Star Group LP (SGU) 2008 Q1 法說會逐字稿

Good afternoon. My name is Luanne, and I'll be your conference operator today. At this time I'd like to welcome everyone to the Star Gas Partners Fiscal 2008 First Quarter Results Conference Call. (Operator Instructions). Thank you. I'd now like to turn the call over to Mr. Dan Donovan, President and Chief Executive Officer of Star Gas Partners. Sir, you may begin your conference.

Thank you, Luanne. Good morning and thank you for joining our call and our Web-cast. 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 our investor relations firm Jaffoni & Collins to read the Safe Harbor statement. Rob?

Thank you, Dan. Good morning, everyone. This conference call will include forward-looking statements that represent the Partnership's expectations and beliefs concerning future events that involve risks and uncertainties, including those associated with the effect of weather conditions on our financial performance, the price and supply of home heating oil, the consumption patterns of our customers, our ability to obtain satisfactory gross profit margins, our ability to obtain new accounts and retain existing accounts, our ability to affect strategic acquisitions, the impact of litigation, the continuing residual impact of the business process redesign project and our ability to address issues related to that project, our ability to contract for our future supply needs, natural gas convergence, future union relations and the outcome of current and future union negotiations, the impact of current and future environmental health and safety regulations, the ability to attract and retain employees, customer credit worthiness, counterparty credit worthiness, 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 for the fiscal year ended September 30, 2007 and on form 10-Q for the fiscal 2008 first quarter ended December 31, 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 would like to turn it back to Dan Donovan now for opening remarks.

Thanks, Rob. Following my introductory remarks, I'll turn it over to Rich, who will give a brief financial review of the fiscal first quarter that ended December 31, 2007 and then, of course, we'll be happy to take your questions.

Adjusted EBITDA for the first quarter was $19.3 million, a decrease of $3 million versus the $22.3 million in the same quarter a year ago. The decrease is mainly attributable to the impact of the $0.024 decline in home heating oil margins versus last year. While the 2006 first quarter saw a heating oil price decline of over $0.10 per gallon, during this quarter, the price of heating oil spiked over $0.50 per gallon, making it difficult to fully pass on wholesale price increases. This is especially true during our fiscal first quarter, October through December, when consumers are typically most proactive in shopping for a better price and when many, due to the record price levels, are willing to forego superior service for a lower price. As an aside, this final cash price of home heating oil in New York harbor, increased over $1 in the past year, but 58% of that increase occurred in this past quarter.

Attrition was impacted by this record surge in prices also. Our net attrition was 1,400 more than the previous first quarter as a result of an increase of 1,900 lost accounts offset by an increase of 500 gained accounts. The vast majority of these losses were due to pricing and accounts cancelled by us for failure to pay within our credit terms. I'll also add that the evaluation of credit worthiness also affected us on the gain side as accounts rejected to low credit scores was up almost 30% versus last year.

That said, we work constantly at balancing margin obtainment with attrition level. Optimizing margins, while at the same time minimizing attrition was a difficult balancing act, given the volatile pricing environment experienced in the first quarter.

Our field operations continue to improve. For the first time in 4 years, we're completely staffed at all local operations and our employees have performed very well in servicing our customer base during this difficult period. We realize that there is always room for further improvements, and we will continue to listen to the voice of our customers to ensure that we are providing the very best in service.

Acquisitions continue to be a priority. While we did not complete any acquisitions in the first quarter, we closed on a small acquisition in January, and we're in various stages of evaluation on a few others. We will continue to maintain our discipline when evaluating potential purchases to consider only those that we feel will be a profitable fit with Star's operations. We expect the challenging marketing conditions created by the high price of oil to present increased opportunities for further industry consolidation.

With that, I'll turn it over to Rich for his comments and additional color on Star's financial results and, of course, then we'll be pleased to answer your questions following Richard's remarks. Rich?

Thanks, Dan and good morning everyone and thank you for joining our -- with our results for the quarter. For the quarter we sold 113 million gallons compared to 99 million gallons last year. This increase of around 14% was largely due to colder temperature as the volume lost through net customer attrition was offset by the fiscal 2007 acquisition.

