Star Group LP (SGU) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Star Gas Partners fiscal 2009 second-quarter results conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Monday, May 11, 2009.

I would now like to turn the conference over to Mr. Dan Donovan, President and Chief Executive Officer of Star Gas Partners. Please go ahead, sir.

Thanks, Mohammed.

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. Rich Ambury will give a brief financial review of the fiscal second quarter and six months ended March 31, 2009. My remarks will follow, and then we will be happy to take your questions.

But before we begin, I would like to ask Rob Rinderman of our investor relations firm Jaffoni & Collins to read the Safe Harbor statement.

Thank you, Dan. Good morning, everyone.

This conference call may include forward-looking statements that represent the Partnership's expectations or beliefs concerning future events that involve risks and uncertainties that may cause the Partnership's actual performance to be materially different than the performance indicated or implied by such statements. 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 the fiscal year ended September 30, 2008 and in its Form 10-Q for fiscal 2009 second quarter ended March 31, 2009.

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 publicly 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 now like to introduce Rich Ambury to go over the financials.

Thanks, Rob and good morning, everyone. Thank you for joining us to discuss our results for the second fiscal quarter and the six months ending March 31, 2009.

Let's first look at our top-line volume for the quarter. We sold 176 million gallons compared to 169 million gallons last year. This 4% increase was largely due to 9.5% colder temperatures, which more than offset the effects of the decline in our customer base and some additional conservation.

In the second fiscal quarter of 2009, we continued to enjoy the benefits of lower home heating oil product costs. This compares favorably to the second quarter of fiscal 2008 in which heating oil prices continued to rise and set highs on many occasions. Our home heating oil margins were up by about $0.11 and reached $0.85 as compared to the per-gallon margins realized in the second quarter of fiscal 2008.

In looking at our operating expenses, they increased by about $6.5 million. While our bad debt expense was down by over $1 million, our delivery expense rose by $3 million due to the colder weather and higher fuel costs of $1 million as we hedged our fuel during our higher-cost period.

Insurance expenses also rose by $1.5 million, due in part to the significant difference in weather. Our profit-sharing expense was higher also by $1.3 million, due to the rise in adjusted EBITDA. Adjusted EBITDA was $75 million, or 25% higher than the prior period, as the company benefited from an increase in home heating oil volume and higher per-gallon margins.

During the quarter, we bought back $26 million of our bonds at a discount of $6 million and reduced our total debt outstanding to $137 million. Our all-in yield to maturity on our bond repurchases in fiscal 2009 is over 21%.

We posted net income of $109 million, up $66 million due to the increase in adjusted EBITDA of $17 million, a favorable change in the fair value of derivatives of $44 million and a gain on bond redemption of $6 million.

In moving over to the six-month results, for the six months, we sold 286 million gallons, up 1% as colder temperatures and volume from acquisitions were reduced by customer losses and conservation. For this six-month period, our temperatures were actually colder than normal.

Our per-gallon margins were $0.86, up about $0.14. As I mentioned before, the fiscal years are quite different. In fiscal 2008, our product costs hit new record highs, and in fiscal 2009, our product costs declined to not seen since the heating oil season of fiscal 2005.

The current state of the economy is impacting our installation bit revenues and for the six months, they were down by 7%. As a result, our net installation profitability declined by $2.9 million.

In looking at our operating expenses, they increased by $12 million or about 9%. A portion of the increase is due to colder temperatures, expected wage-rate increases, higher profit sharing, and higher vehicle fuels of $2.5 million, again as we hedged this expense during a higher-cost period.

Adjusted EBITDA was $110 million, or $33 million higher than the prior period, as the increase is due to a higher home heating oil volume and an expansion in margins more than offset the increase in operating expenses and the decline in installation profitability. We posted net income of $101 million, up $34 million largely due to the increase in adjusted EBITDA of $33 million.

At March 31, 2009, we had $176 million in cash, which is in excess of our long-term debt of $137 million. We are moving forward with refinancing our bank facility and hope to close sometime this summer.

Dan?

Thanks, Rich.

As Rich indicated in his comments, the Partnership is pleased to have exceeded last year's adjusted EBITDA for both the quarter and the six months ending March 31. This is primarily due to colder-than-normal weather and improvements in our margin management.

Fiscal 2009 has presented both challenges and opportunities. Strong price volatility, heightened consumer pricing awareness, continued conservation and a weakened economy have all been challenges for everyone in our industry. The New York Harbor spot prices for the period from October 1, 2008 to March 31, 2009 decreased approximately $1.47 per gallon while they increased almost $0.89 per gallon in the same period in 2008. The decrease in price this year, along with the colder weather, presented a near-term positive opportunity for us, but one that was an anomaly that cannot be expected to occur each year.

