Star Group LP (SGU) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Star Gas Partners first quarter fiscal year 2004 earnings results conference call. (Operator Instructions) I would now like to turn the conference over to Ms. Purdy Tran, investor relations for Star Gas Partners.

Please go ahead, ma'am.

Thank you. If anyone wishes to access a copy of the press release, you can do so at the Star Gas Web site, www.star-gas.com.

I would like to remind everyone that today's conference call contains certain forward-looking information that is subject to certain risks and uncertainties as indicated from time to time in the partnership's 10-K, 10-Q, 8-K and other filings with the Securities and Exchange Commission. Included risks and uncertainties are the effects of the weather on the partnership's financial results, competitive and propane and heating oil pricing pressures, and other factors impacting the propane, home heating oil, natural gas and electricity distribution industries.

I would now like to turn the call over to Mr. Irik P. Sevin, Chairman and CEO of Star Gas Partners.

Good morning, everyone. What we're going to be discussing this morning is the first quarter of our fiscal year, which ended this past December. Given the weather that's been transpiring this January, which has been obviously exceedingly cold, it was hard to mentally put in perspective what happened the last quarter.

It ended up being a very, very good quarter in terms of both sales being up to a record level of $434 million, but when you look at it, the real essence of the quarter was that despite weather last quarter, which seems a very long way away - despite weather that was actually 10% warmer last quarter than the comparable period in '03, and actually, 4% warmer than normal, we were able to increase revenues by 12%, operating income by 8%, and net income by 20%.

What really happened here is in the volume area. Despite whether that was 10% warmer than the prior year, volume was up almost 4%. And that's largely due to two things. Number one is our acquisition program.

Over the last - since the beginning of last year's first quarter, we bought 12 companies, comprising 113 million gallons, which drove volume up 12%. That was offset by weather that was 10% warmer than last year, and the increase was supplemented by something we discussed at the end of last fiscal year in September, which was a change in delivery pattern. Which as we described last year impacted fiscal '03's results negatively since by changing the delivery pattern we did not deliver is much in '03, shifting some of those deliveries for efficiency purposes into fiscal '04 so that we could deliver more efficiently by delivering fewer gallons in the summer, fourth quarter of '03.

But that did impact positively our results in this first quarter by about 10 million gallons, which combined with our acquisition program, combined to lead to almost a 5% increase in volume, despite the warmer weather that we experienced in the quarter.

This did translate itself into very attractive operating results, with operating income increasing almost 8% despite the warmer weather, as the contribution from the acquisition program increased operating income by about 13%.

And what happened there was, our acquisitions last year, 113 million gallons of acquisitions, as we discussed last year, were primarily, or majority of which, were acquired after the winter heating season last year. As a result, we're really seeing their impact on our operating performance for the first time this winter, and they drove an increase in our operating profits by about 13% in the first quarter, again, offsetting the effect of weather.

Also offsetting weather was an improvement, a continued improvement, in our gross profit margins by about a penny and a half. Those who have been with us for a while kind of remember, or probably recall, the nature of our business. We are a customer-service oriented, home-service oriented business. Yes, we deliver propane and heating oil, but we do focus in on the residential sector of those businesses, the relatively high margin sector, and despite higher energy costs, because of the service component of our business, we have been consistently, for the past 24 years, been able to consistently increase our gross profit margins by about a penny and a half. And this past quarter was no exception to that.

Thirdly, we got a benefit this past quarter from a business process redesign program at Heating Oil, and the focus by Propane division on the sale of additional ration-related products, as well as improving their own profitability in their own service department. As a result of that, we again improved sale and revenues from other ration-related products from our service business, reducing expenses associated with the business process redesign, all of which contributed probably around $4 million to the improvement in our operating profit.

The third factor this past quarter that I want to talk about is our ability, again, to focus in on improving our capital structure and liquidity. For the past four years, we have focused very significantly on keeping a balanced capital structure, improving our liquidity, reducing our leverage.

We're really pleased that as a result of numerous small - about eight or nine small equity offerings over the past four years -- we've been able to improve our leverage ratios and our credit profile so that we were able to undertake a $35 million what they call a tack-on bond, which was added to the indenture of our $200 million senior subordinated offering that we did last year, to provide us with an additional $35 million worth of capital, at almost 2.25% lower yield than we had to offer last year.

