Star Group LP (SGU) 2007 Q1 法說會逐字稿

Welcome to the Star Gas Partners fiscal 2007 first quarter results conference call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded, Friday, February 9, 2007.

I would now like to turn the conference over to Joseph Cavanaugh, Chief Executive Officer, please go ahead, sir.

Thanks. Good afternoon, everybody. Thank you tor joining us on the call. Before we begin with information we would like Rob Rinderman to read our Safe Harbor information. Rob.

Thank you, Joe. Good afternoon, everybody. In addition to historical facts or statements of current conditions today's conference call contains forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the partnership's current expectations and beliefs but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today's news announcement and in Star Gas' filings with the Securities & Exchange Commission including its reports on Form 10-K for the fiscal year ended September 30, 2006, and on Form 10-Q for the fiscal first quarter ended December 31, 2006. Star assumes no obligation to to publicly update or revise any forward-looking statements. With that I would like to turn it back to Joe.

Thanks, Rob. Very happy to report that despite the lack of any meaningful cold weather in our first quarter the Company performed very well during the period. Degree days were almost 20% lower than normal, and that was the primary driver of our reduced volume. As you know, we're not currently using hedge accounting so our results reflect a non-cash change in fair value of the hedges we use on our protected price business and our physical inventory.

Our reported EBITDA of 16 million for the current quarter reflects a non-cash charge of about 6 million for the change in fair value of those hedges compared to the 2006 loss of 12 million which was negatively impacted by about $41 million . Wholly-owned margins continued to be strong and were about $0.01 higher than last year excluding the non-cash hedging charges. We continued to tightly control the cost of operations and were able to partially offset the impact of the warmer weather through expense reduction. We also benefited from anticipated weather insurance proceeds of about $7 million. G&A expenses are also down from last year primarily due to lower legal costs and interest expense is down as a result of lower debt outstanding.

Our attrition continues to improve. For the three months we lost about 4,100 accounts net compared to the same period last year when we had net losses of 7,200 accounts. I believe that our decentralization and employee empowerment initiative are having a very positive impact on reducing customer losses. We've been evaluating several potential acquisitions, all of them fairly small. We did complete one small acquisition in January which is being operated by one of our main in divisions in New York.

All in all I believe that we have a company that's operating very well as demonstrated by our results in one of our warmest quarters in memory. We're not completely where we need to be, but we are well on our way to getting there. As you probably saw in our press release this morning I plan to retire at the end of May having reached age 70 with almost 38 years with the Company I think it is time to pursue other activities. I will retain my seat on the Board of Directors. Dan Donovan our President and COO will succeed me as CEO. Dan has been instrumental in the success we've enjoyed in the past two years, and I am confident that under his leadership that success will continue. Dan, before we give it to Rich, do you have anything you want to say?

Just to say, Joe, obviously I am grateful to have the opportunity as President and CEO to continue our ongoing operational and financial turn around. Joe Cavanaugh's contribution of stable leadership has basically enabled us to form an excellent team in operations, marketing and sales, HR, IT, and of course in finance, accounting, and our S&D department. I am confident that we will continue our transformation as a profitable heating and oil company. Rich, do you want to review the financial results first quarter.

Sure. Thanks, Dan. Before discussing the quarter I would like to address our accounting for derivative transactions. Currently we mark-to-market our hedges and recognize the gain or loss in the current period before the purchase of the underlying product and the ultimate sale to the customer. Historically we have been successful at recovering these amounts from our customers. Due to the volatility associated with the non-cash changes in the fair value of hedges, management evaluates pregallon margins and the operating results exclusive of this change. Management is also compensated before the change in the fair value of hedges. Now let's move onto the quarter.

For the quarter we sold 99 million gallons compared to 131 million gallons last year. The decline of 32 million gallons or 24% was due to temperatures that were 18% warmer and that customer attrition of 6%. Our pregallon margins increased by about $0.01 to $0.717 versus $0.708 the prior year. We continue to see improvements in our service department which is included in our gross profit and the net loss from service was reduced by $1.7 million.

