Executives: Jim Ferrell - Chairman, Interim CEO & President Doran Schwartz - CFO & SVP

Analysts: Mirek Zak - Citigroup James Spicer - Wells Fargo Tarek Hamid - JPMorgan

Operator: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ferrellgas Partners Third Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the presenter's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Doran Schwartz, Chief Financial Officer of the company, you may begin your conference.

Doran Schwartz: Thank you, Rob and welcome to our third quarter earnings call. Thank you for joining us. 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 we file from time to time with the Securities and Exchange Commission. Throughout our call, we will refer to non-GAAP measures, reconciliations of our non-GAAP measures to the appropriate GAAP measures can be found in the press release or in our Form 10-Q filed this morning. We're excited to report continued progress on our strategies of growing our business and our cash flows. Our internal cost reduction and customer growth initiatives coupled with favorable weather compared to last year, particularly in April had grown cash flows with our trailing 12-month EBITDA increasing by $10 million and now is at $253 million, up from the rate at the end of fiscal 2017 of $230 million. We also successfully closed on a new $575 million working capital facility, which is comprised of a $275 million term loan and a $300 million revolver. This credit facility repaid the amounts outstanding in our previous facility and also placed significant cash on the balance sheet and provides a $300 million revolver with no current outstanding borrowings and also allows for issuance of approximate $100 million of letters of credit outstanding. Also we've renewed and increased our accounts receivable securitization facility to $250 million up from $225 million previously. These two key facilities provide us with multiyear access to substantial liquidity and flexibility needed to operate our business effectively and efficiently as we continue to execute our business strategies and grow the number of customers that we serve. These important steps we are taking now as we wrap up fiscal 2018 will continue to strengthen the balance sheet and provide us with a foundation of liquidity and access to working capital, allowing for focus on growing and creating shareholder value over the long-term. Now as detailed in our Form 10-Q that was filed this morning, our third quarter adjusted EBITDA was up over 13% for the quarter at $86.9 million compared to $76.8 million for the quarter last year. Adjusted EBITDA for Q3 in our Propane segment was $95.6 million as compared to $87 million in the prior year, an increase of 10% and was positively impacted by higher volumes and an 18.9% increase in gross margin. Adjusted EBITDA for the Midstream segment was $1 million as compared to a $500,000 negative EBITDA for the prior-year. The Q3 results reflect cessation from low-margin barge operations and the sale of Bridger Energy LLC, both of which occurred earlier this year. The Midstream segment is positioning for growth opportunities that are expected due to higher oil development and drilling activity, driven by higher recent oil prices. On the volume side, propane sales volumes for third quarter were $246.3 million gallons up 16% from the $212 million gallons a year ago, driven by retail and Blue Rhino tank exchange customer growth and favorable weather particularly in April. Gross profit, total gross profit for the quarter was $221 million, that's up 10% compared to the $201 million in the prior year's third quarter. Propane gross profit was $191 million of the total for the quarter, up from $172 million last year. Gross profit benefited from higher sales volumes, particularly or sorry, partially offset by slightly lower margins per gallons sold, largely the result of the company's strategy to compete for new customers. On the operating and G&A expense line items, operating expense for the quarter was $116.6 million, that's up from $104.8 million during the quarter last year was primarily due to the incremental expenses associated with the increase in gallons sold. General, administrative expense for the quarter was up slightly to $11.7 million, that compares to $10 million last year. Interest expense for the quarter was $40.4 million, that's up slightly from $39.9 million a year ago, once again reflecting higher borrowing rates under the previous secured credit facility compared to the third quarter last year. Our CapEx on maintenance CapEx side was $5.7 million for the quarter, is $19.1 million year-to-date as we continue to refresh our vehicle fleet and growth CapEx was $17.5 million for the quarter and it's $39.9 million year-to-date, primarily related to an increase in the number of cylinders and cages purchased to support increases in tank exchange sales and selling locations as well as capitalized costs associated with the set up of new retail customer locations. And on the distributable cash flow front, on a trailing 12-month basis, DCF was $82 million equating to coverage of 2.1 times, that's up from $74 million or 1.86 times at the end of fiscal Q2, Based on our forecast we expect the coverage ratio to increase as we grow cash flows and maintain our distribution at its current level for the foreseeable future. Now at this time, I'll turn the call over to Jim for his comments, Jim?