Not to be disingenuous about it, the lower yield was both a result of market conditions - it was a very attractive high-yield marketplace - but also I think due to the appreciation in the marketplace to our performance.

What we're seeing this past quarter is really the essence of what we've been doing for four years, that our acquisition program - since we began our business, we've acquired 266 small retail propane and heating oil companies. Since 1999, we acquired 66. And of course, since fiscal '03, the beginning, we acquired 12 companies. This really is what's been driving the growth of the business.

And so in a quarter in which it appears as though our competitors - and understandably, when you're comparing ourselves and them to last year's very cold first quarter, the comps are difficult. Our acquisition program, which allows us to buy companies at a 5.3 multiple have allowed us quite frankly to plow through that weather in the first quarter, to demonstrate operating income increase.

Our ability to continue to manage our margins is linked to the business process redesign program and the focus of our Propane division on operations. We are a service-oriented business, and by improving our service, by focusing on our service, we have been consistently able to move our gross profit margin and control our costs.

In regard to net income, net income was up 20%, about $3.2 million. Included in that, however, was a differential impact this year, about $3.9 million, due to last year's having to take, or taking, a write-down of $3.9 million last year in the first quarter, which we didn't have this year, due to the write-down at TG&E of the intangible value of their customer risk.

If you take that out of our net income, net income was down about $628,000, not up the 3.2 that -- including the 142, down $600,000, but that was primarily associated with increased non-cash expenses in terms of depreciation and amortization of $1.7 million, and amortization of that discount of $800,000, or $2.4 million. So on a cash basis, we were also up about $1.4 million, which is relating to an EBITDA increase, as we reported, of $4 million, offset by interest expense increase of $2.5 million.

In summary, the quarter, I think, demonstrates what the company really has been about for four years, and shows that through a very disciplined acquisition program and a disciplined operating focus, we can overcome even warmer than normal periods.

Now, of course, January has been exceptionally cold. It's been a great month. But we have no control over weather, and so what we're looking to do here is be able to perform not only in cold periods, but in periods such as the first quarter, where weather is warm, and we think that we can do that by continuation of a very disciplined acquisition program, and by capitalizing on our size to reduce operating expenses and reconfigure our revenue side so that the service departments become profit contributors rather than cost centers.

At this time, I'd like to take any questions.

Thank you. (Operator Instructions) Your first question comes from the line of Ron Londe with AG Edwards. Please state your question.

Yes, thank you. Irik, did any of your weather insurance come into play in the first quarter?

No, the weather insurance, the way that it's structured, Ron, is that it's a seasonal insurance program, running from November 1 to March 31. And what we do is we calculate at the end of the season whether the degree days were less than our policy called for. If they were, we get paid $35,000 for each degree day less than the policy calls for. Obviously, with this January, we thankfully will not get paid on our insurance policy. Like most of us, we pay our premiums and hope we never get paid on our policy, and we're in the same position.

I do want to point out to people though, that there is a $3.5 million premium for that policy. That is about a dime a share, and what we see in that is that dime a share really provides us with a cushion so that we have protection against the downside, while allowing us to participate as weather gets colder, as it has done this year.

And one thing that is on my mind, Ron, is that when people look at the yield on our security, and I'm quite surprised by our yield being so much higher than our competitors, especially given our performance, where over the last four years we have outgrown all our competitors, except for Inergy (ph). Just so we understand, who just went public at a much later stage than we did. And this quarter's results, where again we're growing despite the weather, we're very surprised by the yields. Not only because of the growth pattern that we've demonstrated - and again, this quarter, but also because of the weather insurance.

The weather insurance does cost us a dime, but while it affects our distributable cash flow by a dime, I'm surprised that it really hasn't reflected itself in probably a lower yield or a better yield, because there probably is less risk associated with the company because we have the weather insurance protection on the downside.

So I appreciate the question. We're not going to get paid. We didn't get paid for last quarter, but it gave me an opportunity to get something off my chest.

OK, also, January weather obviously has been very good in your marketing areas. What effect do you think that will have on margins? I mean, heating oil costs have been pretty high in the quarter, in January, rather. Do you anticipate any margin deterioration?