Total operating expenses decreased by $14.6 million or 22% due to our ability to reduce operating expenses in response to the warm weather, somewhat lower legal and professional expenses of about $1.5 million, and $7.2 million recorded for weather insurance which reduced operating expenses. The change in the fair value of hedges resulted in a non-cash charge of $6.3 million for the quarter as heating oil prices moved down by $0.04 from September 30, 2006. In the quarter ending December 31, 2005, the change in fair value of derivatives was 40.6 million as home heating oil prices declined by $0.42 per gallon. Interest expense, net interest expense declined by $3.3 million due to our recap in April 2006 as we reduced our average debt outstanding by over $100 million. For the quarter we posted net income of $4.7 million as compared to a net loss of $28 million. This represents a change of $33 million.

From an operating point of view we are able to almost fully offset the impact of lower volume which costs us $22 million with slightly higher margins that provided $0.9 million, lower service and operating expenses of 9 million, weather insurance of 7.2 and lower net interest expense of $3.3 million. The non-cash change in the fair value of derivatives favorably impacted the quarterly comparison by $34 million. For the quarter we generated EBITDA of $16 million which includes the non-cash charge of 6.3 million with a change in fair value of derivatives. In the first quarter of fiscal 2006 we generated an EBITDA loss of $11.9 million which was after a reduction of 40.6 million due to the change in the fair value of derivatives. I would like to now move over to the balance sheet for a second.

As of December 31, we had cash of $70 million and zero borrowings under our working capital facility. The warm weather did favorably impact our cash position by an estimated $75 million due to the combination of lower accounts receivable and higher receipts from customers on our budget payment plans. That said we have improved our liquidity by over $32 million from a year ago as we obtained better terms from our trade creditor and our hedging counter parties. We currently have in place a bank credit facility of $310 million and as of today we have yet to borrow under this facility. I would like to now turn it back over to Joe.

Thanks, Rich. At this time we're welcome to take any questions that you may have. Like to open the lines, please.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Ron Londe with A.G. Edwards. Please proceed with your question.

Like to find out a little bit more about the weather insurance. Where did that come in? Which line item did that hit?

Ron, this is Rich. It reduced the delivery and branch expenses.

Okay. Delivery and branch expenses.

Delivery and branch expenses are lower by $7.2 million.

Okay. Does that mean given that net income was 4.7 million, that the actually from an operating standpoint you lost 2.5 million for the quarter if you take out the weather insurance?

Well, you also have to look at the impact of the non-cash changes in the fair value of derivatives.

Okay. How did that affect--?

That's really a non-cash charge, and that relates to the change in the fair value of the derivatives that we had in place. They really relate to fixed price contracts that we're going to deliver in the subsequent period, but since we mark-to-market now, our hedges any gain or loss is booked currently in the P&L even though we have not really delivered those gallons to the ultimate customer.

Okay. Also, you said attrition was about 1% for the quarter. Normally your attrition over the longer period of time is about 1% from natural gas encroachment and people servicing their heating equipment and making it more efficient. So are you about as low as you can go from a standpoint of attrition or can we expect anything below 1% over a longer period of time?

We're talking about 1% in the quarter. We won't be satisfied with attrition until we have no attrition. I mean, our goal is to turn attrition into growth, and that's our long-term plan, and we continue to work on that.

So that would entail taking market share from other heating oil companies?

Yes, and of course acquisitions.

Acquisitions. Okay. The acquisition you made, you said it was small. How many gallons was that?

About 750,000 to 800,000 gallons, about 800 accounts.

What month?

January.

January.

January. Okay.

Yes.

Okay. That's all I have for now.

Thanks, Ron.

[OPERATOR INSTRUCTIONS] Our next question is from the line of [Frank Haywood] with Frank Haywood Associates. Please proceed with your question.

I have a couple of questions here. One again on the weather insurance. How much did you pay for the weather insurance?

We pay approximately around $3 million for the weather insurance.

And explain to me a little bit about how it works. I read in the report that you get $35,000 for each day that you're 3% below the normal temperatures. Now, is that the kind of a gross payment or a net payment? In other words, you recorded the 7.2 gain in the Q1 here, but if you get into the second quarter, if you have some below normal weather days, do they offset against the above that threshold level days?