As Dan mentioned, our per gallon margins decreased by about $0.024 a gallon, $0.69 due to the dramatic increase in the cost of home heating oil. During the quarter, home heating oil reached record highs individually 15 times during the quarter. Now comparing them to the prior year's quarter, we actually experienced declines in our cost of products.

In looking at our operating expenses, they increased by $11.6 million, due in part to a $7.2 million credit recorded under our weather insurance contract last year, which reduced operating costs. The balance of the change or $4.4 million is largely due to the 14% increase in home heating oil volume.

Adjusted EBITDA decreased $3 million to $19.3 million due to the impact of the margin decline and the additional volume sold during the 3 months ending December 31, 2007, offset the $7.2 million weather insurance benefit recorded to the prior year.

Our net income [growth] by $20 million to $25 million has $24 million favorable change in the fair value of derivatives was reduced by the $3 million decline in adjusted EBITDA to higher income taxes of $700,000. When you look at our balance sheet as of December 31, we had net cash of -- or cash of $5.9 million in net working capital greater than $154 million. Also as of that date, we had bank borrowings of $19.7 million.

With that, I'll just turn it back to Dan.

Okay, Luanne, could you please open the line for questions?

(Operator Instructions) Your first question comes from the line of Michael Prouding with 10K Capital.

Good morning, guys.

Morning.

Yes, good quarter considering the challenges you faced. Just one question. Can you refresh our memories on how the derivatives work? Thanks.

The hedging derivative?

Yes, exactly.

Well, we mark to market those derivatives each and every quarter and what those derivatives are for are future deliveries to our customers. And they ventured into either a cap or a fixed (party's) arrangement with us; and if the market happens to go up, we're in the money on those hedges. We take that in the money value and we take that in and will reduce our cost of product when we go to ultimately purchase the product for those customers in forward looking months.

Good, so do you continue just to roll those over or how does that work?

Well, we renew our fixed price and our price -- and our ceiling or cash customers every day here. Customers sign up and when they sign up we hedge for them each and every day.

Okay, all right, thanks. And just one other question. Any thoughts on attrition going forward? Thanks?

Attrition going --

Attrition going forward, yes. We're very optimistic on the attrition number. That -- we think that our gains -- we're hoping that we can continue the increase in the gains, and we feel that we have some very good products to sell our customers in not only variable prices that go with the market, but also in a protected price or what we call our fueling program, so customers have catastrophic protection that prices won't go above a certain level. It seems to be very popular to customers. And on the loss side, because we are now local, we are seeing a big change in the -- not only in the effort, but in the results of customers staying with us, customers coming back to us because they are realizing that the type of service that they were used to getting at [Petro] and that they've always gotten at [Meenan's] is back and so we feel relatively optimistic about that.

Okay, thanks.

Your next question comes from the line of Colin Moran with [Adell].

Hi, guys. Can you just say what the gross profit for a gallon was in the quarter? You mentioned it was up $0.024, but or rather down $0.024, but what was the actual number?

$0.69.

Okay, and the -- under the service contract revenue and the customer credit balance and the payables didn't really move relative to the same quarter last year, despite the increase in price of oil. How -- can you help me understand why that didn't drive at least some of those three items up?

Well, we bill our service contract to our customers, again, each and every month, and we haven't seen a dramatic increase in our -- in the service contract pricing, so you wouldn't really see an increase in the amount of unearned service contract revenue. During the quarter we do adjust our budget payments to our customers so we probably have gotten more cash in this year versus last year. In payables, we don't have too much straight credit with our suppliers, I'm sorry to say. We pay everything within a day or two, so there is really not going to be an increase or a string out in payables due to an increase in the price of heating oil.

Okay. And then the plumbing and air conditioning acquisition you did last or I guess two quarters ago, how -- when -- is there any particular seasonality to that contribution from that, that we should be aware of?

No, on the plumbing side there is not that much seasonality. Steve, I don't know if you want to comment about that?