No, no. It's understandable - we've gone through this for many, many years, with many, many people reviewing our performance. That I think they are always wondering, is this the year, is it too cold, is it too warm, prices too high, prices come down? If you look at published information on retail heating oil and propane prices, you'll see that retail prices have kept up with the very significant - and there has been very significant increase in wholesale costs, that for 24 years now, our margins have increased consistently. They did in the first quarter when wholesale costs went up. Wholesale costs are up in January, but if you look at published information from the EIA or from state energy offices, you'll see that retail prices for propane and heating oil are up commensurately.

So, again, ours at least - I don't know about competitors. When you're in the residential sector of this business, we have demonstrated an ability to pass along higher costs.

On the Propane side, we had a pretty big draw of propane inventories last week. Do you see any problem with any supplies in your areas?

No, not that I'm aware of.

You said you made 12 acquisitions over the last year, or so. Can you give us an idea of what the EBITDA multiple was on those, on average?

Yes, yes I can. 5.2.

OK. Any change in your expectation for 2004 for the cost of finalizing your business process improvement program?

Yes, it's a great question. When you go into these things, Ron, you structure them and there was just a major restructuring here. We're very excited by it. But as with any major restructurings, when you get in the middle of them, like we are now, there are always adjustments. They have to be expected.

We may have - I think we planned for something like an additional $1.4 million of expenditures this year, and that may be bumped another $1 million or so, just to take on the adjustments that we need. And I remember some investment banker calling it audiblizing at the line of scrimmage. It really was to be expected that the plan is fine - it makes sense. But it's going to take a year or two. And during that year or two, we are going to tweak it - we are going to adjust it. And it will probably cost another $1 million, nothing major. But we are in the middle of tweaking it, adjusting it, until we get the benefits that we expected, and dealing with the issues with having restructured a business.

It's exciting, but there are always issues, and we're dealing with them and spending the money - not a major amount - to adjust them.

OK, thank you.

Your next question comes from the line of John Tysseland with Raymond James. Please proceed with your question.

Irik, how are you doing?

How are you doing, John?

Good. I wanted to know, can you break up the gallons on heating oil and propane oil sold during the quarter, or are we just going to wait for your Q on that?

Oh, the Q's been filed..

OK, I haven't seen that.

So heating oil is 167.2 million gallons of heating oil.

OK.

And propane - propane was 52.3 million gallons.

There is - one thing I want to point out to everybody, when we report these numbers, there's a little bit of an overlap. One is Star Propane, and that's the amount of propane that Star Propane sold was 52.3 million gallons, and Heating Oil sold 167 of heating oil. Interestingly, the Propane division, which has included in it our Ultramar acquisitions from last year. They have about an additional 14 million gallons of heating oil being sold there.

So probably in your models and everything, when you're looking at how much heating oil you're selling, you're probably looking at the Heating Oil division, and that did sell 167, but we did sell an additional 14 million of home heating oil at the Propane division.

So that's - that would be the discrepancy, I guess, between the 219 combined there and the 230 that you reported?

Yes, that's exactly right. That's exactly right. Very articulate.

OK, and then if you look at what kind of acquisitions you have on your plate this year, or you're kind of looking at, is the timing of those typically always going to be during the summer months, or do you think you'll close some of those and get some of the benefit of the winter. Or is it generally going to be more along the lines of the summer?

It's in the summer. Just, John, what happens so that everybody understands it. People who own heating oil and propane companies, they want to get their winter profit. So they don't sell in the winter, because that's the season they really make their profits. So even people we're talking to now, we will not be closing until after the winter season. They're not going to give up winter profits.

So almost always, there's a real seasonal factor and it's counter-seasonal to delivering the product. You deliver the product in the winter, sellers make their profit in the winter, and then they all want to close in the summer with the summer losses. And that's just every year for 24 years.

Will there be some idiosyncratic, isolated acquisitions during the winter season? Yes, but generally speaking it is in the summer offseason.

So if you look at, I guess the magnitude that you could experience this year is probably going to be a little bit lower than last year. Last year you had obviously a very good year in the acquisition market, but this year, would you assume that your costs associated with the acquisitions would be lower, just because your acquisitions might be a little bit lower than last year's large acquisitions?

