Ferrellgas Partners, L.P.

Welcome to the Farrell Gas Partners second quarter fiscal 2025 earnings call. All participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. If you would like to ask a question at that time, please type your question in the ask a question box on the lower left-hand side of your screen. Please note we will pause for a few moments to allow time for the speakers to read them and respond accordingly. Please be advised that this call is being recorded. I would now like to turn the call over to Tamria Zertucci. Please go ahead.

Welcome to our second quarter fiscal 2025 earnings call. In the second fiscal quarter, FerroGas continued to showcase its expense management capabilities and expertly planned for a strong start to the heating season. Of course, it starts with our people. We have the very best in the industry. Our retail employees navigated a warm November and then expertly delivered a strong December and January. Our experienced drivers across all business lines safely navigated wintry conditions, including ice and snow, to meet the needs of our customers. Our wholesale business, which includes the Blue Rhino Tank Exchange brand, had a record January. Blue Rhino's larger customer base this year drove more units delivered in January than any other January. a truly great performance by all business lines. I think it's important to call attention to propane's strong role in the energy choice discussion. Propane is there when other energy grid systems fail. Propane is a key part of our everyday life, but also a key part of disaster relief efforts. When ice storms create energy gaps, propane's strong distribution network is there. Feral gas supported the relief efforts in response to wildfires in Los Angeles, and we continue to provide support to those communities in western North Carolina that are still rebuilding due to the destruction caused by Hurricane Helene. Our people live and work in your community, powering our everyday life and supporting critical energy grid failure events. Our employee owners truly are the power behind our promise. I will now turn the floor over to our Chief Financial Officer, Mike Cole, to go over the financial results of the quarter. Mike?

Thank you, Tamria, and thank you all for joining us today. I'd like to remind everyone 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, filed on September 27, 2024, and other documents filed from time to time with the Securities and Exchange Commission. Additionally, we note that the purpose of this call is to discuss the results of our operations for the second fiscal quarter ended January 31, Gross profit increased $19.1 million, or 6%, in the second fiscal quarter. The increase in gross profit was driven by an increase of $59.9 million, or 10%, in revenues, which was partially offset by an increase of $40.8 million, or 14%, in cost of products sold. Gallons sold during the quarter increased by 14.4 million gallons, or 6%, as wholesale gallons sold increased by 11.5 million gallons, or 20%, and retail gallons sold increased by 2.9 million gallons, or 1%. In addition to the increase in gallons sold, The revenue and cost of product changes were driven by wholesale propane prices that were 16.9% higher from Mount Bellevue, Texas, and 16.2% higher from Conway, Kansas, compared to the prior year period. We recognize net earnings attributable to FerroGas partners LP of $98.8 million and $95.8 million in the second fiscal quarter of fiscal years 2025 and 2024, respectively. The $3.1 million increase was primarily due to the $19.1 million increase in gross profit described above, which was partially offset by an $11.1 million increase in operating expenses and a $3.5 million increase in interest expense. The $11.1 million increase in operating expenses consists of an increase of $11 million in personnel costs, driven by increased overtime costs and one-time expenses related to workers' compensation costs, and an increase of $0.9 million for plant and other costs. These increases were partially offset by a decrease of $0.8 million in vehicle costs due to a $1 million decrease in fuel costs driven by our investment in telematics technology. For the second fiscal quarter, adjusted EBITDA, a non-GAAP financial measure, increased by $10.1 million or 7% to $157 million compared to $146.9 million in the prior year quarter. The $19.1 million increase in gross profit in a $2.1 million decrease in general and administrative expenses after adjusting for a $1.6 million increase in EBITDA adjustments, primarily related to the Eddystone legal cost, drove the increase in adjusted EBITDA for the second fiscal quarter as compared to the prior year period. This increase was partially offset by a $10.6 million increase in operating expenses after adjusting for a $0.5 million increase in EBITDA adjustments for a settlement related to a core business. As previously disclosed, on January 15th, 2025, the company entered into a settlement agreement related to the Eddystone litigation. Of the $125 million accrual in the first fiscal quarter, $50 million was paid on January 15th, 2025, and two additional payments of $37.5 million will occur on or before June 16, 2025, and January 15, 2026, respectively. As part of this settlement, the $190 million appeal bond and the related letters of credit have been released. I'll now turn the call over to Tamria to discuss operational and company highlights during the quarter.

