Star Group LP (SGU) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Star Gas Partners Fiscal 2007 Second Quarter Results Conference Call. [Operator Instructions]

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

Thank you, Tamika. And good morning, everybody. Thank you for joining the call.

Before we begin, I would like to ask Rob Rinderman to give our Safe Harbor provisions. Rob?

Thank you, Joe. Good morning, everybody.

This Conference Call will include forward-looking statements which represent the Partnership's expectations or beliefs concerning future events of 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 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, an ability to address issues related to that project; natural gas conversion, 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 statements of historical fact 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 for fiscal year ended September 30th, 2006 and its quarterly report on Form 10-Q for the fiscal 2007 second quarter ended March 31st, 2007.

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, whether as a result of new information, future events or otherwise after the date of this Conference Call.

I'd like to turn back to Joe. Please go ahead with your opening remarks.

Thanks, Rob.

With me this morning are Rich Ambury, our Chief Financial Officer; and Dan Donovan, our Chief Operating Officer; soon to be Chief Executive Officer.

I'm delighted to report very positive results for our second fiscal quarter, which reflect the positive impact of our 2006 recapitalization, combined with the many operating initiatives we have successfully implemented over the past two years.

Our volume for the quarter grew by about 7% due to colder weather, partially offset by customer losses. And on that subject, we also continued to progress, with net customer losses decreasing to 1.3% of our base, compared to 2.4% in the second quarter of 2006. While our attrition is improving, more work needs to be done. And we continue to focus on reducing net customer losses. Our margin decreased by 6.8 cents per gallon, and our service and installation results improved by over $2 million over the second quarter of 2006.

As you know, we're not using hedge accounting currently, so our reported results reflect the noncash change in the fair value of the hedges, which we use primarily to project our fixed-price business. Our reported EBITDA of $90 million reflects a credit of $18 million for these items, compared to the 2006 second quarter EBITDA of $70 million, which included a credit of $11 million.

Our results for this quarter were also negatively impacted by a $7.3 million swing in expenses due to our weather insurance, which Rich is going to talk about more later.

Star's results continue to reflect our commitment to decentralization and employee empowerment. On a very positive note, as of the end of March, we are no longer using the Canadian call center. And the majority of our customer calls are answered locally, with only night, weekend and overflow calls being answered at a Pennsylvania call center.

Our acquisition program has become very active in recent months. We've recently completed acquisitions of three heating and oil distributors and are in the process of finalizing three others. In addition, we continue to review other potential acquisition candidates that fit our criteria.

All in all, I believe we are well on our way to where we need to be. We have enthusiastic and well-motivated employees. We have strong leadership, and we are well capitalized.

I feel very confident that the transition to Dan Donovan as our new CEO will be seamless, and that the Partnership will continue to move forward under his leadership. These past two years have been very significant for Star Gas, and I appreciate the opportunity to have served as CEO during this momentous period.

With that, I will turn this over to Rich with the financials. Rich?

Thanks, Joe.

For the quarter, we sold 195 million gallons, compared to 183 million gallons last year. The increase of 13 million gallons, or 6.9%, was due to colder temperatures of 14%, reduced by a net customer attrition of 5% for the 12 months ending March 31st, 2007. Our per-gallon margins were strong and increased about 6.8 cents, to 74.2 cents per gallon. As Joe noted, our Service department, which is included in gross profit, improved by $2 million.

Total operating expenses, including delivery, branch and general administrative, increased $11 million, of which $3.7 million was due to the increase in volume. The balance, or $7.3 million, is due to the change in weather insurance. Due to the colder temperatures than expected in the quarter, we reversed $2.9 million of the weather insurance benefit we recorded at the end of December. This led to an increase in operating expenses.

When comparing the second quarter to last year, please keep in mind that the impact of weather insurance reduced operating expenses by $4.4 million in the second quarter of fiscal 2006. Again, the quarter-over-quarter variance, due to weather insurance, is an increase in operating expenses of $7.3 million.

The change in fair value of hedges resulted in a noncash credit of $18.5 million for the quarter. And in the second quarter of fiscal 2006, a credit of $11.2 million was recorded.

Interest expense was down by $2.8 million due to the recapitalization in April 2006 and lower working capital borrowings on average. On average, we lowered our total debt outstanding by $124 million.

