Star Group LP (SGU) 2006 Q2 法說會逐字稿

Welcome to the Star Gas Partners second quarter results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we'll conduct a question and answer session. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Tuesday, May 9, 2006.

I would now like to turn the conference over to Mr. Joe Cavanaugh, Chief Executive Officer, Star Gas Partners, please go ahead, sir.

Thanks, Steve, good afternoon, everyone and thank you for joining our call, with me this afternoon are Dan Donovan, our President and Chief Operating Officer, and Rich Ambury, our Chief Financial Officer. Before we get under way, I would like to have Steve Hecht, Jaffoni & Collins, read our Safe Harbor Statement, Steve?

Thank you, Joe, this conference call will include forward looking statements, which represent the partnerships' expectations or beliefs concerning future events that involve risks and uncertainties, including those associated with the affect of weather conditions on our financial performance, anticipated proceeds from weather insurance, the price and supply of home heating oil, the consumption patterns of our customers, our ability to attain satisfactory gross profit margins, our ability to attain new customers and retain existing customers, our ability to effect strategic acquisitions or redeploy underperforming assets, the impact of litigation, the on-going impact of the business process redesign project at the heating oil segment, and our ability to address issues related to that subject. Natural gas conversions, future union relations, and outcome of future and current union negotiations, the impact of current and future environmental, health and safety regulations, customer credit worthiness, and marketing plans.

All statements, other than statements of historical facts included in this conference call are forward-looking statements. Although the partnership believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct.

Important factors that could cause actual results to differ materially from the partnerships' expectations are disclosed in this conference call, and in the partnership's Annual Report on Form 10-K for the year ended September 30, 2005, and it's Quarterly Report to form 10-Q for the fiscal quarter ended March 31, 2006. All subsequent and written and oral forward-looking statements attributable to the partnership or persons acting on it's behalf, are expressly qualified in their entirety by the cautionary statements.

Unless otherwise required by law, the partnership undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, after the date of this conference call. Joe?

Thanks, Steve. I'm going open with a brief overview of on our results for the fiscal quarter ended March 31, 2006, and then have Rich go into some detail on the financials after which we'll take questions you may have. The partnership performed very well in the quarter despite one of the warmest Januaries on record, although the results were mixed.

Our operating income increased by $2 million to $51.7 million, over the $49.7 million generated in the same quarter last year, after adjusting for a $67 million non-cash customer list write-down last year. Margins improved by $0.093 a gallon, and operating costs remain under control. We don't anticipate the margin increase will continue for the remainder of the year, nor do we expect high levels in the coming fiscal year. The margins reflect this year in addition to our margin improvement plans, some very favorable market conditions that we can't expect to be repeated.

Our volume was down 25% to 180, 2.5 million gallons from the 245 million gallons sold in the second quarter of fiscal 2005, which reflected 16% warmer weather customer attrition and other factors including conservation. Attrition continues to be our biggest problem. We're moving ahead with our decentralization efforts, and are beginning to see positive results, but this not going a short-term proposition as I said before, it's going to be take several months before we will know how well the program will work.

At this point, we are answering about 30% of our customers' calls overall at our local operations, with some districts answering 70 to 80% of the calls. We're adding customer service representatives at the district level and conducting employee customer service training. Our actual growth losses this quarter were 3500 less than the same quarter last year, unfortunately our gross gains were down by a like number. So net, we were essentially flat to the second quarter of 2005.

Our losses are driven not only by continued customer dissatisfaction with its centralization of customer service, but also by the higher price of oil, which is prompting for customers to shop around for lower prices, and even moving to COD dealers, who do not provide service. Gross gains were impacted by our setting of higher minimum profitability standards for new accounts, and the reduction in mass marketing advertising, that attracted transient customers in 2004 and early 2005, and our tighter credit standards. The warmer weather this quarter impacted attrition as well. As customers felt comfortable moving away from our full service pricing, believing that they would not suffer from a breakdown, suffer if their heating equipment broke down, while temperatures were well above normal.