Thank you, Mike. Our logistics experts are continually looking for ways to serve our customers better. Our days to set a tank, we did it 25% faster. Our turnaround time to respond to orders was also favorable. We were able to get to our customers faster. These improved metrics in addition to the gains Mike noted from our telematics initiatives, such as reductions in idling time of 15%, favorably impacted fuel usage. This enabled us to serve our customers better and work to control operating expenses. January was actually our coldest month of our fiscal 2025 year, with temperatures that were 12.2% cooler than normal. Gallons sold by our retail business in the second fiscal quarter 2025 exceeded the prior year period for all customer segments except agriculture. Our sales to residential customers increased by over 4.5 million gallons as compared to prior periods. While our retail business benefits from colder weather, we also continue to gain weather-agnostic customers. For example, we gained a new autogas customer during the quarter, expected to provide 100,000 gallons annually. These gallons power bus services to a number of school districts and other organizations in Minnesota. With 6,000 selling locations that Blue Rhino, our tank exchange business, added in the prior year, organic sales have grown 14%. Blue Rhino also achieved sales increases driven by demand during the second fiscal quarter as consumers diversify the uses of product for applications such as propane patio heaters, outdoor fireplaces, emergency power generation, temporary heat, and additional emergency preparedness and response needs. Through its real-time cylinder inventory management, capital expenditures decreased 4.7 million, or 40%, while gallons sold increased 2.2 million, or 9%. Cylinders delivered in the month of January were higher than any summer month in the last three years. We also sold an additional 9.3 million wholesale gallons during the second fiscal quarter. I will now turn the call back over to our moderator as we move to the live Q&A section of our call.

Thank you. If you would like to ask a question at this time, please type your question in the Ask a Question box on the lower left-hand side of your screen. Please note we will pause for a few moments to allow time for the speakers to read them and respond accordingly.

All right, thank you.

We're getting the questions sort of organized here. Mike, there's a question here around the J.P. Morgan High Yield Conference. Why don't you go ahead and take that while we organize some of these others?

Thank you, Tamaria. Good morning, everyone. The company, J.P. Morgan, has a high yield conference that they hold annually each year down in Miami. And this year it was February 24th through the 26th. The company has attended that conference in the last couple of years and met with investors. This year we met with over 20 different companies and we also made a presentation to a group of investors at that conference. That presentation was attached to an AK filing that we did on February 25th and that's posted to our website. You know, a couple, as we had discussions with investors, a couple of the key topics that came up, one was around Eddystone, looking for kind of an update on where that was at or a better understanding of, you know, how that settlement worked from a cash and liquidity perspective. And again, we do have an 8K filing out there on that settlement. But in short, what we did with Eddystone is we made a $50 million cash payment as part of that settlement in January of this year. And then we have two subsequent payments that are due $37.5 million each, one in June 16th of this year, and the final payment January 15th of 2026. Those two outstanding payments are supported by letters of credit in a like amount. So, you know, $37.5 million letter of credit supports the June payment. That letter of credit will be canceled once that June payment is made. And the same thing for the January payment. So from a liquidity perspective, prior to the settlement, we had $125 million letter of credit issued to support the appeal bond. That was canceled. and replaced with that $50 million payment to Eddystone and then the issuance of two LLCs totaling $75 million. So from a liquidity and cash perspective, it was a net neutral transaction for the company. Another topic that continues to come up is around our capital structure. You know, we previously disclosed we have retained Mollison Company to help us assess alternatives around the capital structure, including our upcoming debt maturities. We are continuing to evaluate alternatives and are not in a position at this time to make any announcements related to the capital structure or any refinancing activities, but we will certainly make the appropriate announcements when we get to that point. So that's an update on the JPMorgan Conference, Tamria.

Yeah, thank you, Mike. I appreciate that. There's a couple questions around our acquisition activity and, in particular, Kilhoffer, which was our most recent. And I'd like to just say that, in general, you know, Kilhoffer really met our typical approach to M&A, which is that their customer base complements our customer base in terms of leased tank customers versus customer-owned tank. also complements our route density and other strategic requirements for a tuck-in acquisition such as Kilhoffer. We're quite pleased with it and excited to see how that area continues to grow. We had another question around what drove the significant increase in wholesale gallons, and the tank exchange branded Blue Rhino. And that, as we kind of stated in the call today, that grew by over 14%. I mean, we are really seeing uses for that Blue Rhino branded tank exchange in areas just outside of the backyard. Again, temporary heat, emergency power generation, the grid failures were real in Q2, and we took advantage of that. However, the 6,000 additional locations that Blue Rhino added, that's really the consistent and persistent volume that you'll see going forward. I think, Mike, that's a question for you about the Bs, of course.

