to find an agreeable solution or a structure on that financing to date. We are working hard on that.

Clearly we want to avoid disruption in the distribution on behalf of our investors and in particular our owner-employees of the Company through the ESOP. What I would tell you though is we've not been able to find an agreeable solution that positions the Company positively for the longer term.

There are band-aid solutions that might be out there that help us in the short term. We're not interested in those.

What we are interested in is finding a structure, and I don't have one to detail with you today but we continue to evaluate, that again even if in the short-term we run into a problem with the distribution in December, that's one date on the calendar, we want to avoid that to the extent that we – obviously we want to avoid that but we are mindful of the long-term here, positioning the Company positively for the long term. So, don't have a structure for you in terms of what that might look like at this point, haven't found a structure that works for the Company and our employees and our investors to date, but we continue to look at it, we want to get things done before December but we want to position the Company positively for the long term as a priority.

Got it. Fair enough.

Thanks for taking the questions.

Good morning guys and thanks for the prepared remarks. They were really helpful.

But the CapEx guidance you gave, $50 million to $60 million, could you break that out between maintenance and expansion capital?

Yes. We had $27 million of maintenance CapEx in FY 2018.

Roughly $6 million of that was associated with buying trucks in our fleet to maintain the fleet. We are going to return back to more leasing in FY 2019.

So, I'd probably haircut that and say that maintenance will be somewhere between $15 million and $20 million based on the assumptions in the forecast right now, and the balance would be growth.

And that growth capital, how flexible is that?

As we think about it, that capital is tied to, the largest chunk of it, our tank exchange business. So, as we add new locations, they need cages and new tanks to support those cages as they are placed.

We are seeing continued growth there. We want to put that CapEx to work.

That's a good returning business for us and the opportunity to maximize our growth there. That's capital we want to allocate.

We're seeing opportunities in the retail side of things where we have growth capital to install new tanks or tanks at customer locations that we win new business from. Again, we see really good returns on that, as we have in the past, as we grow our market share.

We are also planning for two new plants. I guess if there were any flexibility in our capital from what I see, is we could delay those plants if we wanted to.

We have no plans to do that at this point, to add two new tank exchange plants, one in the Northeast, one in the Midwest. We view those as, again, a very good use of capital with a good return profile against it.

So we're moving forward with our capital plan here right now and the timing associated with that of deploying the capital throughout FY 2019.

And you mentioned retail growth expectations of 2.2%. You're looking at historical numbers I think, or pushed it last year.

And then you've mentioned growth in tank exchange, but I don't think you provided a number. Does that capital you're spending likely to show up in the fiscal year 2019 or is it in terms of helping growth or is it investment for 2020 and thereafter?

Yes, I think any time you're putting capital to work, you're always going to have a partial year effect in the year you're putting it in and then a full year effect the following year. We will see that this year.

The plants that we're building on the tank exchange side for example, they are in the planning stage right now, they won't be fully constructed until clearly into the second half of this year. So any cost savings that we would see from those plants being closer to the customer and reducing the number of miles that we drive or the amount of diesel that we burn, that's going to be more fully felt in FY 2020, but clearly it makes good sense to move forward with the construction here in FY 2019.

Tank selling season on the residential side is really right now as we get ready for the heating season. So I think you'd see more of the effects of that here in the current year.

And tank exchanges, really we're adding new customers throughout the course of the year. So, I would say that you'll see some effect of that this year as we place new cage locations and start selling or exchanging tanks at those locations, again I think with more full-year effects next year.

Some of what we put into place last year, we're going to get the full year effect of this year. Remember, we were up 5,000 tank exchange locations in FY 2018 as we enter in here in FY 2019.

So, I think there will be some partial year effects, you'll see full year effects in FY 2020, but there will be benefits in FY 2019.

Just as I look at the OpEx increase, you mentioned from the growth initiatives, you expect some in the first quarter, can you quantify how much that represents or how much that is?

So, OpEx, again I think – apples to apples, normalized OpEx year-over-year for FY 2018 is in the $425 million range. Again, we have been ramping up on adding new drivers and positioning ourselves for FY 2019 growth throughout really the year of FY 2018 but certainly in the second half of FY 2018.

So, that being said, we will see some additional effect on that in Q1. The extent of that effect is going to be – I mean if you take a look at Q4, we are up roughly $10 million on OpEx year-over-year.

So maybe that's a barometer that you could use as we think about an entry rate going into FY 2019 off of the exit rate of FY 2018. But really the full measure of that OpEx is going to be measured around the heating season in the number of gallons that we deliver in the field getting into FY Q2 and Q3.

And this is hiring temporary workers if there's more volumes, right, is that the way to think about it?

That would be a part of it, yes.

Just my last question for you, just G&A going forward, you mentioned there is some legal expenses that have been played in your numbers the past year and in the last quarter. At what point should we expect those legal expenses to decline and what is a good run rate G&A for this year post selling the other assets as well?

I don't have an answer for you in terms of ultimately these cases, a lot of which you think about the disclosure that we have in the Form 10-K. Eddystone would be one of the larger cases where we're spending a lot of time right now.

We don't have a lot of updates on Eddystone. It continues through the discovery phase.

Lawyers spend time to get up to speed during discovery phase. I would anticipate that would continue here in FY 2019.

But we're working as hard as we can to try and push that case towards some form of a resolution as quickly as we can. But I would anticipate that there will be a run rate that will trickle into FY 2019, somewhat consistent with FY 2018, potentially a little less than FY 2018, but it will be certainly something that we'll be talking about I think as a variance throughout FY 2019.

Great. Thank you for the time, guys.

Appreciate it.

Okay, thank you, and thank you to everybody again for joining our call today. Again, we feel like Ferrellgas is well-positioned for the future having exited Midstream and exited Global Products, with liquidity on the balance sheet, access to working capital with our renewed or amended and extended credit facilities, and a lot of opportunity to continue our growth.

We're focused on market share, customer density, and also see a significant amount of upside to continue with accretive bolt-on acquisitions in an industry that's very fragmented as we think about the opportunity to accelerate our growth rate going forward. So we feel we have a great employee base, they are working hard, they are engaged, they are focused on the opportunities in front of them, and feel good about where we're at right now and where we can take the Company.

So, we are optimistic about the future of being able to continue to grow as a propane-only company and we'll keep you in the loop on other key things such as refinancing activities as we move through the year, but we appreciate your time today and your interest in our Company.