Star Group LP (SGU) 2006 Q4 法說會逐字稿

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

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Friday, December 15, 2006.

I would now like to turn the conference over to Mr. Rob Rinderman. Please go ahead, sir.

Thank you, [Kamika]. Good morning, everybody.

This conference call will include forward-looking statements which represent the Partnership's expectations and beliefs concerning future events and 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 (indiscernible) patterns of our customers; our ability to obtain satisfactory gross profit margins; our ability to obtain new accounts and retain existing accounts; our ability to affect strategic acquisitions or redeploy assets; the impact of litigation; the continuing impact of the business process redesign project and our ability to address issues related to that project; petro 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 creditworthiness; 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 Partnership's expectations are disclosed in this conference call and in the Partnership's annual report on Form 10-K(a) for the year ended September 30, 2005 and in its quarterly report on Form 10-Q for the fiscal third quarter ended June 30, 2006. All subsequent written and oral forward-looking statements attributable to the Partnership or persons acting on its 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 weather as a result of new information, future events or otherwise after the date of this conference call.

With that, I would like to turn it over to Star Gas Chief Executive Officer, Joe Cavanaugh. Please go ahead, Joe.

Thanks, Rob. Thank you, everybody, for joining our call this morning. As you saw in our press release this morning, we are reviewing our accounting for derivatives and therefore, we filed a 15-day extension for filing our 10-K. We believe that the results we presented are an accurate representation of our performance during the fourth quarter and the fiscal year, but they are unaudited and subject to adjustment, particularly as to the accounting for derivatives under the accounting standard FASB 133.

We don't expect any adjustments. If we do have any adjustments or if we do have any adjustments, they would not have any effect on our liquidity or our business.

Having said that, let me tell you about our business. I'm very pleased report that we had a good fiscal fourth quarter and a year in which we have demonstrated tangible improvements on many fronts. We continue to make progress but we do have a lot work yet to do in order to get where we would like to be.

For the quarter, we reduced our operating loss by more than half to $18 million compared to the $40 million loss in the fourth quarter last year. For the year, our operating income was $29 million compared to a loss of $101 million last year. That loss included a $67 million goodwill write-down, if you recall.

EBITDA for the year was $55 million, a significant improvement over last year's loss. Several factors contributed to these improvements, among them were better margins, lower operating, lower general and administrative expenses, lower legal fees, lower financing costs, and improved service and installation results, all of which more than offset the impact of lower volume, which was the result of both customer losses and warmer weather.

Net customer attrition continues to be an issue. While we have seen a reduction in the number of lost accounts, gains continue to be lower than expected, primarily because of our margin requirements, tightened credit standards, and a reduction in mass-market advertising, which typically attracted a more transient price shopper in the past. Price sensitivity due to the higher level in volatility of oil prices continues to be a major factor in customer turnover.

On a more positive note, we've done a better job this year in retaining new homeowners as customers when a current heating oil customer moves out. We are progressing with our localization initiative and have established a more formal employee training program stressing customer service and employee empowerment, which Dan is going to talk about in a few moments.

While we didn't complete any acquisition this year, we have looked at several opportunities, two of which we expect to be finalized shortly. Neither of these is of a material size. As we have said in the past, we're going to be very careful in our acquisition program, only pursue companies that will fit within our model without undue disruption to our ongoing business. That said, we do intend to become more aggressive in our search for quality companies to acquire.

All in all, it has been a very satisfying year. We completed our financial reorganization. We have a new general partner and we have a sound financial base with substantially less [depth] from which to operate. Nevertheless, we said at the beginning of the remarks we have a way to go yet and there are many challenges to be faced. But we do have a superior and focused management team and employees who are upbeat and prepared for continued success.

With that, I would like to turn this over to Rich Danbury, who is going to go over the financials in more depth. Rich?

Thanks, Joe. First, I would like to walk through the quarter and then fiscal 2006.