With the price of gasoline and heating oil a hot topic in the media, our employees, especially those that have direct customer contact, again performed very well in servicing our valued customers and responding to their inquiries and issues. Answering these queries and serving our customers' home heating needs in a timely manner during colder-than-normal winter periods was, as always, our paramount concern.

Volume for the three months and the year-to-date period while favorably impacted by colder-than-normal weather continued to be adversely affected by conservation and account attrition. Net customer attrition for the quarter was greater than last year's second quarter by 5600 accounts. In the fiscal second quarter, there were 600 fewer account gains than last year and 5000 more losses than the previous year. In the six months ending March 31, 2009, there were 3700 more gains and 9300 more losses than during the same period in 2008. The increases in the losses was mainly due to price and credit issues, and by that I mean the failure of customers to pay past-due balances is and conversion to natural gas.

I should add though that included in these losses were approximately 5300 customers that decided to terminate their fixed pricing agreements with us, pay the early termination fee, and then switch to a competitor. We consider these fixed-price customer losses to be out of the ordinary and a direct result of the extremely volatile pricing environment I alluded to earlier.

We did not close on any acquisitions during the fiscal second quarter, which is not unusual since it is the busiest time of the heating season for most dealers. We are currently in the early stages of evaluating several potential candidates and are hopeful that we will be able to complete some of these purchases in the coming months.

As in the fiscal first quarter, we were pleased to announce the payment on May 15, 2009 of a $0.0675 per unit distribution to unitholders of record as of May 7, 2009.

At this time, we will be pleased to address any questions you may ask. Operator, please open the phone lines for questions.

(Operator Instructions). Steve Araco, Locust Wood Capital.

So the way I calculate it, you guys have done a phenomenal job since you have taken over this business. Your first year, your EBITDA I think was $68 million. Last year, which was a little more warmer, was $55 million. This year is going to be a good year, something probably north of or close to $90 million. So that averages out to $70 million.

So when I look at your company with the cash that you have on your balance sheet, you guys are trading at an enterprise EBITDA of something less than three times, which I think is probably cheaper than what you can do acquisitions at.

Would you guys consider, given that you have a net cash balance of $40 million which will probably grow over the next six months as your receivables pay down, would you guys consider starting to buy a significant amount of your stock back? Thank you.

Steve, that has always been one of the options that we look at it. We've talked about this since the very beginning, also.

Attractive acquisitions obviously is something that is one of our top priorities but we've also looked at debt repayment, which we've actually done, as Rich mentioned, both in the first quarter and the second quarter. Obviously, buying back units is an option that we will be looking at. So yes, that is something that is definitely on the table for us to consider.

Well, again congratulations -- you guys have just done -- congratulations on a great quarter, and I also applaud you buying back the debt but just I think they've moved up so perhaps that opportunity doesn't exist any more number but the stock is sitting right here. So again congratulations on a great quarter.

Thank you.

Walter Schenker, Titan Capital.

Thank you -- a couple of questions all around, again, cash flow and use of cash flow.

Could you just walk us through -- and I don't know what a normalized year is -- the thinking going forward or to this point of the distributions to unit holders, and how it relates to cash flow, EBITDA, or how one comes up with the $0.0675 per quarter number?

Well, $0.0675 was arrived at back in 2006 when we capitalized the Company. We are going to proceed paying that for several quarters until we take a look at the true earnings power of the Company. At the last call, I did say we have done fairly well in the EBITDA that we have generated. But you know currently we are all looking at refinancing our bank agreement and we don't have one in place currently.

Therefore, it is a historic number and not necessarily meant to reflect the availability of cash currently. How do you prioritize that versus debt buyback, share buyback, acquisition?

Let me just try to answer that and add a little bit of something to what Rich said. I don't want to keep repeating myself, but we always are looking for acquisitions, both small and large. We hope we have several candidates here, because obviously we want to be a growing company. We work on our own internal marketing, so organic growth is something that is very important to us also.

With the cash, we have several options -- buying back debt, you buying back some units, the acquisitions, and of course distributions, increasing distributions and special distributions is something that's always on the table.

But one thing I would like to emphasize, that I mentioned in my remarks, is that this has been a bit of an anomaly this year. We have had cold weather and decreasing prices which allows us to capture some extra margin. There is no guarantee -- I wish there were -- there's no guarantee that happens every year.

Okay. Therefore, that anomaly means that you would look at this year when it is completed as probably above a normalized results for the Company?

But you know, when we plan, we always plan for normal weather, and we always plan that we are going to be able to make a budgeted margin.