With the recapitalization behind us, we're substantially better capitalized, and we're much less leveraged. We now plan to begin reviewing potential acquisitions, and we'll look to purchase qualified businesses, but only after a strict financial study, and an operational review, including with our fields operations management.

We continue to carefully monitor and control our operating and other costs. And our local management is taking on more of the control of their business, always subject to corporate oversight. We have great employees, who are concerned for our customers, unfortunately they've been distracted for some time now, with the centralization and with the financial concerns. I believe we have, and are continuing to overcome those concerns, and expect that this will help us to reduce our attrition.

With that, I'll turn the call over to Rich Ambury.

Thanks, Joe. First I would like to walk through the quarter, and then the six months. For the quarter as you saw in the press release, we sold 182.5 million gallons, as compared to 245 million gallons last year. The decline of 62.5 million gallons or 25.5%, was due to temperatures that were 16.2% warmer, net customer attrition of 8.5%, and conservation.

In addition buy and sold for the quarter was also higher, due to a delivery scheduling variance of 4 to 5 million gallons. Our per gallon margins of home heating oil were strong for the quarter. We realized the margin of $0.68 versus $0.587 realized in the prior year, or an increase of $0.093 per gallon. Included in our gross profit is the cost of our service department, and a net loss from service was reduced by $1.6 million.

When you look at our total operating expenses, we managed to decrease our total operating expenses by $19.6 million, or 23.5%, as we strove to reduce operating expenses with a decline of volume. We believe we are able to reduce operating expenses by an estimated $7.1 million in response to the warm weather. Also during the quarter, we received $4.4 million from weather insurance, which also reduced operating expenses.

Our legal and professional expenses were down, as well by $2.7 million, and the quarterly comparison was also favorably impacted for a charge of $3.1 million, that we recorded in the March quarter for severance. As Joe mentioned, operating income increased $69.1 million, principally due to a non-cash goodwill impairment charge that we recorded in the March quarter of $67 million. The balance of the increase or approximately $2 million, was due to the operations of the business. We were able to hold our own despite the warmer temperatures of 16.2%.

Let's move on to the six month results. For the six months, we sold 313.8 million gallons, compared to 387.3 million gallons last year. The decline of about 74 million gallons was due to, or 19%, was due to 10.2% warmer temperatures, net customer attrition, and conservation. Our per gallon margins for the six months were strong as well, we achieved a margin of $0.69 versus $0.55 realized last year, this is an increase of $0.14, and it's more than the increase of the quarter, which was $0.093. As you might recall, we had an increase in our per gallon margins in the first fiscal quarter of $0.21 which impacted the six month results ending March '06. Again we made progress in our net service. And we reduced the service loss by $4.2 million.

Total operating expenses declined by $35.2 million, or 21.3%. We believe we were able to reduce operating expenses by $9.4 million, in response to the warm weather, and we reduced marketing expenses by $5.5 million, as we evaluated the merits of past spending programs. As I mentioned before, we also received $4.4 million in weather insurance, which again, lowered operating expenses. Approximately $16.3 million of the change in operating costs, relate to either legal, professional, financing or severance cost that were included in the prior year, but were not repeated in the first half of fiscal 2006.

Our operating income increased by $110.6 million, of which $67 million is due to the goodwill impairment charge recorded in the March quarter, the balance of the increase, or $43.6 million, is due to results of operations, of which 16.3 million is again due to the the lower level of legal, professional, financing and severance costs, and $23.7 million is due to our expense control program, and higher margins, which offsets the impact of 10.2% warmer weather.

I would now like to now turn it back to Joe.

Thanks, Rich. With that, we will turn the call over now to any questions anybody may have. Steve?

Thank you, ladies and gentlemen, [OPERATOR INSTRUCTIONS] One moment please for the first question. Our first question comes from the line of Adam [Blickerstein] of Black Gold Capital Management. Please proceed with your question.

