Star Group LP (SGU) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Star Gas Partners Fiscal 2009 Third 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 Thursday, August 6, 2009.

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

Thanks, Nelson. Good morning and thanks to everyone for joining our call and our webcast. With me today is Star's Chief Financial Officer, Rich Ambury, and our Senior Vice President of Operations, Steve Goldman. Rich is going to give a brief financial review of the fiscal third quarter and the nine months ending June 30, 2009. My remarks will follow, and then we'll be happy to take your questions.

Before we begin, Rob Rinderman of our investor relations firm, Jaffoni & Collins, will read the Safe Harbor statement. Rob?

Thank you very much, 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 from 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 Form 10-Q for the fiscal 2009 third quarter ended June 30, 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 statement. 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 would like to turn it over now to Star's Chief Financial Officer, Rich Ambury, for a review of the operating results. Rich?

Thanks, Rob, and good morning, everyone, and thank you for joining us to discuss our results for the third fiscal quarter and the nine months ending June 30, 2009.

During the quarter, we sold 43 million gallons of home heating oil or 6.5% less than last year, as customer conservation efforts and a decline in our customer base outpaced the impact of acquisitions. Our home heating oil margins were up by $0.145 cents and reached $0.90 per gallon in the quarter. And as a result, our gross profit increased by $4 million.

If you look at our gross profit from service and installation, that gross profit declined by $1.7 million due to two factors. We are seeing some weakness in our installation sales as a result of the economy, and our vehicle fuel expense increased as we had hedged this cost when prices were high.

In looking at the balance of our operating expenses, branch, delivery and G&A expenses, they increased by -- they actually decreased by $2 million, largely due to lower bad debt expense. The adjusted EBITDA loss for the third quarter of fiscal 2009 was $5 million, an improvement of $4.6 million. For the most part, the lower operating expenses offset the decline in service profitability and the increase in product gross profit dropped to the adjusted EBITDA line.

We posted a net loss of $2 million versus a profit in the prior year of $12 million. The difference is largely due to noncash mark-to-market adjustments on our hedges. In the current quarter, the gain was $9.6 million or $20 million less than the noncash gain of $30 million in the third quarter of fiscal 2008. As you might recall, home heating oil prices moved up dramatically in June 2008, which drove the noncash hedging gain in that quarter.

In looking at our nine-month results, we sold 329 million gallons, basically unchanged from the prior year, as colder temperature and volumes from acquisitions were reduced by net customer losses and conservations. Our per gallon margins were $0.89, up about $0.16, which led to an increase in product gross profit of $52.5 million.

Our net service and installation profit did decline by $4.7 million. Again, the driving factors are the downturn in the economy and higher vehicle fuel costs.

In looking at our operating expenses, they increased by about $10 million. The lion's share of this increase is in delivery expense, which rose due to colder temperatures and higher vehicle fuel expense. In addition, higher profit sharing accruals and additional expenses from acquisitions also contributed to the increase.

Adjusted EBITDA rose by $38 million to $105 million, as the increase in product gross profit more than offset the increase in operating expenses and the decline in installation and service profitability.

As we have mentioned on previous calls, during fiscal 2009, we bought back $36 million of our bonds at a discount and recorded a gain of $9.7 million. We posted net income of $99 million, up $20 million as the increase in adjusted EBITDA, lower net interest expense, lower depreciation and a gain on the bond purchase was reduced by noncash changes in our hedges.

In looking at our balance sheet at the end of June 2009, we had $217 million in cash, which is in excess of our long-term debt of $137 million. We closed on our bank facility this past July. It is a three-year facility, and we can borrow up to $290 million from November to April and the balance of the year, the facility size is $240 million.

We recently purchased warm weather protection for fiscal 2010. The contract period is from November through March, taking at whole, and the strike price is 7.5% below the average weather for the past ten years.

In addition to that, I'm happy to report that many of our home heating oil suppliers are starting to extend trade credit to the company.

Dan?

Thanks, Rich.

The Partnership has maintained both a fiscal and operational discipline during the fiscal third quarter and the nine-month period ending June 30, 2009, which allowed us to achieve the financial results discussed by Rich.

As you saw in our news announcement from last night, we are especially pleased that our board of directors has authorized the repurchase of up to $20 million in additional senior notes, as well as the repurchase of approximately 10% of the Partnership's outstanding common units.

We've come a long way, but we still have great challenges ahead. In line with the disciplined approach developed when Star recapitalized in 2006, our focus has been on ensuring that our retail business delivers the very best in home heating and air conditioning service to our valued customers at the local level.

We felt then, and still do, that the key to operating a successful company is to repeatedly demonstrate to consumers that we are their best choice for helping them protect their largest asset, their homes. We do this by offering outstanding customer service in all facets of our business. We believe that in the last three years, we have made great strides in accomplishing this important goal. But we're never satisfied, we never will be satisfied, to rest on our laurels and to stop trying to improve in this key area.

We now have a local presence in our total footprint combined with strong programs that train and incentivize all customer contact employees. Importantly, we've also recently developed and launched a strong quality assurance program for all operating activities to ensure that what we say is what we do when it comes to acquiring customers, retaining them and further enhancing their experience as one of our customers.

As we have discussed on several quarterly calls, the last two years have been particularly challenging due to significant price volatility, heightened pricing awareness, continued conservation and a weakened economy. New York Harbor prices for the period from October 1, 2008, to June 30, 2009, decreased approximately $1.10 per gallon, while they increased almost $1.74 per gallon in the same period in 2008. The decrease in price this year along with colder weather presented a near-term positive opportunity for us but one that was an anomaly and cannot be expected to occur each year.

Heightened volatility has caused many consumers to be much more aware about the price they pay and, thus, has made it even more imperative that we position ourselves as the premier service focused company I described earlier.

