Star Group LP (SGU) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Star Gas Partners Fiscal 2007 third quarter results conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Thursday, August 09, 2007. I would now like to turn the conference over to Dan Donovan, President and Chief Executive Officer. Please go ahead, sir.

Good morning and thank you for joining our call and webcast. With me today is Star's Chief Financial Officer, Rich Ambury, and our Senior Vice President of Operations, Steve Goldman.

Before we begin, I would like to ask Rob Rinderman, of Investment Relations firm, Jaffoni & Collins, to read the Safe Harbor statement.

Thank you, Dan. Good morning, everyone. This conference call will include forward-looking statements that represent the Partnership's expectations or 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 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 residual impact of the business process redesign project, 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 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 third quarter ended June 30, 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 it back to Dan Donovan now for his opening remarks.

Thanks, Rob. With my first opportunity to publicly address the investment community as Star's newly appointed Chief Executive Officer, I'm delighted to report solid quarterly results in the fiscal third quarter, traditionally a non-heating period for the Partnership.

I have participated in quarterly calls for two years now as Star's President and COO and I'm pleased to report that as expected, we had a smooth transition following Joe Cavanaugh's retirement at the end of May. Joe and I share a similar philosophy with a focus on managing a strong, decentralized and cost effective operation and in providing excellence in customer service, not just in words, but also in the everyday actions of all of our employees.

Following my introductory remarks, I'll turn it over to Rich Ambury, who will walk through a financial review of the fiscal third quarter and the nine-months ended June 30th. After the financials, we'd be happy to take your questions.

As noted in today's news announcement, Star achieved double-digit increases in both total revenues and heating oil volumes during the period. Temperatures in our operating regions were over 30% colder during the quarter than in the prior year period, which enhanced results.

Reducing customer attrition remains one of our main goals. I am therefore pleased to report that we once again achieved noteworthy improvements on this front. Over the past two fiscal years and trailing 12-month period we cut net customer attrition from 7.1% to 6.6%, to now 5% as of 6-30-07.

Per gallon home heating oil margins increased slightly during the third quarter and we recorded an increased profit from service, which is another important goal. On the expense front I'm pleased to note that operating expenses declined approximately 7% on a year-over-year basis during this quarter.

One last financial metric I want to highlight, Star achieved an EBITDA of $0.8 million during the period, due in part to operational improvements. And this compares favorably to a $20.5 million EBITDA loss in the fiscal 2006 third quarter.

For some time now we have been sharing our strategy with you for localizing Star's operations and empowering regional management teams to be responsible for their respective P&Ls. The rationale is that nobody knows the local market better than the local manager and their valued team of employees and our improved results validate this strategy.

Since April 2006's recapitalization, Star is once again able to grow by acquisition. We have maintained our discipline when evaluating potential acquisitions to consider only those that we feel will be a profitable fit with our existing operations. To date in fiscal year '07, Star has acquired six heating oil distributors with an aggregate gallonage of 16.9 million and over 18,000 accounts.

I'd also like to briefly touch upon the all-important customer service aspect of our business and reiterate something that we spoke of in today's news announcement and we also highlighted in previous calls. Star participates in a highly fragmented and increasingly competitive industry, especially given the number of providers and the unprecedented increases in the price of heating oil over the past four years.

(Technical Difficulty)

I'm sorry for the glitch. I have no idea where this thing cut me off at, so you'll have to bear with me, I'm going to probably just read most of my statement over again.

But what I was saying is, I've participated in these quarterly calls for two years now as Star's President and COO and I'm pleased to report that as expected, we had a smooth transition following Joe Cavanaugh's retirement at the end of May. Joe and I share a similar philosophy with a focus on managing a strong, decentralized and cost effective operation and in providing excellence in customer service, not just in words, but also in the everyday actions of all of our employees.

Following my remarks, I'll turn it over to Rich, who will take you through a financial review of the third quarter and the nine-months ended June 30th. And then of course we'll be happy to take your questions, assuming the phones don't go down again. Let's hope they don't.