For the quarter, we sold 30 million gallons compared to 34 million gallons last year. The decline of 4 million gallons or 12% was largely due to net customer attrition of 6.7%. Our per-gallon margins were very strong in the quarter. We achieved a margin of $0.94 versus $0.58 realized last year or an increase of $0.36 per gallon.

Included in our results in the 2006 fourth quarter was a mark-to-market hedging gain of $6.4 million, or $0.21 per gallon. The balance of the margin improvement is $0.15 and compares to our home heating oil margin increase of $0.15 for the fiscal year-over-year period. I would like to point out that, for the first quarter of fiscal 2007, we believe our results will be reduced by the impact of the $6.4 million mark-to-market gain that was recorded in the fourth fiscal quarter of 2006.

We continue to see improvement in our service department, which is included in our gross profit, and the net profit from service increased by $1.7 million. As Joe mentioned, operating expenses decreased by $10 million or 18% due to lower bad debt of $3.8 million, lower legal and professional expense of $3.1, and $3.1 million of other expense reductions.

For the quarter, the operating loss improved by $21.5 million from a loss of $40 million last year to a loss of $18.5 million this year. We were able to offset the effects of lower volume with margin improvement and expense reductions. I would like to point out that our net loss was reduced as well by $25.3 million.

During this non-heating period, the EBITDA loss was $11 million, which represents an improvement of $20 million. To be clear, gross profit, operating income, EBITDA and net loss were favorably impacted by the $6.4 million mark-to-market gain.

Let's move on over to the year. For the year, we sold 390 million gallons compared to 487 million gallons last year. The decline of $94 million or 20.6% was largely due to temperatures that were 11% warmer and net customer attrition of 6.7%. Our per-gallon margins for the year were up $0.15 per gallon as we achieved a margin of $0.71 versus $0.56 realized last year. Again, when you look at our net service profitability, it improved by $7.2 million.

Total operating expenses decreased by $49 million. We believe we were able to reduce expenses by $15 million in response to the lower volume and we reduced our marketing expenses by another $6 million. We also received $4.4 million in weather insurance proceeds in the second fiscal quarter which also lowered our operating expense. Again, we made continued progress in our collection and credit expense and as a result, bad debt and credit collection expense was lower by $4.8 million for the year. Approximately $24 million of the change in operating costs related to either legal, professional, financing or severance costs that were not incurred in the prior year--that were incurred in the prior year but not repeated in fiscal 2006.

EBITDA increased by $163.6 million to $55.2 million. Approximately $103 million of the increase was due to a $67 million charge for goodwill impairment recorded in 2005 and a change on the loss on debt redemption of 35.5 million. The balance of the increase in EBITDA or $61 million is due to results of operations, of which $24 million was due to a lower level of legal, professional, and severance costs and $36.6 million was due to our expense control programs and higher margins, which more than offset the impact of 11% warmer weather. Again, in fiscal 2006, we generated $55.2 million in EBITDA. Included in the calculation of EBITDA is the hedging gain of $6.4 million as well as the non-cash loss on debt redemption of 6.6 million.

It would like to move over to our balance sheet for a quick second in our liquidity. As of September 30, 2006, we had $91 million in cash, working capital of $90.5 million, and long-term debt of $174 million. All of this long-term debt is due in 2013. Since the recap in April, we have started to receive some trade credit with our suppliers. We have also entered into swaps for our fixed-price customers, which has improved our liquidity. Since these swaps are collateralized under the bank agreement, we are not required to post any cash collateral for these trades.

I would like to point out, when you look at our financial statements as of September, we had purchased and extra 18 million gallons for our winter needs. This represents a cash use of 34 million in the fourth fiscal quarter of 2006 over and above our normal expectations.

We have a bank credit facility of $310 million. As of today, we have yet to borrow under this facility.

Now I would like to turn it over to Dan.

I would like to talk about operations for a bit. The repopulation of customer service in the local operations continues at a steady rate. All of our operating districts now have the ability to take customer service calls once again. Some districts are now 100% self-contained and all of our infrastructure improvements have enhanced our capacity to handle these calls. We also maintain a cost effective and efficient centralized customer service to handle key call volumes, nights and weekends. We have improved our hiring and training techniques to ensure responsible and empowered decision making closer to the customer, resulting in better retention results.