Good afternoon, you mentioned that you are getting closer to start looking at acquisitions again. Could you elaborate a little bit on what type of acquisitions? You know, obviously I assume heating oil, but are you also looking at propane and potentially other midstream, you know, qualifying MLP assets?

At this point we're going looking at home heating oil acquisitions, high quality businesses similar to ours, with full service type of operations in good margin areas. We're going concentrate on that.

Thank you.

The next question comes from the line of Matthew Mark from Jet Capital, please proceed with your question.

It's Jet Capital. Could you talk about some of the [phantom] metrics that you would look at with respect to the acquisition policy of the company, in terms of acquisition multiples, and could you talk also about the kind of customer bases you would be looking to acquire. Maybe to put some color on the word quality. Will we be looking to find customer bases that's weren't attriting to the extent that our current customer base was?

What we look at is customers who are looking for a full service type of dealer, which we are, as opposed to customers that are very price sensitive, we would look into a marketplace and dealers like that. I wouldn't want to go out and start looking at somebody that was selling 100% COD business, that kind of a thing, that's what I'm talking about a quality type of business. Somebody who's looking for customers who are not so price sensitive. Are more sensitive to service. In areas that are, that reflect that. There are areas of the marketplace that it's a very price sensitive market. A lot of points going into those.

Any sense of what you would pay, if you're going to do an acquisition like that?

You know, I kind of like not talk about that, since that could be a competitive issue, but I would just tell that you we're going to very cautious as to what we're paying for them and we're not going to be overpaying. We're going be paying to get a proper return on the business.

Thanks.

Mr. Mark, any further questions.

No.

Thank you. The next question comes from the line of Steven [Erico, Locus Wood] Capital.

Thank you. You mentioned that 30% of your customer calls are going into the local level. I assume your goal is to get that up to 80 or 90. How long do you think that would take, and I'm wondering how quickly that can occur.

We think it's going to be still several months. We're on a plan to keep doing that. We have to hire people and we have to train them and have to get the telephone system set up to do it. When I say 30% I'm talking about overall, take all of the calls of the company is probably 30%. We do have branches that are at 75 to 80%. I think we have one branch at 100% right now. Certainly calls other than offpeak like nighttime calls, which go to a call center at this point, but it could be the balance of the year or longer before it gets done.

This is Dan, if I could add a little bit to that, our goal is to get to 100% all of our calls answered locally. We may have a centralized call area, where we might handle weekend or night calls, but we want all of our divisions or districts to be answering all of their calls locally. It takes time to do this. One of the mistakes going to the centralization was rushing it. We're not going rush back. We're going to do it the right way.

We have to find the right people, and we have to train those people, and empower them to take care of our customers, and trust them to do it. It takes a while to get that done, but we've really gone a little bit faster than then even I thought we would, being at 30%. I'm hoping that within the next year. Maybe a little more than a year, we'll be closer to that 80 to 90% level.

I would point out too, that the meaning of the operation is essentially 100%.

What's the cost of that, I mean did you guys have done a nice job of reducing your SG&A costs, should we expect to see those costs rise as you add these people or -- ?

No, you should not, we are doing it as we're adding local people, we're taking them away from the call center, from the centralized call center, we're doing this as cost neutral as possible.

Two other questions. Could you explain the insurance. Do you, is that a once a year, is it typically the business model to buy that insurance each year, and can you explain how that works, I assume you're obviously not buying it for the summer months, it's just the winter quarters, and how does that work?

Rich I'll answer that one for you.

We buy a policy which basically covers temperatures from November 1st through the end of February of the heating season. Historically we've bought coverage, we've bought a base policy of $12.5 million, which we currently have in place, and that's a multi-year policy. And each year for the last several years, we've also added to that an additional layer of $7.5 million.

There are approximately 4000 degree days in the period from November 1st through the end of March, and we get payoff based on the 3 days that are below a strike prices, which basically is three years below the average of the last 10 years. We get paid $35,000 per degree day. We currently have $12.57 million in place going forward, and we're going to evaluate whether to buy a second layer going forward.