Jim Ferrell: Thanks Doran. I'm very pleased with our company's performance in the third quarter and the continued momentum we are seeing in our business. Our strategy is working. We are seeing growth in our customer base and lower operating expense per gallons sold with higher density and a focus on our costs. So yes, we're pleased, but not yet satisfied. We have more to do and we'll continue to charge ahead. I want to cover updates and key strategic and operational objectives, all driven by a common theme of actually managing EBITDA growth to mitigate swings caused by weather. We're focused on enhancing our sales and marketing efforts and that is a big factor in the recent momentum in winning new customers. We're in the process of adding additional sales professionals to key markets across the country to reach even more potential customers. Our retail sales force now has the opportunity to sell tank exchange customers, which has become a core strategy. This was a major silo in the company that we've now broken down. We now win new customers in our tank exchange business with existing retail offices. We've realized retail propane customer growth of 11,500 up 1.7% compared to prior year levels. The additional customers add to the volume growth Doran talked about earlier as well as improved customer density, a key part of our strategy to develop gallons more efficiently with less distance between stocks. We continue to see signs of this working with operating expenses down by $0.02 per gallon for the quarter. There are now 52,000 Blue Rhino tank exchange locations, close to 5,000 more than we had at the beginning of the year. We are seeing tremendous growth opportunities that position us well for the summer's growing season and for the spring and fall patio heating seasons, a significant benefit of growth in this business and lines of our strategy to become less dependent on winter with offsetting peak sales volumes and we continue to look for strategic bolt-on acquisitions to further enhance our customer growth. With our footprint of over 850 locations across the country, we know our people will hear about buying opportunities as they arise. Another strategic initiative is to expand operating margins by lowering our costs and adding capacity to position for future growth. Our new Blue Rhino production plants in Alabama and California will come online by fiscal year-end. These plants get us closer to the customer, lower our fleet mileage by hundreds of thousands of miles per plant and lower fuel and vehicle repair costs. Each plant requires an investment of $3 million to $4 million but it saves us approximately $1 million to $1.5 million per year in operating expenses. We have two more plant scheduled for construction in fiscal '19 and new locations are being evaluated now. These new plants complement our existing plants and allow us to reduce operating expenses while expanding our system capacity to support the significant growth we are seeing in our tank exchange business. We are also investing in our fleet to keep it modernized, largely through leasing programs. We've been able to significantly reduce the age, which allows us to more improve reliability and reduce repair and maintenance expense. We will continue to focus on this to further support our ability to grow and serve our customers and with the customer growth we are seeing, we need customer tanks at our appealed locations that meet specific needs of our customers and that are in a condition where they can be set quickly. We are pursuing an outsourced tank refurbishment program where a portion of our field location yard inventory is collected and moved to a refurbishment site upgraded, painted and then distributed to locations around the country, where we get tanks that meet the customer demand. This will help us put in our idle tank inventory back to work, generating revenue quickly and will also lower our CapEx requirements by reducing cash-out need for new tanks. We've always been on the leading edge of technology to support our field operations and our customers and now we are replacing our current system to enhance our ability to be where our customer wants to do business, whether that be on their mobile device or in our offices across the country. Our focus on technology will help maximize the efficiency of our field operations and enhance the experience of our customers. Another objective of the company is to strengthen our credit profile. First and foremost we are focused on actively managed the company and to grow EBITDA. You can see that from our third quarter results from this year. We anticipate for now that we will maintain our cash distribution at the current level. To Doran's point or earlier that will increase our DCF and provide flexibility for managing our capital structure and we will continue to reduce our debt through sales of non-core assets. The sale of our global sourcing business is on track, which complements the recent transactions of Bridger Energy and Bridger Rail. These are all strategic and operational initiatives that are driving us to actively manage the business and grow EBITDA without totally depending on cold weather and as I said before, our strategy is working. The momentum we have right now and the optimism we have for the future would not be possible without our employees. The morale is high and together we are building a foundation for the long-term success of our company. I want to highlight the recent appointment of Trent Hampton as Chief Operating Officer, a move that has been universally applauded by our people. He, Doran and I make up the Chief Executive or the Executive Committee and we are on the same page. We are doing what is necessary to strengthen the company and we are doing it for the 4,500 employee owners who make it work. I could not be more proud of them all. I will now turn the call back over to the moderator, so we can address any questions you might have.

