Star Group LP (SGU) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Star Gas Partners fiscal 2006 third quarter results conference call.

[OPERATOR INSTRUCTIONS]

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

Thank you. And good afternoon, everyone, 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 begin, I would like to ask Steve Hecht of Jaffoni & Collins to read our Safe Harbor statement. Steve?

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

All statements other than the 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 insurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the partnership's expectations are disclosed in this conference call and in the partnership's annual report on Form 10-K for the year ended September 30th, 2005 and its quarterly report on Form 10-Q for the fiscal quarter ended June 30th, 2006. All subsequent written and oral forward-looking statements attributal to the partnership or persons acting on its behalf are expressly qualified in our entirety by the cautionary statements. Unless otherwise required by law, the partnership undertakes under no obligation to update or revise any forward-looking statements whether it is a result of new information, future events, or otherwise after the date of this conference call. Joe?

Thanks, Steve. I'm going to open up with a brief overview of the business and then Rich will go into some detail on the financials, after which we will be happy to take your questions.

Our third quarter results reflecting impact of 22% warmer weather and attrition, as well as conservation due to continued volatility of home heating oil prices and the unprecedented high prices of all petroleum products. The warm weather combined with attrition and conservation reduced our volume by 30% to 46 million gallons. Despite this, I believe the partnership performed quite well in the quarter. Increased margins and service revenues along with reduced operating expenses almost offset the impact of the lower volume and an unusual increase of about $3 million in insurance costs, leaving us with an operating loss of $24.3 million compared to the $23.4 million in the same period last year. The gross profit margins remain strong. And our service and installation departments continued to show improved results.

Our operating and marketing expenses are tightly controlled. And our interest expense was reduced by $3 million this quarter as a result of the recapitalization and lower working capital borrowing. We continue to make progress with our localization initiative. And while net attrition remains at higher level than appropriate, we believe that the decentralization o four operations will be a major factor in bringing our gross losses into mind. I believe that the results for this quarter when our gross losses were reduced by 2600 from the same period last year, combined with the improvement in the second quarter when we experienced 3500 gross losses are a preliminary indication that the measures we are taking to reduce losses are beginning to take hold. Unfortunately, while we've been more successful in retaining current customers, we continue to have difficulty adding new accounts due to the continuing high levels, price volatility, and our disciplined pricing policy. We do have an array of pricing plans, one of which should appeal to most if not all of our current and perspective customers. But the high prices continue to be an obstacle.

We have reviewed several potential acquisitions, but to date none have fit our model. And as I've noted before, we are not going to purchase businesses that do not fit simply to add volume. We continue to see quality companies that have similar operating characteristics as us and who operate in quality markets. We are currently reviewing a small number of potential acquisitions, none of which are of the material side.

We are working with our employees to continually reassure them that they are the most important factor in customer retention and have instituted a formal program of training designed to instill a culture of individual responsibility where each employee understands that they are empowered to solve customer concerns without the need to pass problems from department to department. I know every CEO says this, but we really do have great employees who really care about their customers. And we want them to know they can take care of their customers without being second-guessed.

With that, I'd like to turn the call over to Rich for the financial presentation.

Thanks, Joe. First I would like to walk through the quarter and then the nine months.

For the quarter, we sold 46 million gallons compared to 66 million gallons last year. The decline of 20 million gallons or 30% was due to temperatures that were 22% warmer than the prior year and net customer attrition of 8.3%. Our per gallon margins were strong in the quarter. We realized a per gallon margin of $0.67.3 verses $0.57 last year or an increase of $0.10.3 per gallon. Included in our gross profit is our service department. A net profit from service increased by $1.3 million. We were able to reduce our total operating expenses by $3.7 million; unfortunately, insurance expense was higher by $3.2 million, largely due to the adverse settlement of two workers' compensation claims. Exclusive of insurance, operating costs improved by almost $6.9 million, of which $3.3 million is due to lower volume, $1.4 million is due to lower SOX costs as last year was our first year for SOX compliance and additional expense reductions of $2.2 million as the Company continues to rationalize its operating expenses. For the quarter, the operating loss widen by only $0.9 million as we were able to almost fully offset the impacts of 22% warmer weather and the additional insurance expense through higher home heating oil margins and our expense control initiatives. Before leaving the quarter, I would like to point out that our net loss widened by about $6.8 million to a loss of $36 million due to a non-cash charge of $6.4 million relating to the early redemption of debt in connection with our recapitalization.