Income tax expense was $3.8 million and represents an increase of $3.4 million over the prior year's comparable quarter. We will be -- going forward, we'll be applying a tax rate for fiscal 2007 of 5% to pretax income. We will be recording tax expense in the income quarters, and we'll be recording a tax benefit in the loss quarters. We posted net income of $74.9 million, which represents an increase of $20.6 million.

EBITDA increased by $20 million to $90.2 million, as the impact of the additional volume and higher margins drove a $20 million increase. EBITDA was favorably impacted by $7.2 million due to the change in derivatives, but was reduced by $7.3 million due to the difference in weather insurance.

Let's move on to the six-month results. For the first half of 2007, our volume declined by 6.2%, largely due to net customer attrition of 5% for the 12 months ending March 31st, 2007. Again, our margins were up. They increased by 4.5 cents to 73.4 cents per gallon. The net service results improved by $3.6 million for the first half of fiscal 2007. And again, total operating expenses decreased by $3.6 million as well.

The change in the fair value of hedges resulted in a noncash credit of $12 million. And in the first half of fiscal 2006, the change in the fair value of derivatives was a noncash charge of $29.3 million. For the first half of fiscal 2007, EBITDA increased $48 million to $106.2 million, of which $41.5 million is due to the noncash change in the fair value of derivative instruments. And the balance of the change, approximately $6.5 million, is largely due to lower operating expenses.

In looking at our balance sheet for a second, as of March 2007, we had over $91 million in cash and working capital of $179.7 million. In addition, we have recently amended our bank agreement to facilitate our acquisition program.

And now I'd like to turn it back to Joe.

Thanks, Rich. And Tamika, we can open the lines at this point for questions.

[Operator Instructions] There are no questions at this time, Mr. Cavanaugh.

Thank --

I do apologize; we have a question.

Go ahead.

[Jason Kroll with Bear Stearns].

Hey, guys. Was wondering if you could give us a little update on the -- more on the timing and the expected size of the acquisition program that you envision.

Well, the timing is -- we're in the middle -- we're very active in it right now. We're looking at the companies that -- as I mentioned, we have three that we are close to finalizing. And we're looking at several other companies.

Ah.

Size -- they vary in size.

Now are they of a similar size to some that you've recently completed? And could you give us, I guess, a feel for the types of multiples you're able to acquire these at?

Well, I don't want to talk about multiples. But the size is -- the size varies anywhere from just under five million gallons to million-gallon size acquisitions that we've been doing. We got a pretty wide range there.

Okay.

And just in terms of the pipeline, it sounds like, compared to what you've experienced in the past, it seems a little more robust. Is that fair?

Yes, that's fair, Jason.

In terms of the rating agencies, I would think, given the performance, you would have a good argument to get an upgrade here. Is there anything we should expect in the near term, terms of discussions?

Rich?

Well, we meet with the rating agencies on a regular basis. I can't predict where they're going to go. But with $179 million of working capital, $91 million in cash and $172 million of debt, I think we've hedged at least [inaudible] results over the past two years.

Okay. I did have one question, Rich, about the -- on the volume, the line item delivery scheduling and other --

Right.

-- down 4.6. What exactly is that line?

Well, it's a combination of possibly additional conservation, some loss of some lower-margin bid and COD accounts, as well as possibly a delivery-scheduling variance, which would be where we expect it to be this year versus last year. It's not such a big number; it's around 1.5, 2%.

Right.

And certainly April was pretty cold. So would you expect, I guess on a comparative basis, that the upcoming quarter should be -- reflect that?

Volumes were up this year versus last year due to the colder temperatures. That's a true statement.

Right.

You can't get too excited about April [inaudible] --

What's that?

You can't get too excited about April being cold, because a lot of those volumes -- a lot of those degree days occur at nights. And the volume increase -- the correlation is not as tight as it would be, say, in December, January, February.

Right.

Okay, that's it for me. Great job.

[Stephen Errico with Locustwood Capital].

Hi, guys. Congratulations on a great quarter.

I was on the call late, so I didn't hear your opening remarks. But you seem to be generating -- the way I calculate it -- a significant amount of free cash flow, which I know you're going to be using for acquisitions. But do you think you might address the dividend earlier than 2009?

We're committed to that date. We're -- there's several different things we could do with the cash right now. We believe that proper acquisitions are the best way to use that cash. And that's what we're concentrating on.

Thank you.

[Operator Instructions] Matt Dellorfano with View Street Capital.