Yes, generally speaking, yes. Last year, we bought a lot of companies. And as a result of buying a lot of companies, and especially the Ultramar, which was in the summer, that was a standalone business. So the expenses last summer associated with our acquisitions and how they impacted our summer quarter will probably be greater than this year, unless we have another great acquisition year.

What would you say your costs associated with your acquisitions were? I think we've been over this, but I can't remember.

What was our ballpark about how acquisitions affected us last year.

About $1 million on the EBITDA line.

One last question was, maintenance CAPEX for the quarter, approximately? Do you have that number?

Yes, I do. For the quarter was $1 million.

$1 million, and what I guess a good number to use? Do you think you're going to be similar to last year on your maintenance CAPEX for 2004, or do you think it's going to be up a little bit?

If you look back for our five years, it's the same thing every year.

All right, thanks a lot.

Thank you.

Your next question comes from the line of Eve Siegel (ph) with Wachovia. Please proceed with your question.

Good morning.

Hi, Eve, how are you doing?

Good, Irik, how are you?

I'm great.

Irik, do you anticipate the competitive landscape changing much given the recent acquisition of one of your competitors getting into the heating oil market?

I don't know. I don't know. I think that Suburban bought Agway and, you know, Suburban's just a great company. And Agway is a little bit of a different business than ours. It is a more rural business. It's a business that is a different model than ours. It's closer to the propane model, quite frankly, because it's rural-based. And they've got propane, heating oil, diesel, kerosene, and it's got a very interesting model, which is co-op based, rural-based. And they certainly do heating oil and a lot of it.

It's just really different than us, because we're urban/suburban based. So I don't know if it's going to change the landscape or not. There could be arguments that it will, and there could be arguments that it won't, and I just don't know. We've been doing this for 25 years. We've got an image in our markets, which are the urban/suburban markets where we're really pretty good, and that's where our area of expertise is.

They're in different markets than we are. So I'm not really sure how it's going to affect us, Eve.

And here's another one. Do you have any idea what Shell's doing right now, buying some propane properties?

Yes, I don't - I remember that and that was in the summer, and I haven't really given it a lot of thought. You know, the week that it happened it raised on our radar and everybody wonders what's going to happen. And you know, Eve, we really try and pay attention to our business. And everybody says that. It's kind of like a cliché, but you know, we're really focused in on a real disciplined, active approach to our acquisitions in propane in our markets, where we've got a great reputation.

Heating Oil, we have a whole department that's out there every day visiting 600, 700 dealers all the time, small dealers, and we're really focusing on this business process redesign program, which we're just trying to hone.

So I'm not that involved in thinking about what Shell is doing.

Right. OK. Well, good luck in '04. Thanks.

Thank you very much.

Your next question comes from the line of Mark Easterbrook with RBC Capital Markets.

Please proceed with your question.

Yes, good morning. I just want to follow up on Eve's question, because I had some other questions, but they've been answered. But did you look at Agway at all? Did you participate in that bidding process?

You know, we sign a confidentiality agreement, and so I just don't know what I can or cannot say. It's just - it wasn't our type of business, it's not in our market. It's a different business. It was halfway between our Propane and Heating Oil business. It didn't fit either one, and we're really disciplined about what we do. We really like buying businesses that really fit into either one of our divisions, the nice, clean propane, rural, small propane businesses in our markets, that's what we like. And in the Heating Oil, those businesses that really fit into our mold there.

So Agway really didn't fit. We looked at it obviously, we'd be remiss not to, so I signed a confidentiality and didn't look at it hard.

And then just a follow up on that. You said that the average multiple paid last year on the acquisitions was 5.2 times EBITDA. Do you have a breakdown between home heating oil and propane?

Sure, I think. Heating Oil was a 5.1 and Propane was 5.3.

OK, so they've narrowed together, basically.

They have. It's an interesting observation. Propane has really come down for us, and we paid up for two very attractive in one market two heating oil companies that were ideal in size. We considered them plums. It allowed us fabulous concentration in one market, and so we paid up higher than we normally would for those, and we were able to really be disciplined in what we were doing on the propane.

And then last question - looking - it's probably tough right now because you're in the middle of winter, but where do you see the most opportunities in 2004, is it home heating oil or is it propane?