As noted in today's news announcement, Star achieved double-digit increases in both total revenues and heating oil volume during the period. Temperatures in our operating regions were over 30% colder during the quarter than in the prior year period, which enhanced results.

Reducing customer attrition remains one of our main goals. I am therefore pleased to report that we once again achieved noteworthy improvements on this front. Over the past two fiscal years and trailing 12-month period, we cut net customer attrition from 7.1% to 6.6%, to now 5% as of 6-30-07.

Per gallon home heating oil margins increased slightly during the third quarter and we recorded an increased profit from service, another very important goal. On the expense front I'm pleased to note that operating expenses declined approximately 7% on a year-over-year basis during this quarter.

One last financial metric I want to highlight, Star achieved an EBITDA profit of $0.8 million during the period, due in part to operational improvements. And this compares favorably to a $20.5 million EBITDA loss in the fiscal 2006 third quarter.

For some time now we have been sharing our strategy with everyone about localizing Star's operations and empowering regional management teams to be responsible for their respective P&Ls. The rationale is that nobody knows the local market better than the local manager and their valued team of employees. Our improved results validate this strategy.

Since the recapitalization in April of '06, Star is once again able to grow by acquisition. We have maintained our discipline when evaluating potential acquisitions to consider only those that we feel will be a profitable fit with our existing operations. To date in fiscal '07, Star has acquired six heating oil distributors with an aggregate gallonage of 16.9 million and over 18,000 accounts.

I'd also want to touch briefly upon a very important aspect of our business and that's customer service. I want to reiterate something we spoke of in today's news announcement and highlighted on several calls in the past. Star participates in a highly fragmented and increasingly competitive industry, especially given the number of providers and the unprecedented increases in the price of heating oil over the past four years. We don't consider ourselves just an oil company, but more importantly, a critical service provider, protecting our customers' most valuable assets, their homes.

We know and acknowledge that some customers do not care as much as others about the level of service, only the number at the bottom of their monthly bill. These are usually not profitable customers for us. Our strategy is to attract and retain long-term loyal customers that appreciate Star's high-quality service. If we focus on delivering value for them, we will in turn drive long-term value for our unit holders. We also feel that our varied pricing plans offer consumers the best options available in the retail heating oil business today.

Star instituted in September of 2006 a customer service training program known as Boot Camp. This is intended to reinforce to every employee the reality that we're all in the customer service business, striving to deliver the high-quality level of service our long-term loyal customers expect from us. Boot Camp is geared towards everyone at Star, especially those who make the most direct contact with our customers, from the representatives who answer the phone at our local offices, to our drivers, technicians and supervisory staff in the field.

But this training process is meant for all supporting staff, no matter what their function. At Star, each and every employee, up to the CEO, is a customer service rep. This key training program is not a one-shot project. We will always be training and retraining our employees in the value of excellence in customer service.

With that, I will again turn the call over to Rich for his comments on Star's financial results.

Thanks, Dan. For the quarter, we sold 57 million gallons compared to 46 million gallons last year. The increase of 11 million gallons or 24% was due to colder temperatures of 30%, reduced by net customer attrition of 5% for the 12 months ending June 30, 2007. During this transitional quarter, our per-gallon margins increased by about $0.007 to $0.675 per gallon of home heating oil.

As Dan noted, our service department, which is included in gross profit, improved by $1.2 million.

Total operating expenses decreased by $3.4 million or 6.7%, despite an increase in volume of 24%, due to lower insurance and professional expenses. The change in fair value of hedges, which was a non-cash credit of $4.9 million for the quarter. In the third quarter of fiscal 2006 a non-cash credit of $2.3 million was recorded.

Net interest expense declined $2 million due to the recapitalization in April 2006 and higher invested cash balances. The net loss for the quarter was reduced by $25.8 million to a loss of $8.3 million, largely due to the increase in volume, lower net service expense and operating expenses and lower interest expense.