We are re-establishing a customer-centric customer service philosophy and a culture--and culture to espousing leadership, empowerment and trust in what we call a two-day customer service boot camp. This is not an initiative, but this is a culture change. Each session is limited to no more than 25 to 30 employees. We have held 12 sessions thus far and have covered all of our areas of operation. I attend the first day of every session. The hallmark of the program is leadership. By leadership, we mean employees are accountable to delivering excellence and customer service while also being aware of the bottom-line requirements. The leadership we are encouraging in every employee is not a title but an attitude and a commitment. We want leaders at all levels to take pride and responsibility for their work and to take charge of their own sphere of influence. We want employees to see themselves as a resource to others to teach, inspire, and motivate. Our employees are empowered to solve problems where they begin--solved them, follow-up, and prevent reoccurrences. They're also trusted to use the correct means to satisfy our customers. Of course, strong controls are in place. We will trust, but verify. We will delegate to solve problems at the level closest to our customers but we will also inspect.

Customer satisfaction is our culture. This is not mere lip service. We mean what we say. We do what we say. There are no fancy presentations, outside trainers, or consultants. It is run by our own experienced employees who not only know the heating oil business, but they also know how to deliver service that exceeds customers' expectations. The program is not just for customer contact employees but for every employee, line and staff. So everybody understands that we are all customer service reps, that we are all customer advocates.

It will take a while to get every employee through the program. It only takes a few to get the word out that the customer service philosophy and culture at Star Gas is dedicated to excellence and customer service not just in word but in action. I view this as an ongoing program that will constantly reinforce this culture. Employee reaction has to thus far been very positive, since their expanded role is more as an owner versus an employee. It is what they inherently know is the right way to operate our business.

In addition, all local customer service staff will be involved in new and reworked outbound proactive retention programs. In a nutshell, we are emphasizing this. Joe Cavanaugh and I have been saying since day one--local general managers running operations that are guided by a dominant customer satisfaction philosophy and culture that emphasizes retaining customers and achieving EBITDA goals. We still have a ways to go but we are on the right track. Joe?

Thanks, Dan. At that point, [Tamika], we will open the lines for questions please.

(OPERATOR INSTRUCTIONS). Ron Londe, A.G. Edwards.

Yes, I would just like to go over maybe some of the trends from the latter half of '06 and how they might go into '07. From the standpoint of depreciation and amortization, it kind of bounced around during '06. What do you think we can view as kind of a normal level for '07?

Well, Ron, this is Rich. We are not giving any projections out for the year but you could probably take the fourth quarter of 2006 and multiply it by 4.

Interest expense--do you think it will probably be in line with '06 or lower?

That is probably--we do have $174 million of long-term debt and that is at 10.25%. That's all public information. We have $100 million in cash on the balance sheet at the end of September. We had cash today on the balance sheet of around $60 million. So, we haven't dipped into the bank acquisitions--or not the acquisition facility but our working capital facility. But there will be some use of the facility during the course of the year. So I would use those two, $174 million and the fact that we do have some cash, to try to ballpark what your interest is going to be for next year.

Maintenance capital spending in '06? Do have a number for us?

Yes. We have always said that our maintenance capital runs between $3.5 and $4.5 million.

That would extend into '07 too then?

Yes.

Now, margins were around $0.72 a gallon?

Right.

Do you think those are sustainable into '07? I know the first quarter is going to be a difficult quarter; you've already indicated that. But for the full year?

Again, we are not going to project out where margins are going to go.

Okay. Generally speaking, in the first and second quarter, you lose money in the services side of the business. Are you looking for less of a loss in services in '07 potentially?

The only thing I can help you out with is--going back and looking at the trends over the last several quarters. I think we have managed to reduce that loss consistently for the past year, year and a half.

Can you give us a feel for what the attrition has been for October into November?