Operator: [Operator Instructions] Your first question comes from the line of Mirek Zak from Citigroup. Your line is open.

Mirek Zak: Hi. Good morning, everyone.

Jim Ferrell: Good morning.

Mirek Zak: Is there any timing you can provide around a potential sale of the global sourcing business at this time?

Doran Schwartz: So good question, we're actively working out I would say from the perspective -- you're never done with these deals until they're done, but we're actively working towards by end of fiscal year and timing for close.

Mirek Zak: Okay. And regarding the fixed charge ratio and the restricted payment pool, how are you looking to address that concern from a unit holder perspective before 1Q '19, is that solely on organic growth or do you expect that a potential sale of the global sourcing business would be sufficient to bring that above the 1.75.

Doran Schwartz: Yes so good question. I think as we grow EBITDA, obviously that's going to be helpful and then you know asset sales and the ability to de-lever will also be helpful. One of the things that we announced or included in our press release and we announced the new credit facility when we closed on that in May, was information that basically indicated that we were contemplating also different types of refinancing options or solutions associated with the MLP bonds. And so essentially what that was, what that allowed for I think was for bondholders to call in and for an exchange of ideas, not to talk specifics about strategies of what would be the right solution or wrong solution, but more to exchange ideas on how best to think about refinancing MLP bonds. So those conversations are essentially happening right now. I think there is a healthy exchange of ideas and I feel good about the progress that we have made at this point, but you have a couple options there. You can grow EBITDA or de-lever or which we are doing or you can actively go after a refinancing option or solution on the MLP bonds and take risk off the table before you know the basket that we are paying distributions from today is exhausted in the event that we were unable to achieve the 1.75 times FCCR. So more to come on that, I would say we're working it right now but we're pursuing it from a variety of different angles.

Mirek Zak: Okay. Great and just one more quick one, based on your various covenant levels, what's your ability to incur additional debt at the OLP level?

Doran Schwartz: Yeah so we've gone through a pretty extensively, we have a lot more flexibility under their credit agreement that we just announced here earlier this quarter. In early fiscal Q4, we have a lot more flexibility to utilize our credit facilities under the new credit financing covenants that we have in place at the facility. As it relates to OLP debt from an unsecured basis, we've gone through a process working with our legal counsel and others to evaluate that. We've evaluated our various baskets that might be available. We've evaluated the covenant structures we have in our bond indentures and we're not publicly announcing exactly what the amount is of new debt that we could end up with at the OLP level. There is flexibility to have more debt on an unsecured basis down at the OLP level and that's a part of how we're thinking about the solutions around the MLP debt refinancing. So again more to come on that. We do have some flexibility there. Feel very good about that. We tailored the credit agreement to give us multiple options to solve for the MLP notes and that allows for -- we included in 8-K that this is all public. So we have the opportunity to exchange MLP bonds down to the OLP and then we also have the opportunity to take out secured debt and move those proceeds up to the MLP to refinance those bonds. So we have a lot of arrows in the quiver as it relates to refinancing the MLP bonds. So we can absorb some more debt at the OLP but more to come on exactly how that will look as we work with the bond holder group.

Mirek Zak: Okay. Great. Thank you. Very helpful. Thanks for the time guys.

Doran Schwartz: You bet.

Operator: Your next question comes from line of James Spicer from Wells Fargo. Your line is open.