EBITDA increased $21 million to $0.8 million, as compared to an EBITDA loss of $20.5 million in the third quarter of 2006, as the impact of the additional volume, slightly higher margins and lower operating expenses drove a $12 million increase in EBITDA from operations. The balance of the change, or $8.9 million was due to a non-cash charge of $6.6 million in the third quarter of fiscal 2006 relating to the recap and the impact of derivatives, which favorably impact the quarter's comparison by $2.6 million.

Now moving on to the nine months. For the first nine months of fiscal 2007 we sold 351 million gallons, approximately 2.4% less than the prior period, as the impact of 3.6% colder temperatures was reduced by net attrition of 5% for the 12 months ending June 30, 2007. Again, our per-gallon margins were up and increased for the nine-month period by $0.038 per gallon to $0.724.

The service results also improved by $4.8 million for the first nine months of fiscal 2007 and total operating expenses decreased by $7 million as well. The change in fair value of hedges again, these are non-cash impacts, favorably impacted the nine-month results by $17 million versus a charge of $27 million for the nine months ending June 30, 2006.

Net income increased $79.7 million to $71.3 million, of which $44.1 million relates to the change in derivatives and $6.6 million is due to the loss on debt redemption in the prior period. The balance of the change, or $29 million, is due to higher gross profit from product sales of $6.8 million, lower net service and operating expenses of $11.8 million, a decline in interest expense of $8.9 million and lower depreciation expense of $2.9 million, reduced slightly by $1.9 million of higher income taxes.

EBITDA increased $69 million to $107 million, of which $44.1 million is due to the change in fair value of derivatives and again, that's a non-cash impact, $6.6 million is also due to the non-cash loss of debt redemption recorded in the prior period, but EBITDA from operations increased by $18.6 million as we continued to control our operating expenses and expand our per-gallon margins.

Moving over to the balance sheet for a second, as of June 30, 2007 we had $133 million in cash and working capital of $169 million and total long-term debt of $172 million.

And with that, I'd like to turn it back to Dan.

Okay, Chris, you want to open up the lines for questions?

(OPERATOR INSTRUCTIONS) Milan Gupta with South Point.

Good quarter. I just had a question on the customer attrition as you guys break it out on the Q. You break out customer gains and losses. It looks like in the nine-months ended you gained 42,300 customers and I think you guys said a little over 18,000 were acquired. Do you know what the number was for the three-month period?

Acquisitions are not included in that number that you see on the Q. They're not shown as gains, no. The losses may be shown, but not the gains. For the six-month period, which is also right next to it on -- I forget what page it is, but the gains were basically flat from one year to the other, 6,900 in both periods.

Those gains and losses are from internal marketing.

Okay, got it. Thank you.

Michael Prodding from 10-K Capital.

Congratulations on a good quarter and continued operational improvements. I had two questions. Firstly, on the reduction in the insurance costs, could you just explain that a little bit and in particular, whether that's ongoing? The other question I had on the customer attrition is it looks like you continue to make good progress there, although if you compare it say versus the prior quarter and of course, the June quarter isn't as high a quarter for customer attrition because people aren't paying as large bills, but it looked like the percentage reduction in losses in the most recent quarter wasn't quite as significant as the prior quarter and it's not clear to me, is that a result of continued churn of unprofitable customers or maybe you can just speak to that?

Let me take the insurance part of the question. We continue to try to make some strides in our insurance and we try to reduce our expense, so the favorable comparison versus last year basically had to do with some one-off situations that happened last year where we had a couple of unfortunate incidents that hit in the quarter.

On the gains and loss question, let me just explain it to you this way. Several things. First of all, we are now going up against a better batting average. We had a better batting average last year. We started getting a lot better last year and really we've been getting better over the last two years. So as we compare quarter-to-quarter the improvement is not going to be as great, although we're hoping that we always have continued improvements.