Yes we can, Ron. The attrition for October and November, from October 1 to November 30, 2006, we lost 2300 accounts or about 0.5% versus last year, October 1 to November 30, 2005, we lost 4300 accounts, or 1%.

Also, you mentioned the business improvement plan and you did talk a lot about that. Is there a number that we can kind of speak to? If the plan meets your objectives, what kind of cost savings you might gain from that during '07 or even into '08 or maybe on an annualized run-rate basis?

We are always trying to save expense on anything we do, although we don't call this the business process improvement. That was the old program. Right now, we call it I guess we want to call it something--we call it localization and establishing more of a customer service culture. And our goals are customer retention. Obviously, we try to do everything with keeping in mind that we spend as little money as possible.

It's very much with the localization, Ron, that the managers--and that kind of even goes back to the service a little bit--that the local management is watching their costs and their billings very closely. That is the plan. But every expense is continually looked out.

Okay, but you can't say okay, this is going to be--is going to help us 5 or 10, or 20 million or whatever on an annual basis?

We haven't put any numbers like that to it.

[Connie Hawks], Private Investor.

Obviously, a very impressive the year on being able to generate it looks like $55 million of EBITDA if you back out that one-time gain you got in the fourth quarter. I guess the question I had using--and these are my numbers, not yours. But if you are assuming there's about 17.5 of interest expense on the notes, also the cash, and the 4.5 of maintenance CapEx that you discussed, with the $55 EBITDA, that is $33 million of free cash flow or $0.44 of free cash flow per share. So what I'm trying to understand is why not go ahead and start paying out a dividend? It seems like you can support one. Certainly that--being able to pay out a $0.35 or $0.40 dividend I think would make your stock price look very attractive at the current levels. Clearly, everyone wants the stock to go up. Then from a business point of view, you obviously want the stock to go up so you can use it as a currency to make acquisitions. So why not pay a dividend now?

There's a lot of reasons. There are several different ways we can use the cash. We can do acquisitions; we can pay down debt; we can buy units back; we can pay dividends. We look at all four all the time. The first thing we do is, yes, we did have a good year. We are still in a situation where we have some--price volatility is an issue with us. The attrition, we still want to continue to bring that down. It's just a lot of things. We've got to finish fixing this company before we start going out and doing other things with the cash.

The plan is to start paying a dividend in '08. We intend to do that. That was all in the recap. That's how we decided to do it. We don't have mandatory distributions until '08. The first thing we want to be able to do with the cash is acquisitions. We've got a couple in the target in line right now. We want to be able to go out and do that. That is our first use of the cash and we think that that is our best use of the cash. But the other three are also on the table and we are still looking at it.

Okay, so it's fair to say though that there's really nothing then that could take place in terms of the business. I thought this was a much better year than I was expecting for '06, so in '07 there is million nothing that could take place that would make you want to pay out a dividend before that '08 target?

I can't say that. I really can't say that, Carnie . I mean (multiple speakers).

It seems unlikely at least. It doesn't sound like that is something that is likely to happen anytime soon, maybe is what I'm trying to get out.

Well, again, the plan is to start paying in '08. So that is probably the answer to your question.

Matthew Barnett, Jet Capital.

It looks like you are headed the right way. I had kind of a series of questions. You guys are showing pretty good trends on the cost-cutting on both the delivery and branch costs and SG&A. Is there more room to get those numbers down? Or should we think of kind of the numbers in '06 as something that is a run rate that we can work with going forward? I know you guys are hesitant to give any color on the future but it does seem to be items that you can control.

We are always trying to right-size our business. And where always trying to find more ways of saving monies. There are some things that we could do going forward over the next several years whether they be consolidations or just changing some methods of how we operate. We never give up on expense control. We are always looking at it. It is one of our main objectives is to constantly be going through expenses and justifying them to ourselves.

But it is fair to say that I guess those two items added up in '06 (indiscernible) call it 226 or so--material changes from there aren't something that we should expect?