Let me just suggest something - not correct it. One of our big acquisitions, the Ultramar, I got that at a combined multiple, and if I broke it out - I mean, the heating oil segment of it and the propane, my multiples would change. Because I know how we priced it. So the 5.1 and the 5.2 are closer because the Ultramar was combined into the propane segment of the analysis. Had I broken it out, you probably are below 5.0 in the heating oil, and probably above 5.3 in Propane.

Still, it's somewhat narrowed from ...

Yes it has. Yes it has. Yes it has.

OK.

Our targets are the same, though.

And then just sort of your outlook for 2004, where do you see the most opportunities?

It's a good question. I've been doing this for 25 years, and I think we'd look back and it looks as though we, pretty consistently now, buy about 15 million of propane and about 15 million of heating oil, and that's at least what we did historically. There are no projections that's what we're going to or not do. That's why last year was a great year for us when we bought 112 million for the year. The other million was the two that we bought in this year.

Every year I start - I'm kind of a nervous guy, so I start thinking I'll never make another acquisition. I think that's maybe why we've had some good luck, but I don't see anything different this year.

OK, thanks.

Sure.

Your next question comes from the line of Dean Graves (ph) with Grandview Capital. Please proceed with your question.

Hi, I wondered if, one, you could tell us how much EBITDA came from acquisitions in the quarter?

And then, two, to follow up on your business process redesign discussion from an earlier question, is it fair then to assume that your expected savings are going to be pushed out a little bit? Or are the issues - maybe you could give us a little more color around the issues - or maybe that's too strong a word, that you're seeing in implementation.

Yes, sure. First of all, acquisitions look like EBITDA, as long as you asked, provided $5, $5.5 million of incremental EBITDA. In terms of the business process redesign, I think you're quite correct in saying they're not issues. It is as expected. Just tweaking it, improving it, honing it, looking for increased opportunities actually to do better than we thought we might do, to be very frank with you, especially in the marketing area. We hired a Dave Shinnebarger, who is Chief Marketing Officer. And we just think we're going to have some very, very interesting opportunities in the heating oil industry as a result of the business process redesign.

That may entail some additional expenditures, enabling us eventually to grow internally. So I don't want you to take that those additional expenditures are so much that there are issues or problems, as much as capitalizing upon opportunities that we probably didn't even see when we started this.

At the same time, without being disingenuous, there are also improvements that we need to make on the initial design. So, on balance, I'm real happy where we are. We see some things that we need to deal with, but we also need to invest some money to probably get some greater benefits long-term than we thought we'd get.

From a financial point of view, interestingly, in the quarter we really did see some savings. Were they exactly where we expected them to be? No. But we really did see some savings. And we saw some incremental impact on operating income versus last year. And that's really good.

You go into these things with projections, with hopes, and to really put some numbers on the board were great for us. Whether the numbers were exactly as large as we expected? Probably in the first quarter of this whole process, we probably looked at it and accrued it in terms of our own mind evenly through the quarters, and we shouldn't have. But we're seeing probably more opportunity back-end than we expected.

Great, thank you.

Your next question comes from the line of Martin Pearlman with Martin Pearlman & Associates. Please proceed with your question.

Could you remind me of what the businesses processing redesign costs were last year in the first quarter and what they were for the quarter just ended?

Yes, if you would give me one half of a second, I will tell you exactly those numbers.

The reorg last year cost us $1.1 million, we invested. And we invested - of the $1.4 million we expected this year, maybe an additional $1 million that we'll have to expend, we spent about $700,000 this quarter on the business process redesign.

Most of the expenditures last year had to do with that large severance in April where we let go 20% of our people, and with the painting of trucks in the offseason. So we got some incremental benefit and reduction in reorg expense, but that mostly is going to show up in the third and fourth quarters.

So the historically very small quarters will get a boost this year because of the - year to year?

Yes, you're exactly right, Martin.

Your next ...

Yes, and I think it has to do - and Martin, it's a great question, because I think it had to do with those expectations of those summer quarters. The summer quarter last year is really where we spent the money on the reorg, because it makes sense. That's when you're going to reorganize your business, when it's in the offseason.

