Star Group LP (SGU) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Star Gas Partners fiscal first quarter conference call. At this time, all participants are in a listen-only mode. Following Management's prepared remarks, we will hold a Q&A session. (Operator Instructions) As a reminder, this conference is being recorded today, February 4th, 2010.

I would now like to turn the conference over to Dan Donovan, Chief Executive Officer.

Good morning, and thank you for joining our call and webcast. With me today's is Star's Chief Financial Officer, Rich Ambury, and our Senior Vice President of Operations, Steve Goldman. I will be providing some brief comments about the state of the business, after which Rich Ambury will review the fiscal first quarter ended December 31st, 2009, and this will be followed by some comments from Steve Goldman regarding Star's operations, and then we will be happy to take you questions. But before we begin, Chris Witty of our investor relations firm, Darrow Associates, will read the Safe Harbor statement.

Thanks, Dan, and good morning.

This conference call may include forward-looking statements that represent the partnership's expectations and beliefs concerning future events that involve risks and uncertainties, and 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 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 and Form 10-K for the fiscal year ended September 30th, 2009. All subsequent written and oral forward-looking statements attributable to the partnership, or persons acting on its behalf, are expressly qualified in the 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 would now like to turn the call back over to Dan Donovan. Dan?

Thanks, Chris.

On our last conference call eight weeks ago, we outlined a number of steps that Star Gas was in the process of implementing in order to improve our capital structure, increase our operating efficiency, and enhance unit holder value. These included paying down debt, buying back units, making attractive acquisitions, and preparing for price spikes in cold weather.

Since that time, we have continued to implement this plan by redeeming $50 million in senior notes, and continuing to purchase common units, of which a total of 4.9 million have now been purchased out of 7.5 million authorized for repurchase by the Board. We are pleased with these actions, as we believe they will allow us to become a stronger company with increased value to each unit holder. In this regard, the Board has approved an increase in the quarterly distribution to $7.25 per common unit to holders of record as of today, to be paid on February 12th, 2010.

While Steve Goldman will have some specific comments regarding our operations, let me just say that we plan to continue focusing on enhancing customer service as a primary method by which we can retain existing customers, and attract new customers. Net attrition versus the previous first quarter was favorable by approximately 2,900 accounts, due to the emphasis on retention, while account gains were 7,300 less than the three months ended 12/31/08, and that was primarily due to usual factors that boosted customer gains last year, our losses were also less in this quarter by over 10,000 accounts. We feel that the changes we have already made in our continuing program of empowerment, discipline, devaluation and accountability, will enable us to both increase new customer gains and reduce existing customer losses.

As always, acquisitions are an ongoing priority, and we continue to evaluate all opportunities with the hope they will be a profitable fit for Star.

With that, I will turn the call over to Rich Ambury to provide some comments on the first quarter financial results. Rich?

Thanks, Dan, and good morning, everyone. For the quarter, our volume sales were down 14 million gallons, or 13%, due to warmer temperatures of 5% versus the prior period and net customer attrition. In addition, degree days for the quarter were warmer than normal by about 2.2%. As expected, our home heating oil margins declined by $0.04 per gallon. You may recall that in the prior period, our per gallon margins benefited from a significant decline in wholesale product costs, over $1.40 per gallon, while in the December 2009 quarter, products cost rose by $0.30 per gallon, which limited margin expansion. Looking at our operating expenses, our delivery and branch expenses declined by 11%, which was in line with the lower level of volume.

We posted net income in the quarter of $12 million, an increase of $20 million versus a loss of $8 million in the prior year, reflecting a favorable change in the non-cash change in fair value of derivatives of $40 million, and lower operating expenses of $11 million. These benefits were partially offset by a rise in non-cash deferred income taxes of $9 million, and lower product gross profit of $17 million.

Regarding taxes, over the last several years we have utilized a good portion of our NOL carry forwards. At December 31st, 2009, we anticipate that our NOLs will be about $51 million. After we exhaust our NOLs, our cash taxes will increase significantly, which will reduce our funds available for distributions in the future periods. Adjusted EBITDA for the quarter declined by $8.7 million to $26.8 million, which was in line with our internal estimates, as both heating oil margins and volumes normalized during the quarter.

As Dan mentioned, we are calling $50 million of our bonds later this month, which should reduce our annual interest expense by approximately $5 million. While we did not borrow under our working capital facility during the first fiscal quarter, we currently have outstanding borrowings of $25 million under the facility.