James Spicer: Hey. Good morning, guys. Just to build on that last question a little bit, clearly you're very focused on your commitment to the distribution. The 1.75 times fixed charge coverage in the MLP notes, in order to address that, you really only need to take out half of those notes correct. So I'm just wondering if when we think about the amount that you need to really address here, is it the full $350 million or just $175 million?

Doran Schwartz: Yeah. No, technically you're right. We would need consent from at least 50% of the notes that are held at the MLP level.

James Spicer: Okay And then in terms of the asset sales, can you just provide a little bit more commentary around the global sourcing business in terms of how big that is with respect to EBITDA contribution currently and then what other potential asset sales you could be looking at?

Doran Schwartz: So global products is a business that is tied to our propane business. It's not directly propane. It's more of an ancillary propane business that sells grill, that sells real accessories, patio heaters and things of that nature. So that business overall is we have broken out separately EBITDA on that and I do not necessarily at this point in the process as we're actually talking -- actively talking to a buyer community, potential buyer community. I don’t want to get into a situation where set value expectations on that, but what we are seeing is it's in terms of the EBITDA we give up, it's pretty modest relative to our propane operations overall and really the value on that then would be dependent upon obvious the multiple that the buyer community would see. So more to come on that, the vast majority of what we report in the propane operation is our core propane operations, this will be just a small piece of it, but it will from our perspective I think allow us a reasonably meaningful amount of cash proceeds to be able to have financial flexibility to address either MLP notes or de-lever the capital structure.

James Spicer: So is that sourcing business effectively the Mr. Bar-B-Q business or is there -- are there assets in addition to that?

Doran Schwartz: You got it, Mr. Mr. Bar-B-Q.

James Spicer: Okay. Got it. And then are there anything else that you guys are looking at in terms of you know, I know you still have some trucks and other midstream assets that could be non-core?

Jim Ferrell: I think the answer to that is yes. We're looking at everything.

Doran Schwartz: Yes. So for example, midstream, I'll just tell you, we've got, we've got opportunities in the midstream business grow that business. It stabilized, it feels a lot better now than it did a year ago. We saw higher EBITDA this year and basically when you talk to our group now in Plano, Texas, they are seeing opportunities with anticipated oil development that's going to occur in the higher price environment that we've seen here recently. Yes so we're putting more trucks to work. A piece of the results for the quarter in the midstream segment would've been just refurbishment costs with trucks that been idled we refurbish them and get them road ready to be ready to handle new work that's coming online with either new customers or existing customers that are expanding in our oil that are producing saltwater disposal that need -- they need all the way and then sand obviously for their fracking operation. But that being said, we still have too many trailers down there and so we are actively taking a look at a number of trailers now in terms of the cash proceeds associated with that, that won't be nearly as much as what we're going to see on say global sourcing for example, but it is a meaningful contribution to A, rightsizing the fleet and then also it does provide us with cash for more financial flexibility to be able to address the MLP notes or de-lever the balance sheet.

James Spicer: Okay. Got it. Thank you very much.

Doran Schwartz: Yes.

Operator: [Operator Instructions] Your next question comes from line of Tarek Hamid from JPMorgan. Your line is open.

Tarek Hamid: Good morning.

Doran Schwartz: Good morning.

Tarek Hamid: As you sort of look at the increase probably in OpEx and SG&A obviously a lot of that is good reasons with volume increases. Is there a portion of that, that's customer acquisition driven that sort of is temporary, I guess how do we think about that over time?