Yes. That acquisition shows great promise. It's operating pretty much within the plans that we envisioned when we purchased it. The business has no great seasonality; in fact, if there is any mild seasonality, we're actually coming into their more busy period. But, the company is doing well and seems to be a healthy new aspect to our business that we're looking at possibilities can we do something similar with others -- in other areas.

Okay, meaning there is a potential to buy more of those?

It could be a move to the right kind of business that one is of particularly well suited to us. So if we found ones in similar market places, we'll be -- where we saw similar profitability, we would definitely explore that.

Okay, and Rich there was a slight pick up in G&A versus the prior year quarter. Anything in particular that's attributable to?

Nothing in particular. I mean it wasn't that big of a pick up.

Yes. Okay, that's all I've got. Thanks.

Our next question comes from the line of Brad Gold with (inaudible).

Good morning. I just was wondering if you could speak about the -- it seems like a rather dramatic increase in accounts receivable and just given the increase, whether you think a reserve properly as far as for non-payment.

Well, in the receivables they're up due to two reasons. One end was the volume was up 15% or so due to the colder temperatures, and our cost of goods sold was up around 37% as well. If you look at our day sales outstanding this year versus last year, they were about the same as it was this year versus last year, 35, 36, 37 a day sales outstanding. So our customers are paying us in the same period of time.

Thank you.

You're welcome.

Your next question comes from the line of [Gregory Shrug] with [Arklow] Capital.

Hi. On the -- looking at the hedging number that you have in Here -- you have this, of course, reported in your cash flow numbers, this $18 million (inaudible). I don't understand why you're deducting that from your adjusted EBITDA number. And that is a profit that you've made and it's going to be converted into cash in the next two quarters, isn't it?

It is -- it's actually in the money. It's non-cash. It's only going to turn into cash when we ultimately deliver the product to our customers and pay the theoretical, since this is in the money, higher price in the future. So we haven't really made those deliveries to realize the gain on those derivatives.

So why are you deducting it then from the EBITDA number? It's just odd that you're reporting a $0.33 profit versus $0.06 last year and your stock is down 5% on the news.

Well it's a non-cash gain -- and we really haven't delivered the product that, that gain is associated with. If you fast-forward it to the next quarter, we would -- our EBITDA would have been reduced by the higher heating oil prices that we would have to pay for delivering those customers. So we're really trying to match up the delivery and the cost to the customers. We're trying to match the realization we get from delivering the product to the actual cost of the -- for that particular product.

All right. And then just looking at your cash flow numbers. I mean I see your cash flow this year is much lower than last year on the same quarter. Now is that -- that's because what? You buy the product this quarter, you've sold it, and you don't get paid until next quarter? So basically the more you sell, the lower your cash flow is for the quarter?

Sure, I mean, we had a tremendous increase in receivables at end of quarter.

Right.

Again, people are paying us within 35, 36 days, no different than last year, except prices are up 35%, 36% on average and we sold 14% more.

There are people who think that -- the people are worried though because your cash flow is down; but that's just because you sold more and you sold more when prices were up and then you get that money next quarter, right?

The next two quarters, yes. I mean we are still going through the biggest period which is the quarter ending (inaudible) -- I'm sorry, the quarter ending March.

All right. That's fine. It might help if you explained it better to people, but I mean it certainly works fine for me. All right, thanks.

(Operator Instructions) Your next question comes from the line of Brad Crowes, private investor.

I have a question about the weather statistics you guys quote. Is that something that people like myself can look up on line somewhere? Do you know -- is that available? Is there some number, if we wanted to look at current periods or how things are tracking?

Sure, the numbers that we report publicly is a weighted average of all the markets that we're in based on the volume that we sell within those markets. But if you wanted to look at a -- to a certain degree a surrogate for us, you could either look at Central Park, New York City, which is kind of published in several places or possibly Long Island or Logan Airport and do kind of a mixture if you wanted to do that.

The newspapers will also carry the degree-days for areas especially the New York Times.