Let's move on to the nine months. For the nine months, we sold 360 million gallons compared to 453 million last year. With the decline of 93 million gallons or about 21% was due to temperatures that were 11.6% warmer and net customer attrition of 8.3%. Our per gallon margins for the nine month were strong, as well. We achieved the margin of $0.69 verses $0.55.6 realized last year. This is an increase of $0.13.6 . Again, we made progress in our net service and reduced the loss by $5.4 million. Total operating expenses decreased by $39 million. We believe that we are able to reduce expenses by $7.8 million in response to the warm weather and reduced our marketing expenses by another $6.1 million as we evaluated the merits of past spending programs. We also received $4.4 million in weather insurance proceeds in the second fiscal quarter, which also lowered our operating expenses. Approximately, $21 million of the change in operating costs related to either legal, professional, financing, or severance costs that were incurred in the prior year, but were not repeated in fiscal 2006. EBITDA for the nine months increased by $143 million to $66 million approximately $103 million of the increase was due to a $67 million charge for good will impairment recorded in 2005 in a change in loss of debt redemption of $36 million. The balance of the increase in EBITDA or $41 million is due to results of operation of which $21 million was due to the lower level of legal, professional, financing, and severance costs. And $20 million is due to our expense control program and higher margins which more than offset the impact of 11.6% warmer weather.

I would like to move over to our balance sheet for a minute. As a result of the recap, we reduced our long-term debt to $174 million and we have minimal amortization until the year 2013. As of June 30th, 2006, we had a cash balance of $66 million and our working capital was $133 million. In addition, we have the ability to borrow $151 million under our current bank facility.

And with that, I would like to turn it back to Joe.

Thanks, Rich. Okay, folks, we'd like to take any of your calls. If you could open it up?

[OPERATOR INSTRUCTIONS]

And our first question comes from the line of Ed Olson, present investor, please go ahead.

Yeah, what is the experience on the new customer side versus either market share or others? If sales are slow, are they slow for everybody or what's our performance?

This is Dan Donovan. Our performance is in line with what we think is happening in the market. Our losses have slowed down too, which is an indication that other companies' gains have slowed down. Our gains have slowed down mainly because of the stricter discipline we have on margins that will accept for new accounts. We've also raised the credit levels of any new account that we bring in. So based upon those two items, it's the main reason our gains are where they've been in previous years. We're expecting or looking for a higher quality customer.

Is that costing us market share? And if so, that's fine, I'd just like to know that.

I would think, yes, it is costing us market share. If in fact you look at the market as made up of customers who are shoppers where we're trying to stay away from the shoppers who switch year to year from company to company.

We made the decision to not chase after customers that are going to leave us every 6 to 12 months.

One other question. How about the decentralization of sales, how is that working?

You mean the decentralization of our operations? What we call localization?

Yes.

Currently we're answering about 35% of our all customer calls locally. In future -- 100% at Meenan and we're hoping that by the end of the first quarter of 2007 that we'll be answering 60% of our calls locally.

Thank you.

[OPERATOR INSTRUCTIONS]

And our next question comes from the line of Steven Errico with Locust Wood Capital. Please go ahead.

Thank you. How are you today?

Fine, thanks.

I missed the last line. How much did you have available on your lines? I just kind of want to get an idea in your minds, what type of liquidity do you have total given cash on hand and your credit facilities for acquisitions?

Well, we have cash on hand of $66 million, we have the ability to borrow under our revolving credit facility of $151 million, but a portion of that would be we're going to need to set aside for winter, winter working capital purposes.

Okay. And also in this upcoming quarter, should I like to see more of the working capital, accounts receivable? Does that turn into cash ? So would your high point of cash be at the end of next quarter?