Yeah, the question came in. I think they're asking about the amount that's needed to refinance the Bs and the 26 senior notes. I'll start with the 26 senior notes. So we have $650 million outstanding that mature in March of 2026. They're currently priced at five and three-eighths. At the end of this month, they become callable at par. So the question about what is the amount to refinance them, obviously it would be the face amount and no call premium if we were to call them after March of this year. In terms of the Class B shares, with the public documents, there's information out there that there's a 15.85% IRR requirement. You could calculate that math at different time periods based on distributions we've already made to the Class B unit holders, which is about $250 million. Approximately, if you did the math through the end of March, it would be approximately $305 million would be the payoff amount for the Class Bs. But again, encourage you to go to the documents, do your own math and zone calculations of the IRR requirement. That IRR requirement does result in an increasing redemption value for the Class B units if there's no further distributions sent to those Class B unit holders.

Yeah, Maria? Thanks, Mike. There's a question around customers, and I want to talk a little bit about timing as it relates to our customer counts. As you know, there was a very warm start to the quarter. Cold weather hit in January. Obviously, we're not going to get to all customers in the month of January, and some of the demand for January spilled into February. And so I think you'll see some of the customer numbers side of things even out as we move through the winter, which is spread over two of our quarters.

Tamria, there's a question related to the capital structure and Mollis' engagement around us getting listed back on the New York Stock Exchange. You know, we don't have, you know, that's part of the analysis that MOLUS is engaged to conduct is a broad review of our capital structure and strategies around that, which does include reinflating the Class A units. So, again, they're continuing to do the work. We don't have a final path yet that we're prepared to announce to the public. So we don't have a timeframe on when we would seek to be relisted on the New York Stock Exchange.

So I'm seeing a question around wholesale margins and their strength this quarter. There's really no one thing to point to there. So I'll sort of come in with a macro level answer of the margins are a product of a great supply team that does an excellent job of planning and preparing for the heating season. Their ability to navigate, and we take propane on all four pipelines, and I think that what you're seeing there is their ability to navigate different external factors and taking opportunity on those. So we are very proud of our supply team. They do an excellent job, and that was showcased this quarter.

Tim Rea, we received a question about what kind of interest rate would we be fine with as part of a refinancing. Presumably that's a refinancing of the 2026 senior notes. I think as most people know, the high yield market is extremely active right now. There's a supply demand imbalance and credit spreads are at low levels. We don't have a specific kind of break-even point on the refinancing. What we do is we monitor the market conditions. We're in constant contact with our banks. We look at the secondary trading levels, but we don't have a targeted interest rate in terms of triggering the refinancing.

If you give us one second, we're just trying to look at these questions. Some of them are redundant, so we are removing those. Oh, here's one for you, Mike.

Thank you, Tamria. It relates to the Class Bs. Again, you know, would encourage folks who have questions on the Class B units to go back to the documents and read and understand the documents. They are complicated. And, you know, you need to make sure you understand the workings of the documents. The documents allow two potential resolutions to the Class B units. There is the ability to redeem the Class B units, and that option continues to exist until the end of March 2026. The documents also allow us to convert the Class B units into class a units that conversion ratio changes each march between now and 2031. when we i talked earlier about the ir cash payment and the approximately 350 million dollar payoff that relates to the redemption and it is not a it does not relate to the conversion to class a units redemption and conversion are mutually They're different resolutions of the Class B units. So again, the 305 is an estimate for the redemption of the Class B units. That redemption value changes daily based on distributions made and the passage of time. And then on the conversion, that conversion mechanics are laid out in the document and are subject to a conversion ratio that changes each March. So hopefully that answers your question, Christopher.

As we've made our way through the rest of the questions, we don't see anything that is a new question coming in. We will just pause here for 30 more seconds and see if there's any final questions before we close the call. Mike and I thank you for your support. I appreciate you coming to the call today. and I'm going to hand it back over to the moderator. Michelle?

Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.