But one of the things that you'll notice in the numbers is that we have made tremendous improvement on the amount of accounts that we've lost. We lose a lot less accounts. Our gain is not as great as they had been in the past and that's for varied reasons. The biggest reason would be that we have much higher credit scores, higher credit requirements for new customers coming in and we also have higher margin requirements. Because we're trying to discourage churning. We don't want to have customers in one year and out the next and it also helps us reduce bad debt. So, we're looking very closely at the quality of the customer we take in, so that we don't have a lot of churning in that end. I don't know if that answered the question. If not, let me know.

Yes, that's helpful. Just in general, do you feel that you have churned off or how far are you at this point through churning off of the customers that you think you're likely to churn through?

Well, you know, a lot of the lower profit customers we have probably churned through, but you know, every time the price of oil goes higher and higher -- and let's face it, right now we're looking at the highest prices we've seen ever and every summer for the last four summers we've had high price of oil. That triggers more customers to be more influenced by the price of oil, and therefore, they ask more questions about what am I paying for my home heating oil? So it's going to be something that we're going to have to live with.

The best thing of it is though, now that we have local customer service reps in each branch we've gotten a lot better at talking to our customers, communicating with our customers, giving them good information about our price, why the price is high, giving them good information about pricing options. In other words, we have local people that can speak to our customers and from what we hear, our customers like that.

Okay, great. And I guess one final question. The cost that you reported in the quarter, is that a good indicator of cost going forward or were there any unusual reductions in the quarter or are there continuing opportunities to reduce cost at this point? Thanks.

We're always looking at cost. Cost abatement, cost control is a way of life here. So every time we turn around and look at something we find something new and I hope we continue to do that. We have several things that we're looking at right now to try to keep cost down, try to control it, try to reduce it, but yet give the same level of quality service to our customers. So it's an ongoing thing and it always will be.

Matt Barnett with Jet Capital.

Congratulations on the quarter. Can you give some color on the types of acquisitions that you're looking at today and what may be out there? I guess that would be the first question.

On acquisitions we're looking for full-service dealers who basically sell not on price, but on service, similar to us. We're looking for companies that have margins that will support their business, companies that have experienced employees who we know will stay with us, because it's very important to retention. We're looking for companies that have good local reputations that we would love to maintain. We're looking for companies whose owners have a realistic valuation of what the company's worth. We're looking for companies that have the ability to deliver an EBITDA that pays out over a reasonable timeframe. And of course, we're also looking for companies that might give us opportunities to expand our business into related fields.

Okay. Can you expand on the last point and also what's out there by size and I guess just looking at the six acquisitions you've made that's added a nominal amount of EBITDA, maybe 5%, yet we still have $100 million plus of cash sitting on the books, so are there opportunities to put that money to work? What's the intention there?

Our intention is of course to look at every acquisition that comes our way. We talk to a lot of dealers. We probably walk away from a lot more acquisitions than we evaluate further. But it's something that we'll have to see what comes our way. We look at whatever is out there and most of them are not big. Most of them are smaller dealers. And to us, that's probably our best type acquisition.

All right. I guess the question is, why the need for the cash balance? The acquisitions you've made so far, you've essentially been able to fund out of your own operating cash flow.

The cash balance, we still need to reserve some cash going into the heating season for any unforeseen increase in heating oil prices, as well as there could possibly be a large acquisition in the future and we do have a war chest to support the small amount of pop acquisitions going forward. The largest we probably spent on an acquisition is $4 to $5 million, but there could conceivably be an acquisition costing $20 million that will come up.

Right. I guess, again, none of that really explains the need to keep over $100 million. I mean, how much do you need for the heating oil reserve? If you want to assign $40 or $50 million to acquisitions, we probably have half that money left sitting around.

Well, we can't predict what the price of oil is going to be. I mean, some people are talking about oil going over $100 a barrel and some people are saying even higher than that. And we have to be able to be prepared that we can supply product to our customers in any situation. That's one thing in the back of our minds.