Depending on where inventory levels go, yes. Normally you would expect our high point per cash to be around September as not only we collect our accounts receivable, but we also have customers who are under our budget payment plan and their budget payment plan starts to kick in over this summer. They pay us more than we actually deliver to them.

And my final question, last year when you did the proposed recap, in the recap you provided some type of guidance. I think it was roughly what your budget, your plan that you had provided was maybe $45 million EBITDA for fiscal year 2006. You guys are at $66 million through the nine months, obviously you lose money in the next quarter. Do you still feel comfortable with the $45? and my second question to that, do you plan on providing guidance on a -- for an annual basis for next year?

The answer to the second part is no. And you know, I guess the answer to the first part is we feel pretty comfortable.

Okay. And then my last question, since there doesn't seem to be a lot of people on the call. When I look at your guys' biggest asset, it's your corporate structure. And I just want to -- have you guys thought, do you feel the obligation to make acquisitions in the home heating oil business? There are a lot of other acquisitions that you could make that will qualify for the MLP structure. That perhaps are better businesses. Have you guys given any thought in diversifying a way and using your corporate structure to buy perhaps more predictable, midstream assets?

Actually, what we've been concentrating on right now is getting this Company into a condition of stopping our attrition problems and getting the Company refocused, more focussed into the heating oil business and we've been concentrating on heating oil acquisitions. We're prevented by restricted covenant from propane acquisitions in a large part of the United States -- certainly a large part of our footprint because of the sale of the propane company in 2004. But we really have not, we really have not given any consideration at this point to diversifying beyond home oil.

Okay. And if I could just follow up. The backlog -- well, I think I can answer it. You said you're talking to people right now, but the acquisitions at this point in time are -- the people you're talking to would not be material yet, is that correct?

That's correct. Small acquisitions. I will -- Dan, just reminded me. We do have -- and we haven't talked about expanding or, but we do have a home security business, as well, at Meenan.

Okay.

A little bit of this. And we do eventually have potential to grow that business with Petro, but first we're getting Petro straightened out as a home heating oil company, and that would be something that we may look into next.

Great. Well, thank you very much, guys.

Thank you. Our next question comes from the line of [Simon Dock] with [McCay]. Please go ahead.

Hey, guys. Just a follow-up. I know you said you were comfortable with that $45 million number. This far into the quarter are you ahead of where you were last year?

Ahead of where we were for which quarter are you speaking of?

The corresponding quarter last year?

Are you talking about the fourth quarter?

Yes.

I mean, I think we said in the 10-Q that our volume for the month of July was down from last July. But on a volume basis, we're down. But -- our margins are running a little bit better than last year.

Okay. And any thoughts to, you know, distributions? On the equity?

Not at this point, no.

And what, I mean, what's your thought process on that? When do you think, you know, because given the numbers that you're showing, it seems to be that you'd be able at least do something and maybe that would in turn help your stock price. And that in turn might help you put together some acquisitions.

Our dividend, we're really not required to make a dividend until fiscal 2009. We really have no plans at this point to do anything different than that.

Is there anything we should maybe look for in terms of slowing customer attrition or some sort of signal that you guys are looking at that now is a good time to start maybe paying a dividend.

Well, that's something we have to think about when we get the attrition under control and we get the business operating properly.

Okay. Thank you.

Thank you. Our next question comes from the line of [Milan Youssef] with Southpoint Capital. Please go ahead.

Hey, guys. What was the nature of the $3.2 million charge for insurance? Do you expect that to -- is that sort of nonrecurring?

Well, nonrecurring -- I'm not so sure I would qualify it as nonrecurring, but we had two workers' comp claims that resulted in some debts that we had to record this quarter. And that certainly is an event that doesn't happen often.

I see. And also on inventory, it looks like inventory went up this quarter. Usually it seams like it comes down in the third quarter. Can you talk a little bit about that? I understand it might have something to do with the underlying commodity price. If you can also just speak to maybe what your absolute units are of inventory now versus last quarter and versus the same quarter a year ago.