Net customer attrition for the quarter was greater than last year's third quarter by 900 accounts. In the fiscal third quarter, there were 1,300 fewer account losses than last year but 2,200 less gains than in the 2008 fiscal third quarter. In the nine months ending 6/30/09, there were 1,400 more gains and 7,900 more losses than during the same period in 2008. Losses were greatest in the categories of price and credit issues, and by credit issues, I mean customers who don't pay their balances. But most of these losses occurred in the first and second quarter.

I should also add that these losses include approximately 5,000 customers that, in response to a record drop in wholesale heating oil prices, decided to terminate their fixed price arrangements 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.

We did not close on any acquisitions during the fiscal third quarter, but we are currently evaluating several potential candidates and are hopeful to be able to complete some of these purchases before the upcoming heating season, which obviously will be in a few months.

As in the last two quarters, we were pleased to announce the payment on August 14th of the $0.0675 per unit distribution to unit holders of record as of today, August 6th.

And at this time, we'll be pleased to address any questions you may have. So Nelson, please open the phone lines for questions.

(Operator instructions.) Michael Prouting; 10K Capital.

Morning, guys.

Morning.

Hi, Mike.

Hey, just one quick question. How do you assess your ability to reach out to the 5,000 customers that terminated and try to regain those customers going into the coming season?

We have total ability to do that and we've done that already, and we'll be doing it more now as we get into the end of the summer season and into the heating season. We know exactly who they are, and we will contact them both via telephone and probably via some marketing materials, direct mail, et cetera.

All right.

It's not that they were angry at us for anything we did. They were more angry at themselves for locking in a price last summer when the price of oil was $4 a gallon. And then come December, that price is down to $1.40, and they're thinking that they made a bad mistake, and they paid the termination fee and went to another company. So we think we stand a good chance of getting some of those customers back.

Okay, terrific. I don't suppose I could invite you to make some forward-looking projections in terms of if or when we possibly might see customer gains exceed customer losses.

Well, I'm always hoping for that. I think that what we've done here, as a company, we're heading in that direction. So far as the losses go, and I could talk about them separately, we have a major campaign, which we have been really into for three years now. Our first step in it was to take our customer service center out of Canada and then to develop a local customer service unit at each one of our operations. And we've done that.

But you just can't do that and then say, "Okay, that's it. I don't have to worry anymore." Then we went into a major training mode to make sure that these people actually knew how to give good customer service and how to respond to our customers. We did that through a customer service boot camp, which is ongoing.

The third thing that we did was we then decided that if these people, these employees, are that important to us, we should incentivize them, which we have done.

Now the next step in it is we have developed this quality reassurance program where we go around to each division to make sure that they're doing those things that they should be doing that we know customers want when they're deciding to pick a home heating oil company.

On the gains side, I think last year was a good indicator of just what we can do on the gain side in that we have a centralized call center for handling gains and we also have local sales reps in the field. We've very optimistic that with the right conditions -- and last year was a tough year because of the fact of what happened, the price dropping so much, and we didn't really have any normalization of price whatsoever. But even with that, we had a very good year, and our gains are actually on the plan that we had. It was the losses that hurt us a bit in the beginning, and it was due to the fixed price customers that I mentioned in my remarks.

Okay. Yes, that all makes sense. Well good luck on executing on that. Just one final question then. Any thoughts on how you might go about implementing the buybacks, either on the debt side or on the unit side? Thanks.

Well we do plan on making open-market purchases, as we announced in the press release. And I believe we're going to commence that somewhere towards the end of August.

Okay, thanks.

(Operator instructions.) Our next question comes from the line of [Rishi Gallel];Aegon.

Hey, guys.

Hi.

A quick question on the acquisition side. You said you guys are evaluating several acquisitions that you hope to have closed before the next home heating oil season. I mean, can you give us any parameters around size, number, kind of how you're planning to fund it? Is it from cash on the balance sheet, draws on the revolver? And kind of the -- even if it's just a broad multiple range, are these pretty accretive acquisitions that you guys are looking at, or are these things that are kind of more in line with the multiple that kind of you guys trade at today?

Well I can't give you any specific details on the acquisitions, obviously, because of confidentiality agreements, but I can tell you that some are small and some could be larger. We normally look at a multiple somewhere between four and five. We have said that in the past. And we're hoping that something that -- activity has picked up a little bit. We're hoping that it stays that way. And this is the time of the year where that normally would happen.

So far as where we would get the funds from, it would be from our balance sheet.

So is there a minimum level of -- I mean, between share repurchase, between bond buyback and acquisitions, is there a view on how much cash you would like to keep on the balance sheet? Obviously, the number is pretty high now. Obviously, your net debt is negative. So I guess the question is just is there a comfortability in terms of number -- amount of cash that you would like to keep before you start drawing on the revolver?

Well we've always said that the best use of our liquidity is to make acquisitions, and we're always reviewing acquisitions. But obviously, we can't give any assurances about that.

So far as buying back units, that represents and opportunity that's comparable to what we hope we would find but have yet to find in an acquisition. So that's one of the reasons that we want to take advantage of that opportunity.

We'll have to balance buying back the units, buying back the debt and acquisition opportunities with where heating oil prices are and the capacity under our revolver as we get into the heating season. To kind of give you an exact number is tough because all four of those variables are constantly in motion.

Yes. All right. Thank you, guys.

You're welcome.

I will now turn the conference back over to Mr. Donovan. Please proceed.

Well if there are no more questions, I just want to thank everybody for taking the time to join us today and obviously for your interest in Star Gas. We look forward to sharing our fiscal fourth quarter and year-end results with later in the year. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask you to please disconnect your line.