So we didn't spend much in the first or second winter quarters. Most of it was in the third and fourth. So if you're looking at this on a quarterly basis, you really need to think about those summer quarters that last year had some relatively heavier reorg expenses associated with them. And I know that's what you're suggesting, and I just wanted to make it clear to everybody.

I have one follow up question.

Yes.

You've mentioned, and I saw it in the 10-K, that there seemed to be some startup expenses, or some lower level of service quality than you would have liked, from the new answering center, but that progress was being made. I'm just wondering - you're hitting your big season, and whether you're continuing to see progress, customer satisfaction, et cetera, et cetera, or whether it's just stayed at a high plateau in terms of problems.

Yes, it's again - it's a great question. When we began the process in October, when we got hit with the first cold spell, there were, as we should have expected, just issues to adjust the call centers for our level of activity and the type of activity. We immediately went up with, and worked with the call center provider to adjust their level of service, the number of CSRs handling it, the IVR, what it was going to handle, and the quality.

We really are pleased, quite frankly, about the progress we've made. It's been quite pleasing. We had some customer service level issues that impacted us in the beginning of that quarter. Things have consistently improved, and they're continuing to improve. And if you speak to anybody who's done that, this is going to be continued improvement over the year.

What is very pleasing, and we keep talking about it ourselves, here, is that the initial level was lower than we had hoped and expected. It did have some impact on our customer base, but now as things - as we addressed it, and as we got up there, as we threw some resources at it, the $700,000 that I talked about had to deal with spending money on improving call center quality, we really are seeing a much improved call center quality of performance. And it's reflecting itself in our customer base.

Thank you.

Your next line comes from the line Diana Cochran with Raymond James.

Please state your question.

Yes, I was - this is just a general question. On the K-1 statements for the unitholders coming out on February 27th, is there any way those can come out a little earlier? And one of the reasons I think you have succeeded is your code of business conduct and ethics, I think, is outstanding.

I'm sorry, just ask the question again, within the following context. One of the things we do pride ourselves on is getting our K-1s out on time. I know there are a lot, a lot, of different partnerships, and there's nothing so annoying as to get a K-1. It makes it difficult for you to file. We've always taken kind of pride that we get them out relatively early. Would you just kind of enunciate again your issue or question?

Is there any way that those can come out earlier than February 27th?

That's our target date for getting them out, and I would say probably not.

Is that - I'm sorry, but is that considered late for you? Is that a problem?

Well, I have a lot of shareholders that get upset that it's that late.

Is that right? Do most people get them out earlier? I'm sorry.

I don't know.

OK, well, we're going to do our best, and if we tardy and we are later than our competitors and most other people, we're going to speed it up next year. This year, it's February 27th. If we're a little late, I'm going to promise you we're going to do better.

OK. And your code of business conduct and ethics is outstanding.

Thank you very much. If I may just take one second, for 25 years, compliance has been a very, very, very big thing for us - ethics, morals, before it's become codified for public companies, we have always tried to conduct ourselves legally, morally and ethically. And I think it's one of the reasons, quite frankly, is that our acquisition program has been as good as it's been - is that I think people like to do business with us.

I think so, too.

Thank you very much.

Your next question comes from the line of Martin Pearlman with Martin Pearlman & Associates. Please proceed with your question.

I just had a comment on the K-1s. Most of the other MLTs have December years, and people end up receiving the K-1s sometime around March 15th to March 20th. So assuming the holder of the units files a normal tax return in April, yours actually come in early.

We do have a Web site that folks can visit on probably the 27th to get to the K-1s online.

Mr. Sevin, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

It's very interesting. When you do well in the first quarter, there isn't as much to talk about as when you've got a warm year in the fourth quarter, where you have to address the fourth quarter and you have to address why your performance wasn't so good for the whole year.

So this has been a little shorter presentation than we usually have. Ami is sitting in front of me and wondering where the beef is, and the beef is in the numbers, Ami.

We had a good quarter. Let's not get arrogant about it. We had a great acquisition year, last year, which impacts this year. So we had a good first quarter because of it. The weather is there this quarter.

So, quite frankly, we did feel that we could afford to spend the extra money on the reorg. Not foolishly, we're not drunken sailors, but we're just making some good investments, upgrading what we've already done, and positioning ourselves for the future.

So thank you very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.