Okay, just one question. This might be more anecdotal, but in terms of the high prices and seasonal -- I know you mentioned that you've tightened up your credit, which I would applaud as a unit holder. But are you seeing anything that you could identify where people are obviously having more severe trouble making these payments? Like what happens if somebody doesn't pay you? You just cut them off and you're like a creditor? If their house gets foreclosed or something crazy like that?

Yes, basically that happens, but that takes a while. There is a long process and most of our customers have been with us for a long time. And we have a lot of customers due to maybe some foreclosure problems, credit problems, whatever, and this happens regularly in our business and we work with them to try to keep them as customers yet get them to pay their bill and get them through their difficult time.

Of course, we do get a couple circumstances where somebody is just not going to pay us at all, won't work out arrangements, and we call those cancellations and credit cancellations as they're not paying according to our terms. And that's like a last resort, but that number has increased this particular quarter quite a bit versus the previous year.

And given the higher prices and the slow down in housing, it wouldn't -- it would probably make sense that that's going to be an issue going forward?

Yes, it seems that way. We're watching it very closely and we say -- we keep a very tight lid on our credit function, but yet at the same time we do it so that we can retain our customers.

Thank you.

Your next question comes from the line of [David Erv] with [Marian Group].

Hi, thank you. Speaking of some difficult times, I think there was some discussion, I think on the last call regarding your acquisition activities. And it was anticipated then and I think it's been realized that with a spike in the price of the product and certainly the current credit environment that you thought there might be a number of competitors who could be thinking a little harder about selling at this point and perhaps the economics might be improving. Is that the fact of the case and how does your acquisition activity shape up in the near term?

Back in December, we had said that we were working on two acquisitions that we hoped to close in December, but for various reasons we didn't. We closed on one in January and we're still working on the other one. We still hope to close on it. We are seeing -- this time of the year our heating oil dealers, our competitors, are busy doing their jobs. But we think that there are few more thinking about selling, because of the high cost of oil, because of the complications on how to hedge, etc., that they may be thinking of selling and we have -- we get contacted quite a bit and we talk to everybody. We go through an evaluation process. Some we walk away from and some we make an offer and see what happens, but we're expecting that to ratchet up a little bit coming out of this season.

Are you still in process with the transactions that you were looking at in December or are they off?

One was -- no -- one was closed and the other one we're still in the process of trying to close.

Okay, thank you.

You're welcome.

Your next question is a follow-up from Michael Prouding with 10K Capital.

Yes, hi. I'm wondering if you can just give a quick update in terms of the weather you're seeing currently, both in terms of temperature as well as storm destruction, etc., thanks.

Well, to give you a little bit of a rundown on the quarter, I could tell you -- if you remember, September was a basically non-event of a month. There was no degree-day so to speak of. October was about a 50% of normal degree days; November perked up a bit, it was about 115%; December 107%; January was 91%; and when I say 91% of normal, I'm talking about a 10-year normal in our foot prints. In February, right today it's looking like a 93% of normal based upon what's happened thus far, 10-day projection; and then considering that we'll get normal for the rest of the month, it will be about a 93%. So weather has been unfortunately a non-event, thus far. We're hearing that the end of February is going to get much colder. We'll at least get normal weather and where some of the forecasts we're seeing are calling for March to be a normal, if not colder than normal, month.

Okay, good. That's very helpful, thanks.

Your next question comes from the line of Matthew Barnett with Jet Capital.

Hi. I just had a question on acquisitions that you did and the synergies that you may have been able to capture there. How much of that is in the numbers so far, particularly given your G&A -- did your G&A take up a lot more than it would have for the synergy [not] come through.

Well, that definitely would be some sort of pick up, but I believe the volume in the first quarter of acquisition volume was about $4.9 million.

I guess I'm talking about -- I mean, of that, some of the businesses all had G&A costs, and now you're saying you were able to slash those or are you unable to do that in acquisitions?

No, there is some synergies that we could take right away, but we do take our time with the synergies on expense savings, only because our focus is on retaining customers and running those businesses very similar to how they've been run. Over time natural synergies occur and that's (inaudible) to happen.