Yes, you're absolutely right. The way that our weather insurance works is it is a policy that takes a period from November 1, through February 28, as a whole and -- as a whole, and what the accounting literature tells us to do since we were to a certain extent in the money on that weather insurance at contract was we were -- temperatures were warmer than the strike price by about 200 degree days, we recorded an asset of $7.2 million. If January and February are colder than what's in the ten-year average,then that $7.2 million could reverse itself and be reduced to zero.

Okay. So basically, yes, if everything kind of nets out as a zero, I guess you still lose your $3 million premium, I guess.

That is correct.

Okay.

7.2 million is over and above the premium.

Of course early January I think was pretty warm, but now I think late January through February is projected to be actually not only colder than last year but colder than normal. Is that correct?

Yes. January was about 130 odd degree days warmer than what we would have expected and the first seven, eight days of February was about 130 degree days colder than what we were expected, so for those two months to date we're about even on degree days.

So it is expected basically has to do with, normal temperatures, not last year's temperatures.

That's correct.

Okay. That's good. Basically at this point you're in basically a normal temperature situation which is considerably better than you were the last part of the calendar year, and also probably better than you were this time last year or at least going forward assuming February is in fact colder.

That's somewhat correct, yes.

Well, that's good. Okay. That's very good. The other question I have, the petroleum price has dropped as everyone knows very sharply in early January, bottomed out, came back, not as high as they were in December but rebounded a good bit. Did you do anything in the futures market or in arrangements with your suppliers perhaps to store oil like you had done a few months ago to take advantage of those low prices other than just the current sales that you were making to your customers?

We did not make any special arrangements during this time period.

Okay. Good. Well, those are all the questions I have, and congratulations on the improvement in all the operating numbers. That's great.

Thanks.

Our next question comes from the line of [Milan Gupta] at with South Point Capital.

Hey, guys, my only question is can you just talk about how your volumes are running into Q2 with the warmer temperatures in January and the cold February we've had so far?

The only thing I can say about it is volume has been in line with the weather. Our margins continue to be optimized and balanced with attrition, and expense control and abatement is something that's really not what we would consider a project or initiative at Star Gas. We consider it a way of life. We realize we're a business where pennies matter. We understand that concept, and whether the weather is cold or whether the weather is warm, we're always looking at our expenses trying to control them to the best levels we can to run the business and keep our customers as happy as they want to be.

Are volumes running better than last year given the cold?

Our volume is running -- it would be in line with the weather. In the first half of January obviously was warm, and the second half of January was a little bit colder, and so far February looks like a normal month, maybe a little better than normal. I would assume our volumes would be in line with that.

What does that mean in aggregate?

We're not going to make any projections or forecasts for you until we get the whole quarter in.

Okay.

Thanks.

Our next question comes from the line of [Matt Barnett] with Jet Capital. Please proceed with your question.

Hey, guys, thanks for taking the questions. I guess the first one, is there a way you guys can kind of provide a number or some color on if you didn't receive the weather insurance but the weather had been normal where you think either volumes would have been or what was the net impact of bad weather in the quarter?

Well, I mean, you can do the number yourself. We said our margin was around $0.71, and we said that volumes down 18% or so due to the impact of the warm weather, so round numbers 99 million gallons times 18% is $17.8 million times a $0.71 margin. On the gross profit line that hurt us by about $12.7 million, and you can add your own incremental operating expenses.

Okay. Assuming I don't have any incremental operating -- putting that aside, it would be net also the 7.2, so just using those numbers would be 5, and then the operating would be an additional deduction? Is that the right way to think about it?

That's a good way of doing it, yes.

And the 18%, that's versus last year or versus normal?

It is about 20% versus normal.

Okay. Great. Thanks for that one. Is there any reason we should think the churn level that you're at now for some reason was an anomaly in this quarter or are you comfortable where it is at and you're going to work on driving it down more?

Could you repeat that? The question was a little garbled. I'm sorry.

The churn level that you've guided to, the 1% per quarter, is there any reason we should think that that isn't an anomaly and your efforts going forward would essentially be to drive it down further as opposed to something unusual happened in the quarter that caused people to stay with you or for you to gain customers?

That's not an anomaly. That's why we localized. We see the results of a localization where we have most of our telephone calls being answered locally, most of our businesses being run on a decentralized basis based upon the market conditions in that particular area, people being accountable for running their own businesses and keeping these accounts. That's why that's happening, and if anything I just expect it to get better.