Yes, our inventory is up, I believe our absolute number of units are up as well as the per gallon price, which drove our inventory levels up.

Can you quantify that at all in terms of some the -- on a sequential or year-over-year basis?

I just don't have that -- I just don't have that in front of me.

Okay. Thanks.

Versus last year.

Thank you. [OPERATOR INSTRUCTIONS] And our next question comes from the line of Ted Gardner with Raymond James. Please go ahead.

Hi, my questions have actually already been answered, thanks.

Thank you. Our next question comes from the line of Ron Londe at A.G. Edwards. Please go ahead.

Thank you. From a standpoint of solving the problem with attrition, it seems to me that historically just from the encroachment of natural gas in your marketing areas that the attrition has been around 1% if I'm not mistaken.

That's correct. On natural gas it's correct.

And then there's another factor that's built in with regard to older heating oil furnaces that are renovated or replaced with newer units that use less heating oil or sometimes as much as 30% more efficient. You know, you're also going through a process where you said your advertising budget is lower. How are you going to turn around the attrition from this point forward given those factors?

Let me answer the last one. The advertising budget in previous years had an awful lot of fat into it. There were a lot of advertisements of mass marketing that were costing a lot of dollars. They weren't bringing anything in. We track where the customers come from and a lot of the customers, the majority of the customers that were coming in from that advertising were customers that were simply price shoppers that were leaving us after their initial good offer expired after anywhere from 6 to 12 to 18 months. So that we really feel our marketing dollars are now being spent properly where they need to be. And that shouldn't -- that shouldn't really be the impact on not really having newer customers coming in.

As far as -- as far as natural gas, the conversions, that by the way has remained pretty much constant. I've been in this business a long time. It really hasn't changed anywhere from 1% from 2% a year. We really have not seen any significant increase since the prices have started to climb over the last year. Close to two years now. Yes, energy is more, some of the units that we're selling are more energy efficient, but you've got an answer for that one?

Well, obviously, we sell a lot of that he has equipment ourselves and we understand that there will be less oil burned. I mean, that's the basis for selling it. And our customers know that too. What we're looking at doing is -- just talking about attrition as a whole is we plan on gaining less accounts, but we plan on keeping a heck of a lot more of the ones that we gain. Whereas in the past, the draws to bring in a lot of accounts and lose a lot of accounts. We want to stop that churn. The accounts we bring in, that's why we're looking for higher credit scores, higher margins, trying to attract the type of people that want to do business with full service companies protecting the biggest asset, their home. We do it both on the heat side, we do it on the air-conditioning side, and even we do it on the home security side. And then, of course, we want to keep those customers when they do have problems and we want to be able to solve them. That's why we're decentralizing,that's why we're localizing. So that we can solve those problems when they call with one phone call. And we think that we'll get our attrition under control. It will be at a much lower percentage level than it is right now. The gains might be down a little bit. The gain percentage might be down a little bit, but the loss percentage will be down too. The way we're going to grow is through acquisition. The attrition has to remain under control, you know, no matter what.

Okay. Thank you.

Thank you. Our next question comes from the line of [Matt Arnett] with [inaudible]. Please go ahead.

Hey, guys. I have four questions for you. Profit on your services business was up, is that a -- are you doing something different there? And how should we look at that going forward?

Well, it usually, the loss, if you will, it happens to be a profit this quarter. But the loss from service diminishes as you get along during the course of the year. You'll find a greater loss in the first quarter, a greater loss in the second quarter, possibly a profit in the third quarter. And most likely a profit in the fourth quarter. We saw that same trend last year, if you look at the numbers and you see that same trend this year that -- maybe it's not obvious. In the summer your loss on service is a little bit less on an absolute basis than in the winter months. That said, we have made steps to reduce that net loss from service this year verses last year. And for the nine months we improve that loss by $5.4 million. So to a certain extent there was some seasonality in the service department.

But there is a discipline to charge a proper amount for our service contracts and to charge proper amount for service which we haven't seen in the past year, but it's very much in play now.