When we are in the volatile conditions like we've had, you know the price of oil back on July 3, 2008, the price of oil was a heck of a lot higher at $4.08 a gallon than it is now. So when it goes up and down that steeply, that quickly, in a rising market, it's very hard to even make your margin. So in a down market, obviously you have an opportunity to sort of equalize we might not have made when the prices were moving up.

Okay, thanks a lot.

Gregory Shrock, Arklow Capital.

I'm wondering what the plans are for taking off the pill. I'm sure we're not the only ones that would like to buy some more stock. Is there any plan to take that off soon, or --?

That is something that is being looked at by the Board right now. Probably the best probabilities will be reverting back to where we had been.

Reverting back to where?

To where we were before we lowered it to about the 5%, 6% threshold. The pill was in effect at a 15% threshold. We are going to be looking at that over the next month or two, and at our next Board meeting we're going to decide to lift the pill, like you adjusted.

Terrific.

We are moving in that direction. We've just got our -- you know, one of the reasons we did put it in was to preserve our NOLs. We need to confirm those calculations and then we will revert back to where we were.

Okay, great.

[Milan Gupta], Southpoint Capital Management.

Great quarter. Could you guys just talk a little bit more about customer credit and maybe the health of the underlying customer? I notice the 90-day delinquencies are moving up. I understand we are in tough times, but what's normal for that? What's a normal level for that sort of thing? And so again, the margin is obviously very strong; it's a great environment for you guys. Would you potentially look at dialing down the margin to maybe give your customers a break, or would that not even have an effect in the current recessionary environment?

Well, our margins are always a function of what we need to run the business and to make the proper return to our investors. We do feel that we give our customers a break in these margins. You know our forte, again, is the service we deliver. I think I've said it a few times on these calls, that we consider ourselves a service company rather than an oil company because that's what we do; we deliver services to our customers that help protect their largest asset, their homes. So our margins, we think, are fair margins that allow us to continue to do that.

And the 90-plus?

Well, they are down from last year comparative number (multiple speakers) March '08 --

(multiple speakers) kind of the balance, they're up. Like $165 million is the receivable and I think --

You really can't take a percentage of the receivable. You have to look at the absolute balance, because you have different selling prices in the mix, different weather conditions in the mix. But we are down from $21 million over 90 at March of '08 to $18.5 million at March 5 '09. That is really what we kind of focus on, is the absolute dollar as a (multiple speakers) percentage.

I got it. Thanks a lot. Great quarter.

(Operator Instructions). [Howard Bruce], Wunderlich Securities.

Good quarter, gentlemen. As of the end of the quarter, what is your NOL?

Well, we really don't have one at the end of the quarter, per se. We have to look at the end of a calendar period or when we file our taxes. At the end of December of '08, it was about $80 million.

All right. Secondly, my understanding about partnership distributions, you are required to make distributions in an amount equal to your available cash, as defined in the partnership agreement, no more than 45 days after the end of each fiscal quarter. You have the ability to keep back cash. What you consider an adequate or appropriate use of the available cash currently?

Appropriate uses is to keep some funds available to make acquisitions, like Dan just said, or possible debt repurchases, or stock repurchases.

Well, you've just made an acquisition for $3.9 million. Do you consider $3.9 million used of $40 million or $50 million of cash or $175 million of cash?

That was a very small acquisition which was made in October. You know, we are hoping that there will be some larger acquisitions coming along, which obviously the dollars would be a lot more than that.

[Matthew Dainon], [Jode] Capital.

Hello?

Yes?

Sorry about that. I had a couple of questions, follow-ons to just what some other people had asked. On the Accounts Receivable, if you looked at it by the number of customers, has the percentage gone up that are bad debt? I mean, you're arguing that doubling in the percentage of 90-day delinquent doesn't really matter, and if the number of people are going up, there is an issue.

Well, we reserve each and every month, based on historical collection patterns and historical patterns of people going bad. Again, a good portion of the amounts over 90, if you think about it, have to pertain to -- those receivables were created in the prior fiscal year when heating oil prices were much higher.

Let me just add something to that, too, on the Accounts Receivable. We have our own internal credit group that collects money for us. We look at that not just as a collection group but as a retention. Their goal is to collect the money, obviously, but their goal is also to keep customers.

We realize what customers are going through. We are trying to have a lot of empathy with customers who are having harder times because of the current state of the economy. So we work with a lot of our customers who have had good track records with us and who have been customers for years and years. So we are just not going to toss them out the door and we may see a blip up in some of those receivables but we usually have payment arrangements made with those customers. We feel confident that, before the next heating season, that we will be paid.

If you had a payment arrangement, would you be reserving for it?

No. It would be part of our receivable but you know --

But it wouldn't be part of your bed that, is that (inaudible)?

That's correct.