I guess, Dan, the last question is for you and I guess, first, congratulations, do you see any kind of change in strategy or is it essentially just focus on the business and do some small tuck-ins or you think going forward we would see some more bigger tuck-ins or more focus on that now that things have stabilized a bit?

I would so far as the philosophy what we have been doing with the localization and how we run the business, there are going to be very few changes other than to keep emphasizing what we have emphasized in the last year, and that's excellence in customer service, exceeding customers expectations. We know, and it has been proven that high levels of customer satisfaction while it may seem like it costs more, it results in a more profitable company. That's where we're going. So far as acquisitions go, that obviously is going to be our main stay. We're always looking at acquisitions. We're looking at several right now, and we feel that we're definitely going to be moving ahead in that area very strongly going forward.

Okay. Great. Thanks a lot, and enjoy your retirement, Joe.

Thank you.

Our next question comes from the line of [Michael Prodding] with 10-K Capital. Please proceed with your question.

Good morning, guys. Most of my questions have been answered. Just a couple of remaining questions. You guys did a big inventory buy-in in the September quarter. I am just wondering if you saw any benefits of that in the December quarter in terms, say on the cost of product line?

Yes, that probably helped us by several million dollars in the quarter.

Can you quantify that for us?

Somewhere between 3 and $4 million.

Okay. Would you expect ongoing benefits from that in the March quarter, then?

No. We've rolled through that inventory.

Okay. So inventory is at kind of a normalized level at this point?

Yes.

Okay. Then on the customer attrition side, would you say that customer service is now where you want it to be or do you think there's additional room for improvements at this point?

No, it is not exactly where we want it to be, but it is getting there. The reason it is not where we want it to be is because we're still not totally decentralized. That takes time as we've talked about on previous calls, the hiring and the training of local customer service representatives and getting every employee to understand, myself included, that we're all customer service representatives, that's what we're here for is to exceed customers expectations. We have various programs in which we're trying to get that across and as we continue to hire people and move out of our Canadian call center, which is happening more than we even expected for this time of year, I feel that we'll be maximizing our customer attrition by having those local operations.

Sounds like there is room for continued improvement on the attrition side, then?

Oh, yes.

And would you say that you've bled off all the lower profit customers at this point that you wanted to lose?

I would say that, yes, because we've been through a renewal period, but with the price of oil the way it's been for the last two years, this has been the mother of all triggers, and people who never cared about the price of home heating oil just like people who never cared about the price of gasoline now care about that price, so we deal with it on a day-to-day basis, but we're not an oil company. We're a service company, and we try to get that point across to our customers, that we protect the largest asset that most people have, and that's their home.

Sure. And just switching gears finally on the weather, I guess this has been beaten pretty well, but say assuming -- so say based on what you're looking at through today, would you expect, then, to have to reverse the weather insurance benefit that you recorded in the December quarter in the March quarter?

I am not going to play meteorologist, but to kind of confirm, we're in the money 200 degree days on our weather insurance policy. January was about 137 degree days warmer than what we expected, and February through yesterday was about 135, 136 colder than what we expected.

Okay.

If you can tell me what the next 23, 24 days are going to be, I can't tell you that.

I will pass on that one as well. It is helpful. It is helpful to get a sense for that. That's all I had for right now. Thanks.

You're welcome.

Our next question is from the line of [Bill Givins] with Locust Wood Capital.

It is actually [Steve Erico]. Thanks for taking the call. On the acquisition front I was just curious, when you -- when the previous management sold the propane business, what was the lock-up period that you guys have to stay out of that business for and if it is coming up soon, is that a business that you guys would look for acquisitions in?

Five years, and it is -- another three years to go. It is not over the entire country but it's over the big propane markets, and it is also within 50 miles I think of any company we sold them which covers a lot of different states. It is another three years.

I am sorry. I thought it was just another year to go. Thank you.

Our next question comes from the line of [Jason Bucher] with with Family Medicine Specialists. Please proceed with your question.

Every everything has been answered or every question has been asked.

Thanks.

Our next question comes from the line of [George Petrinas] who is a private investor. Please proceed with your question.