Okay. So synergies likely aren't yet captured. Is that a fair statement?

No, I don't think they are fully captured yet. It'll take time to get them, but like I said, our emphasis is on keeping those customers and so far that's been working. We have more customers than we started with when we bought those companies.

Okay, great. Thanks a lot.

Your next question is a follow-up from Brad Crowes, a private investor.

I had a question about the acquisitions. Looking at the history of this company since I've been around, obviously it has been built by acquisitions. I think they might have acquired some of the -- a company that you guys work for. They blew it up; you guys took it back over. Now we're looking back at this acquisition trail. I'm just wondering maybe you can speak to what these -- this type of strategy, why it will work better this time and what you -- how you guys do it better or different than the former management?

Well, I think the biggest difference is that we're maintaining the individual acquisitions as they were. In other words, I think you were referring to the Meenan acquisition by Petro and it wasn't exactly blown up. It stayed exactly as it was and naturally our model now in that we're trying to run those companies as they were running.

We buy successful companies. They're successful for one reason. They're successful because they were able to please their customers and sell -- continue to sell product to them. That's who we look for, and we don't want to make any major changes when we buy those companies. So instead of -- as I would -- instead of "Petrolizing" them and making all of the accounts Petro and bringing them into the Petro fold immediately, which might have been the old model, we don't do that now. The acquisitions are running the same way they did run under their own name. Of course, we will get synergies and we will get some expense savings over time, but the bottom line is that we're just running them as they have been running and making as many changes as we can to enhance the profits, but yet not affecting the customers' experience.

That -- I mean, that's what you've been doing. I know you've done a few and that's obviously working and you guys --

Yes, well it's not like it's a new strategy for us because it's a strategy that Meenan Oil followed for many years and it's a strategy that we have adopted now at Star Gas.

I just want to add something from an operational standpoint to that. I've been around at Star Gas now for about 9 years and I was here during the period when those other -- some of those other acquisitions were being done. And the planning of the acquisitions was to suffer significant losses of accounts during a fairly short period of time, and even in the best scenarios that was realized with our changed strategy on how to acquire and connect these acquisitions into our structure. We're actually not even realizing the modest attrition that we planned for them. We're actually experiencing some growth by giving support from our network to these acquisitions and basically we -- setting the expectations with the management that we bought with those acquisitions. And having them go back and speak to some of their old customers and given some new vitality to those old business that for whatever reason the former owners have decided to sell and we're seeing a net ahead position on the account phase and that posture that we're presuming now is working quite well. It's not super aggressive, but it is a very positive one and to that note we've been able to retain almost every single employee that every acquisition that we brought on in the past 12 months and that's looking very favorably as well.

Great. And one question on -- if you look, I think the acquisition strategy is great though with your unit price so depressed, and I think you've mentioned it in the past and then it's kind of been dropped in terms of going into the market to acquire units, is there an analysis that could be done where (inaudible) acquisitions can add to what you guys are doing? But often do you see that cash flow and unit repurchases, it's a -- and I don't know what the numbers are to make that analysis, but is that something you guys would look at or you have looked at?

Yes, we talked about this on the last call and we're very consistent in regarding our policy on what we want to do on capital allocation ever since Castrol did the recapitalization in April of '06 and our first priority is to grow through attractive acquisitions. And our other -- but there are other options for employing the excess capital, whether it be debt repayment, special distributions, unit repurchases. You've got to remember on a unit repurchase that it's temporarily not an option due to our NOL. It could be at risk due to a potential ownership shift as a result of our recap. But after April of 2009, that issue goes away and all options are on the table. So we always look at all of those options. We always evaluate all of those options in anything that we're going to do when it comes to capital allocation.

Okay, great, and the distributions are going to be reinstated per the agreement when, end of this year?

February of '09 would be the first distribution.

Thank you.

(Operator instructions) We have no further questions at this time.

Okay. I just want to thank everybody for joining us today and for your ongoing interest in Star Gas, and we look forward to speaking with everybody following our second quarter results. Thank you.

Thank you for participating in today's conference call. You may now disconnect.