Is that correct? So I guess what I'm failing to understand is the argument was made to an earlier question that no one should bother looking at the percentage of bad debt to Accounts Receivable, really the absolute number matters and I guess --

You are looking at the over-90 to the total number, not the bad debt.

Correct, so over 90?

Well, that's not bad debt; it's over 90.

Okay, so can you explain to me clearly how it doesn't matter that you're over 90 to of the receivables has doubled, on a percentage basis -- and we should only look at the absolute? I mean, is the number of customers increasing? Is it the same number of customers? I mean that would be --

We don't really see the number of customers increasing, but again, a good portion of the over-90 were created in a higher-cost period or a higher selling period --

Sorry, excuse me. If you don't receive that money, whether it is a higher-cost period or not, it doesn't really matter. You'd still -- it's (multiple speakers) right?

(multiple speakers)

Sorry, let me just ask my question, because the first question wasn't really answered. If you looked at the number of customers -- just by the number of customers over 90 days versus your total customers and you looked at it versus the current year versus last year, would it have increased or would it be the same?

It's about the same.

Okay, so that answers it. I had a second question, which was a follow-on to the last question. They asked whether any of the -- they asked about the $3.9 million in your use of cash in the $40 million. You answered that you had some other acquisitions that were larger. Is this kind of a similar answer that's been given over the last several conference calls? Isn't $3.9 million the average size or more or less the average size of the acquisitions you done in the past? Why are they suddenly going to get bigger?

Well, because there are some -- this is normally the time of the year when people who might be thinking of selling their business will come out. They've probably had a very good year, so they might think that hey, now is the time to sell.

We don't know. We are getting indications that there might be some out there. In the past, when we talked about this, I mean I didn't make up the fact that, hey, we are working on some acquisitions. We work on lots of acquisitions. For every ten we work on, we may make an offer on one or two, because there are some things in it that we don't like. We're going to make sure that we get an acquisition that fits our model, that's going to work with us, that we can make money on. We just don't want to get an acquisition so I could run up the account base and say "I got a gazillion accounts." We are looking for acquisitions that work. They are not easy to find. There are lots of small acquisitions out there. We look at them all; we spend a lot of time on them. We evaluate them in our financial model. If we feel that they're not going to work, we don't make an offer. (multiple speakers)

Sorry, would you say the pipeline that you are looking at today, the size of each of those acquisitions is larger than they were last year?

It is a little too early to say that, but we think that there will be a larger pipeline this year than last year, yes.

When the Board considers these acquisitions, are they willing to make acquisitions at higher multiples than the Company trades at, or is that a barometer that is looked at?

We look at the barometer of what's happening in the marketplace. We look at the barometer of how much money these companies can actually earn. But if we're looking at some really good, full-service companies that fit our mold very well, obviously the multiple may be a little bit higher.

[Asura Sen], Equinox Partners.

Good morning, gentlemen. Thanks for the conference call.

Following up on a comment that you made earlier about the acquisitions and growth of the Company, something like obviously you want to grow the Company. I guess tying that back to the question that was asked earlier, how does that compare with not growing the Company and returning cash to the shareholders? What return metrics are you looking at? There is advantages in consolidating new businesses into yours and cutting back on G&A and so on. So what metrics would you look at for acquiring companies versus buying back stock?

Well, we always look at the acquisitions on a multiple of EBITDA. Obviously, we are trying to grow that so that there would be more cash generated by the business. I don't know if that exactly answers what you're saying, but --

We would look at the present value of the cash flows to the investors of making an acquisition as well as for potentially buying in some units and seeing what would possibly be the best.

What I talked about before of the debt repayment, the buying back units, special distribution or acquisition, they are all looked at on the same level. What's going to generate more cash for the Company? What is going to be better for us in the long run?

So if we have to -- any acquisition would have to be cheaper than your stock, or there's advantage is in consolidation that may --

Yes.

-- give you the opportunity to buy at a higher multiple?

No, there are definite advantages in some of the consolidation. There's a lot of synergies that we can achieve. Some of them we get right away, some of them we don't because we try to enhance the retention of any acquisition we do so that we maintain that business for as long a period of time as possible. But there are definitely some synergies there, and we take those into consideration when we are looking at all of our model -- any acquisition in our model.

The same for buying back stock I guess? You already see your business that's trading at four times [EBIT to] EBITDA, as somebody mentioned earlier. That is an attractive investment for your shareholders capital?

That's correct.

There are no further questions at this time, sir. I will now turn the call back over to you. Please continue with your presentation or your closing remarks.

Okay, thanks, Mohammed. Yes, in closing, we just want to say thank you again for joining us and for your ongoing interest in Star Gas, and we look forward to sharing our fiscal third-quarter results with you in August. Thank you.

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.