Doran Schwartz: Yeah I would say in terms of OpEx it's largely going to be associated with personnel that is one of larger and we did more people from more hours to deliver more propane. So it's heavily tied to a variable component there and then obviously we reported more miles to deliver that propane. So fuel costs were up as well. So it's, I'd say largely a variable component. As we think about the customer acquisition costs, a lot of that actually gets capitalized. So we go out, we set a new tank. We've set over 6,000 net tanks this year. We've grown our customer base by 11,500. So a piece of that is obviously organic. A piece of that relates back to some smaller acquisitions that we bolted on here earlier this year as well. But when we're putting -- a customer decides they want to take a competing tank, competitor's tank off their site and put our take on that site, a fair amount of that actually goes to capital cost as opposed to -- as opposed to OpEx and then we -- that flows through DD&A. So I would say by and large, the OpEx is really tied to a variable component around the gallons that we delivered. We're up 16% for the quarter as we talk about. So we only increased OpEx by around 10% and our gallons went up 16%. So there's some efficiency involved in all of that from our perspective, which helped drive down OpEx per gallon by a couple of pennies for the quarter.

Tarek Hamid: Understood. And that the move in the gross margin right, that's really just driven by the underlying performance of propane that is now additional customer acquisition flowing through their gross margin line?

Doran Schwartz: Yeah, I think you're right. I think that's by and large the biggest piece of it. I mean really the story line for our quarter is our folks out in the field, hats off to them. They are working hard and they're winning the business and we're seeing that in our customer accounts. Tank exchange, significant growth and we like that that tends to be a higher margin end of our business. So we're winning new customers and that's leading the volume growth. We've seen and that's driving gross margin growth as well. We saw slight decrease in our margin or cent per gallon margin. We're down just under $0.02 per gallon for the quarter. So that was a partial offset and a lot of that relates to A, mix; and then B, it relates to customer acquisition strategy. We feel strongly that as we get customers in, we're good at servicing those customers, but we need to get them in and you work with your customers over time on the margin profile, but you really can't work on margins with the customer you don't have. So our initial sales strategy to increase customer accounts is working, that may come with slightly lower margins initially, but we're going to work with those customers over time and we feel good about that, but that would be a partial offset and then the other side of that would be the higher OpEx, but at a slower rate than what we've seen in terms of volume growth.

Tarek Hamid: Got it. That's really helpful. And then just, I don't want to beat the dead horse on the MLP notes, but can you maybe just talk about how you are thinking about timing? Do you want to sort of execute on a couple of these asset sales first or sort of the intent between sort of you guys and the bondholder group to kind of get to a solution this quarter?

Doran Schwartz: Yeah, it's probably early to clearly define I guess the orchestration of how that's all going to work, but this is what I can tell you is our unit distribution is core to us, it is important to us, it's important to the 30% of our units that are held by our employees through our ESOP and through the five million shares that are held by Mr. Ferrell or 5% that's held by Mr. Ferrell. I mean that's core right. So we are working hard and diligently to protect that unit distribution. So what I can tell you is that the solution around the MLP bonds is a real priority and we're working hard on that right now and I wish I give you more details outside of just say more to come on that, but we are moving with a sense of urgency to make sure that we get a solution in place and that the MLP bonds are refinanced whether at the MLP level or OLP level or repaid or some combination thereof in time to avoid any disruption in the unit distribution later this year or actually sorry in fiscal 2019.

Tarek Hamid: Got it. I totally understand that you don't want to negotiate on a public call. So I appreciate that. Thank you for the answer.

Doran Schwartz: Yeah, thank you, Tarek.

Operator: And this concludes the Q&A session. I will now turn the call back to Doran Schwartz for closing remarks.

Doran Schwartz: Thank you very much, Rob. On behalf of Mr. Ferrell and all 4,500 employees from Ferrellgas, I would say thank you for your time today. Thank you for your interest in the company. Our company has momentum and we've shown that this year. We see bright line opportunities out in front of us that we are pursuing. We got a lot of what we call internally red question marks that we're moving to green checks and the credit facility work that we've done moving red question marks to green checks that provide us with long-term runway there to working capital to continue to take advantage of these opportunities that we're seeing in the field. It's an exciting time and so for all of our employees I would say thank you for your hard work and keep it up on behalf of Mr. Ferrell as well and thank you again for all your interest in Ferrellgas. We feel we have a bright future and a lot of momentum. So thank you for your time today.

Operator: Ladies and gentlemen, thank you for your participation. And this concludes today's conference call and you many now disconnect.