Good morning, gentlemen. Thank you for the results and the clear explanation in the press release. I was just wondering, however, if you might be able to discuss and kind of walk us through the customer attrition in the more recent quarter, and obviously how things have changed between last quarter and a little bit -- touch on the history and why it's different now, and what happened, and why the customer retention was a little bit less than I was expecting it to be.

Well, for the most part, what we've been doing is the game plan that we've talked about all along. And that is becoming more of a local company. But besides localizing, which -- now we're answering all of our calls locally -- we also have a special program on changing the culture at Star Gas to make customer satisfaction something that is not just lip service, but making customer satisfaction our culture. And it's a cultural and a philosophical change. And we're trying to develop our employees that way -- employees we call -- employees who are born to be helpful. We consider all -- every employee in the Company a customer service representative. And all of these customer-retention issues are now handled locally, district by district. We think that that is giving us some improvement.

But of course, we still have this huge price-of-oil issue, where most of our losses are in that category. And with the price of oil -- everybody knows at the gasoline pump, hovering somewhere around $3.50 right now -- the same thing's happened with heating oil. And we have triggered a lot of customers -- or that has triggered a lot of customers who never thought about price before to think about getting a better price for home heating oil. So that has an effect also on attrition.

Great. Okay.

What are some of the metrics you're using to compare, let's say, one local customer service group versus another one? How are you comparing it, and how are you making sure the plan is moving along?

Well, we have a database of -- we call it "Check the Oil," where we can look every day at gains district by district, depot by depot. So we know gains, losses; we know categories [which we] got the gains. We know all of the categories for which we might have the losses. We know the customer service reps who actually spoke to the customer. We know the sales reps who signed the customers. See, that's data that we've had all along, although we have honed it to a much better tool as of right now.

We're able to monitor the prices that they're charging. And we know what the new pricing -- what they are charging the new customers.

Okay. Then, that's great.

And one last one, and I'll hop back in queue. You mentioned that, obviously, oil prices are a concern. But are you losing -- in other words, are they -- are people sticking to oil and just trying to go somewhere else, or price shop it? Or are people moving to other forms of fuel? What did you mean by that comment?

We haven't seen any large increase in conversions to gas. That's our biggest -- that's the biggest competitor. It's traditionally been 1% or less per year per -- 38 years I've been in the business. So it really isn't a huge loss --

And we have not seen a huge move away from oil.

Great.

Okay, thanks, guys. I'll hop back in queue; much appreciated.

Thank you.

[Ed Olson, private investor].

Nice quarter, guys.

Two questions -- can you talk a little bit about the amount of stock that the regional managers have, and the incentive of that stock; and what that has done to operations and morale? And secondly, you talk about the cash building up -- has that attracted any unwanted attention?

Answer the second question first -- it has not. The managers -- I really can't talk about what kind of units they hold. I don't know that. Their incentive is a bonus program that pays them based on their results.

And morale?

I'm sorry?

And morale among those managers?

It's pretty darn good.

Good.

[So]?

Thank you. Is that all for Mr. Olson?

Yes, thank you.

[Operator Instructions] [Elena Galant] with Bear Stearns.

Hi. How you doing?

Hi, Elena.

I also missed the beginning of the call. So you might have addressed this already. But you did a great job on the gross margins this quarter. How sustainable is that going forward? And how should we look at that?

And my second question is, on the cost-cutting, do you see more cost-cutting opportunities here?

Well, on the cost-cutting, I'll talk about that first. We of course have gotten by a good deal of the cost-cutting that we wanted to make over the last two years. But expense control, expense abatement, is part of our culture also. We constantly look at this on a daily basis. Our managers are incentivized to their EBITDA number. And a good portion of that is not only gains and losses; it's margin, and it's expense control. So it's something that I hope that we continue to improve each and every day. And when we see opportunities to cut expenses that we feel are not necessary, we'll do that.

In regard to margins, we can't guarantee that margins will be better than our plan. Obviously, we hope to continue to optimize them by discipline in our buying programs; discipline in hedging. And of course, having more variable customers versus fixed-price customers helps in that area also.

Thank you very much.

[Operator Instructions]

There are no further questions at this time, Mr. Cavanaugh. I'll now --

Thank you, Tamika. And thank you, everybody.

This concludes our call. I thank you for your interest. And I wish you and Star Gas continued success. Thank you.