I don't think we can say, Matt. Again, as Dan says, we look at it every day as to what we are doing and where we can cut back and make changes as the--(multiple speakers).

Okay, so it is more likely to go down than up? Is that a fair statement?

I'm sorry?

It is more likely to go down than up, those costs items?

You've got union contracts. You've got cost of living increases. It is hard to say.

Expenses reduced by the $4.4, $4.3 million of weather insurance.

Are you not taking weather insurance this year?

Yes we are.

So why would that be a reduction in (multiple speakers)?

We had weather insurance proceeds. Then the proceeds from the weather insurance is a reduction of insurance expense, which is in our operating expenses. So if we have normal weather, the operating expenses would have gone up because we wouldn't have had the proceeds from the weather insurance.

Then on the accounting issue, do you have kind of a timeframe that you're working on to get that resolved? How should we think about that?

We are working with our accountants as we speak.

I can't give you a timeframe right now.

Do they see this issue as significant or it's something that--?

We are reviewing it with our accountants. 133 is complex, not only the interpretation but the documentation of hedges.

Joe, in your comments, you stated that you're going to get more aggressive on acquisitions. Is that in terms of the number or in terms of the size? How do you think about that?

I am [out beating the bushes], Matt. We are trying to just talk to different people, getting involved, talking to the associations, talking to some of their suppliers and things about (indiscernible) acquisitions of, I don't know, retail customers. We're just actively out looking.

I guess what has changed from last year? It is kind of the same thing we heard last year.

We were trying-- well last year, we had--we really didn't--last year, we were still trying to get things turned around, working more closely with our own employees inside the business. This is an opportunity now to get more outside the business.

Okay. In terms of--

Let me just say does too, Matt. We've got our managers out looking as well now where last year there were trying to get their arms around their own localization initiatives. Now they are also more involved in talking to other dealer areas. This is where, in fact, one of them kind of came to us from, from a manager talking to somebody.

Most of these that you're talking about, I mean, it sounds like they are more bolt-on type of stuff as opposed to a wholesale change in the Company, I mean just by the nature of the talks.

We haven't seen (multiple speakers) large things pop-up yet.

In terms of timing for when you have to get these done versus the way you operate those businesses, is there kind of a timeline where you get to the drop-dead point where it doesn't make sense to buy something because the season is so far into it?

No, not at all, not at all.

Gary Stromberg, Bear Stearns.

Can you give us some sense of volumes, actual volumes in October and November versus last year?

No, we don't have those numbers readily available, sorry.

In terms of weather insurance, as it stands today, would you be collecting weather insurance at least through mid-December and how much would that be?

We have not put the calculation together for weather insurance but through two or three days ago, our temperatures are about 12% warmer than expectations. The policy goes from November through the end of February, so there is a deductible of about 3% or so. But we have to run through that deductible before we would start to collect or accrue some proceeds.

The maximum payout is what?

$12.5 million.

That is paid, if I recall, in the June quarter, or is that paid out in--?

Yes, that would be probably paid out in the June quarter, yes.

I missed the number on the inventory purchase, how much cash that was for the--.

$34 million.

34?

Yes.

So if you hadn't made that purchase cash at the end of the year, it would have been $125 million? Am I doing that math right?

Yes.

Then finally, just big picture, what percentage of your customers now are at the local level--being serviced at the local level versus the call center?

Probably we are close to 60%.

Where do you think that number would be let's say the end of next fiscal year?

100%.

Okay, so that is moving along?

Yes.

Thanks, great quarter.

[Simon Bach], [McKai].

Most of my questions have been answered. Just one follow-up on that inventory question is why did you make that purchase?

Well, we made the purchase mid-summer to take advantage of the [contango] in the home heating oil market, which was about $0.20, $0.25 per gallon.

Okay, so just opportunistic?

That's correct.

Thank you. There are no further questions at this time, Mr. Cavanaugh.

Thank you very much. Thanks for your questions, everyone. Again, thank you for your interest in the Company. We look forward to talking to you again next quarter.

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