Yes, thank you. My question is a little more detail or a little more philosophy if you could on acquisitions. In other words, do you look for people that in the markets mom and pop type operations that are in the markets you're already in? What is the process for basically acquiring companies? Is it new markets that you're not in already, valuation, et cetera?

Well, one of the ways that we do it is certainly looking at mom and pops, looking at smaller companies because we have our managers out in the area talking to people who may be potential sellers, and those are very attractive acquisitions if they're our type of business. We look for a business that's very much like ours, a full service business with reasonable margins. Those tuck-ins are quite profitable but at the same time we're also looking for larger companies that would be in a new area if it were large enough for us to go into that area. You can't go into a new area for a million gallons for instance.

What would you say in the markets you serve now, what kind of market shares do you have just in general terms? If you serve Long Island, let's say you represent what portion of the Long Island heating oil market?

It is not a very big share, it is like 15% or so. There is a lot of competition in oil market.

Okay. Well, that's all I had. Thank you and congratulations on the quarter.

Thanks.

[OPERATOR INSTRUCTIONS] We have a follow-up question from the line of Frank Haywood with Frank Haywood & Associates. Please proceed with your question.

I did have a question regarding acquisitions of new customers. What do you typically pay? I guess there is a range, but what would be a good price per, I guess customer accounts, or per thousand gallons or something like that for acquisition of a business assuming that the capital equipment there would be a very minor part of that, and the value of the customers would probably be the majority of that?

It is usually based on the EBITDA that we expect from that kind of business, and there is a wide range depending on the type of company, and I am just not comfortable telling what kind of range that would be.

Okay. Well, I can understand that. The other question I have, it seems to me and I think you have kind of indicated this, that the substantial reduction in the customer attrition is very directly correlated or actually as far as -- well, actually correlated with the improvements in customer service, getting back to its -- where it is local because I assume if Mrs. Jones needs a delivery on Elm Street in [Pakutsy] that someone in a call center far away may not know that that can't take place because it is icy that day. That makes sense. It resonates that that should be local. Are you in fact seeing that direct link to -- the more you move back to well-trained local people, much -- very direct reduction in that attrition level?

Yes. There is definitely a correlation there. It is a lot more than that, too. It is not just being local. We were local before and had attrition. We're going to be local, but we want to get better, and we do that through various means. It may sound somewhat philosophical, but it is very important to how we manage the Company, and basically the foundation of the Company is built on leadership, and I don't mean leadership here in our corporate office. I am talking about leadership throughout the Company right into the field where each employee whether they be service techs or drivers or customer service reps or accountants, that they will all control their own sphere of influence and help us to provide excellent service to customers.

One of the foundations we're using in our company to make sure that we get this high level of customer satisfaction is what we call our customer service boot camp, that every employee will be going through. We have about maybe 400 to 500 employees have gone through the boot camp session already, and the whole emphasis of the boot camp is on delivering excellence in customer service, exceeding customer expectations, because as I said before we know that high levels of customer satisfaction are going to make us in the long run a more profitable company, so it is just not the localization, but it is also making sure that everybody in the Company thinks that way.

That's great. Again, related to that, I know Enterprise Car Rental, basically they phone a survey to customers of each unit every week, and they get feedback on how the customer service is perceived, so is there any ongoing effort to have a chain here with feedback about how customers perceive the service in their area?

Eventually that's going to happen. Right now we have enough controls out there to be able to test that to make sure that we're delivering those levels of customer satisfaction, but it is funny that you mention Enterprise. Because Enterprise is one of the companies that we use to our own employees. There is a book that has been out about six months now that we use at the basis of our boot camp called satisfaction, how the voice of a customer counts. It is by the J.D. Power people, and they talk a lot about Enterprise and companies like that who deliver that type of customer service, and, yes, we will be measuring those levels for all of our divisions, whether they be on the vitro side or the medium side.

Congratulations. In my opinion that will have a dramatic impact. Because I am very familiar with Enterprise and how that has taken them to way above any other company. That's all for my questions.

Thank you.

There are no further questions in the phone lines at the moment.

Okay. Thank you very much, everybody. We look forward to talking to you again the next quarter.

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. Have yourself a good day.