Okay. And lastly, Rich while I have you, the seasonality of your working capital, I assume we'll start to see a build in working capital in this current quarter?

I'm pretty sure we will. Hopefully we'll collect receivables, and I don't see any reason why we will not. We're basically out of the banks at the end of the March quarter. And I have no bank borrowings as of today.

Very good. Those are all my questions. Thank you.

You're welcome.

Ladies and gentlemen, [OPERATOR INSTRUCTIONS] The next question comes from the line of John King from AIG. Please proceed with your question.

Is there any seasonality in terms of customer attrition, i.e., does it slow down over the next two non-winter quarters versus the winter quarters? And how's that going thus far in the first 38-39 days of this quarter?

Dan, you want to take that.

Sure. Well first of all as Joe mentioned in our on first quarter, we did have higher attrition than the previous year, and that was mainly because we refused to save customers at any cost. We wanted not customers, we wanted profitable customers, so we bit the bullet on a lot of customers who were just shopping for lower price, and I think we got through a lot of those.

In the second quarter we lost 3500, less accounts then the previous first quarter. So far as your question goes towards seasonality, it all depends, it all depends upon what is really happening with the price of oil, and what is happening with the weather. It also depends upon whether you are a variable price customer or a fixed price customer. If you're a fixed price customer you usually have a 12 month contract that ends in one of the 12 months, and it used to be that at Petro, anyway, we had a lot of those customers expiring in April and May.

Now we have them spread out much more evenly through throughout the year. On your variable price customers, a lot of times people start thinking about heating oil, middle of summer, especially in the beginning of the fall. So, when does it happen? It depends, but your greatest season for signing customers is from September through, from Labor Day through Thanksgiving. Right now is sometimes considered a dead period, but because of the cost of oil it still has a lot of interest.

Okay. What have you seen kind of thus far into this quarter?

So far in this quarter our attrition is running at the same rates as we ran in the second quarter, which is better than we planned, and less than last year.

One other question. In terms of understanding your cost structure for heating oil, how should we look at that do you generally just buy some [bought] heating oil, and there's just kind a basis to an index price that we can look at? How should we model that going forward?

Well, a good portion of our purchases that we make are based on the closing prices of the [Merck]. So wherever the Merck goes, or perhaps pretty much close to the bottom, although there can be a little differential between the cash market and the Merck. But you can use the Merck as a pretty good surrogate, as to where our cost of products go.

Is that a pretty real time process? Meaning you can pretty much buy on an as-needed basis for the most part?

We buy on an as-needed basis, we have around 10 days of physical supply, and we run between 5 to 7 days of price inventory, so that we can not be able to respond if the market goes up, or if the market goes down.

Great, thank you.

Understand that's for our variable-priced customers. For the fixed-price customer, we've fixed that. We've hedged that price.

For the fixed price customers it's based more on the 12-month weighted average of the strip.

Okay. Great, thank you.

It's actually a backward, looking forward month on the strip. But a fixed price --

Ladies and gentlemen, [OPERATOR INSTRUCTIONS] The next question comes from the line of Milan Gupta, Southpoint Capital.

It look like you don't have any working capital borrowings into this quarter, and should get a lot of cash coming in next two quarters. Do you have any plans for that cash, is it going to be the acquisitions, or do you foresee possibly repurchasing bonds, or do you just look at possibly just not using your working capital facility as much?

Well, we're looking at acquisitions, and I think at that point this is really what we're looking at. We really have not reached any decisions on anything else.

Got it. That's all I have, thanks.

Mr. Cavanaugh, there seem to be no further questions at this time. I will now turn the conference back to you, please continue with your presentation or any closing remarks.

Thank you very much I appreciate everybody's interest, and I appreciate your joining us on the call, and we look forward to talking to you again next quarter. That's all we have, thank you.

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