Okay. The second element was, can you give some color to how you would describe the weather relative to impacting your business? It seems when you look at how you guys did, you obviously did very well from an operational standpoint, but to a certain extent the weather wasn't that cold for part of the year and then when it did get cold we didn't have a lot of snow. How much does that affect your ability to drive costs or keep costs down? Could you just speak to that a little bit?

Yes. The best type of cold weather is cold, dry and windy with no snow, no precipitation, because precipitation, whether it be ice or snow, can definitely ramp-up our expenses. But if we have to have that along with the cold, I'll take it. What happened this year is we didn't really get any really cold weather until the end of January and then February and March were pretty good months. April also was colder than normal.

But probably the volume increases that we saw in this particular quarter that we just came out of were more from what happened in February and March. A lot of the April degree days, I call them false degree days, they happen at night, it might not affect the volume as much. But we're also thinking that there's a possibility that it could help our volume going forward. So weather plays a key role, obviously, in how much oil we deliver and how expensive it is to deliver it.

And is there a way to give a sense of how much of the cost savings that you were able to capture was driven by I guess an abnormal level of precipitation or a low level of precipitation, below the norm?

Well, if precipitation is above the norm, we're up our expenses. You know, we plan our year based upon normal weather with normal precipitation. So if precipitation is higher we're going to be spending more. But it's really hard to drill down to an exact dollar amount, because it happens in different areas and there were different expenses in different areas.

(OPERATOR INSTRUCTIONS) Gary Stromberg with Lehman Brothers.

Last year in the September quarter I think you purchased inventories to sell in the winter. Do you plan to do that again this quarter?

We've actually done some of it this year, at the end of June. There were some significant spreads early on in April and May and I think it was like $0.15 or $0.16 a gallon. We did take advantage of that in April and May. Currently those spreads have come in, so they're not as attractive as they were. So I guess the answer is, yes.

So is any of that April or May inventory going to be liquidated in the coming months or is that going to be in the March or December quarter?

Well, the way we keep our books on a weighted average basis, whatever that cost is that we acquired, will probably be impacted in the fourth fiscal quarter of this year.

In terms of cash flow?

In terms of it impacting our cost of sales and going through our cost of sales.

Right. Okay. Circling back to the cash question, cash is building here, we have you guys ending probably in the $170 million range by September 30th. Can you just talk about your capital structure, the bonds become callable early next year? Is there a more efficient capital structure out there you guys are thinking about? Can you just comment on that, please?

We are thinking about possibly de-levering a little bit going forward. But we're sitting down with our investment bankers and looking at possibly changing our capital structure around. We're tweaking it a little bit, but we don't see any wholesale changes right now.

Okay. And then final question. Any prohibition in the credit facility or bonds to declare a special dividend?

Yes, there are prohibitions in the bond indenture and in the credit agreement and I'd have to run through those to see exactly what they are. But there are certain ratios which we must meet before we can declare a distribution.

Greg Bylinsky from Bandera Partners.

First I want to say, it's a really impressive quarter from an operational point of view.

April was a good month, this year versus last year.

Yes, I know. It still seems like you guys are making great progress. I had a question about the acquisitions, which I think is sort of exciting you guys have been able to make acquisitions where it seems like some of your competitors have not. Are you seeing from the high price and volatility of heating oil, is that putting the squeeze on some of the mom-and-pops or even some of the bigger operators? Are people thinking of getting out of the business just because it's getting too tough for smaller people?

I think working capital considerations are probably one of the things that some of the owners are thinking about, but for the most part the owners have been in the business a long time and they're looking to turn the business over to somebody else and they know that we have really good experience at doing that and they like the way we do it. Because we basically maintain their company as-is. We make our economies of scale savings over time. Our main focus is on retaining customers.

Okay, great. So having a war chest now can make a lot of sense if there's a chance to really grow, right?

It can certainly help if a good acquisition comes our way.

Mr. Donovan, I'm showing no further questions at this time. I will now turn the call back to you, sir.

Okay. I really just want to thank everybody for joining us today and I thank everybody for their questions. See you next time.

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.