Well, the other discipline too is to -- and discipline is a good word for it is our expense control. The control of the expenses in the service sector. We are doing a pretty good job of getting under control. And we'll continue to do that.

Can that ever be a profit then? It's always going to be slightly negative?

It's possible it could be a profit center. But when you net it with our installation income, it could be a profit center. It depends on market to market. There are some markets right now where it is a profit center. In our footprint from Boston to Virginia, it's a profit center in some right now. Some areas are used to -- such as in the New York area, there's a lot of, you know, what we might call free service. And we're trying to get away from that as a lot of people.

And also, you just commented on credit scores of your customers. Can you kind of give a statistic that would indicate how the average credit score is rising versus, you know, either for your new customers or as a whole for all of your customers?

For new customers we look to get a minimum of 620-650.

Okay.

On various things.

And where were you before?

There is a subjective evaluation made too, but on a raw credit score it's between 620 and 650. In the past it has been considerably lower than that.

Okay. And then is part of the issue with the gain, you know, the slow down in your gains being that some people may be holding off right now just given the environment and that could effect us?

Yes, we think that is definitely the case. That a lot of people are waiting to see what's going to happen with the price of oil. We see a lot of new accounts. Potential new accounts making the decision to try COD companies for a while where they really don't get service. When the winter comes they usually have to make a decision not to have a service company servicing their home. We are seeing somewhat of an uptick of people going to COD. But we think that we have a variety of offerings that should be looked at very favorably by those people who come fall and early winter.

Okay. My last question is on acquisitions. You guys don't seem to have, you know, a very robust pipeline. And I was wondering what's holding people back from kind of selling their businesses, you know, coming to see you, particularly things that may be of some material size?

I think still trying to line up their businesses for next year, and they're beginning now to find out there's going to be some difficulties with the high cost of oil. And basically some smaller ones are having difficulty getting bank credit for it. From what I understand, I think it's a question of timing at this point. People have kind of held off seeing if they could get by another year.

Okay. Is it --

Everything I've seen, the indications are it should start to open up.

And is there any limitations on the amount of acquisitions you can do in a year based on your credit facilities? Is it up to whatever you guys choose to do based on your liquidity?

Well, currently we do have some limitations under the bank facility. I guess over $25 million in any given year we would have to go back to them. You have to understand that's ABL was put in a very crisis mode here at the Company.

Okay. Great. Thanks for your time.

Thank you. Our next question is a follow-up from the line of Ed Olson, private investor. Please go ahead.

The question was answered, thank you.

Thank you, Mr. Olson.

There was a question on the inventory levels. We're up about 12 million gallons from this time this year versus last year. 630 '05 versus '04. And our inventory costs are up about $0.35 a gallon. So a combination of the higher volume and the costs going from $1.63 to $1.99, our inventory products are up around $29 million.

Thank you.

You're welcome.

Our next question comes from the line of Steven Errico with a follow up with Locust Wood Capital. Please go ahead.

Thank you. Can you hear me? Could you give us -- is there -- could you give us a metrics of Petro's attrition in gross ads versus say Meenan and I assume Meenan's are better and kind of how you see Petro evolving?

We really don't break those out separately.

Okay.

Thank you. Our next question is a follow-up from the line of Simon [Dock] with McCay. Please go ahead.

Hey, guys, did you say what CapEx was in the quarter?

CapEx in the quarter, just give me a second and I'll get it for you.

And also if you had any guidance for what the full-year number might be too.

Nope, can't do that.

Okay.

Rich is getting the CapEx for you.

Okay. Thank you.

Mind if we see there are any other questions? Rich has got to pull that number out.

That's fine.

There are no waiting questions at this time.

Okay. That's fine then, Rich will be right with you.

You can call me offline, if he wants.

Okay, I'll have him do that.

No problem.

Okay, he's back. He's back.

There are no further questions at this time.

About $700,000 for CapEx in the quarter. Did you get that?

One moment I did close the line.

Oh, okay. Are we -- any other calls then?

There are no further questions at this time.

Okay. Fine, I thank you again for joining our call and for your interest in the Company. We look forward to speaking with you again in the future. Thanks again.

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