And with that, I would like to turn the call over to Steve Goldman for some additional comments.

Thank you, Rich. Good morning, everyone.

As Dan stated a few minutes ago, we were very pleased with the performance of our operations this past quarter. While weather during the period was rather uneven, with both significantly warmer than normal and significantly colder than normal temperatures, we believe our operating teams throughout the Company performed excellently. Our goal is to always exceed the expectations of our customers at every chance we get, and during the quarter our measured service levels remained very high. Thanks to carefully constructed and executed plan in all our divisions, we saw on-time arrivals for service improve by 3%, the best service response in many years. We are proud of execution in all our delivery departments, and for the excellent service they provided.

As many of you know, we have made significant changes in our Management Team this past year, particularly at our district and branch levels, and these changes are starting to show some very promising outcomes. Our results were not just good in the area of response to our customers, but also in controlling expense. The unpredictable roller coaster weather patterns we experienced this fall certainly made the job of balancing proper staffing and cost control that much more challenging.

This is where our current Management Team has shown substantial strength. An important key to success has been the sharing of resources, which has evolved out of an environment that encourages greater teamwork. This past quarter demonstrated the significant strides we have made in enabling and empowering our local Management Teams. There has definitely been a renewed sense of accountability driven down throughout our organization.

Finally, I would say, as Dan has stressed on many of these calls, that there is a very clear message being communicated in everything we do; and that is, that is that the customer matters most. And the way to show our distinction as a preferred service company is with excellent customer service. We strive to be accountable in every day we interact with customers. The results of our words are now starting to show in the significant decrease in customer losses this quarter. Not only were we able to reduce customer losses by half from the same period last year, but several of our districts either ended the quarter with no net customer attrition, or actual organic growth.

There is no mistaking on a day-to-day basis how important this is to the growth of our organization as a whole. To that end, there is not a day that goes by in which we are not challenging ourselves to explore areas in which to improve revenue, control expense and, most importantly, distinguish ourselves through outstanding customer service and implementing ideas that enhance value for the people who rely on us for heat.

With that, I will turn the call back to Dan.

Thanks, Steve. At this time, we will be happy to address any questions you may have. Operator, can you please open the phone lines for questions?

(Operator Instructions) We will go to Jeff Graham with Bandera Partners.

Hi, guys, can you hear me?

We can.

That was a very good quarter. Great job on the churn and the margins. The one thing on the margins, I was impressed they held up to the extent that they did. I'm curious how big was the benefit that that you saw that came from the 20 million gallons that you took delivery of in the Summer, and did all of the benefit from that flow into Q1 or will we see a bit of that in Q2 as well? Thanks a lot.

The majority of the benefit of that storage transaction that we did benefited this quarter. That was probably $2.5 million.

Okay. That's my only question.

We will take our next question from [Richy Galel] with [Agon].

You talked about in Q2 drawing on the working capital facility; is there an update on where your cash sits, I mean is that something that is close to year end balance or is that maybe we should think dollar for dollar in terms of how the cash number sits?

We have about $25 million borrowed under working capital facility, as of this morning we have around $70 million worth of cash. We are buying back $50 million of our bonds on February 19th. So the majority of that cash will be used to buy back the bonds. We have an interest payment and a distribution payment coming up later this month as well.

With those things in mind, what kind of cash balance do you think you need to operate at, just to have comfortability kind of on a day-to-day basis? Seems like a majority of that cash -- I mean, obviously you will get the working capital benefit through this quarter, but just kind of curious on your thoughts on the cash level?

Really not following your question. You want to know how much cash I need on a daily basis?

Yes, I mean it seems like if you have $70 million today and $50 million is going out the door on the bond buy back, as well the interest payment, is going to be -- you know, cash will drop significantly, where do you feel comfortable running the business at in terms of the cash number?

That's something I really have to sit down and feel where heating oil prices are going to go. At $2 a gallon I might be comfortable at one level, and at $4 a gallon for heating oil prices I will be comfortable at a different level. That's really a tough question for me to answer.

Okay. In terms of the dividend, can you kind of -- if you have color on how the percentage of increase was determined to kind of get to the new level? And you guys have talked about in the past having limitations based on your debt levels, as well as trying to manage kind of the maximum, and dividends being something that you guys will focus on continually trying to ratchet up. Can you kind of give us some mechanics on how the new number was determined, or was it a sign -- it was more just kind a new number that the Board approved?

Well, it was something the Board approved. As we've said on many of the other calls, we are always looking at several things to do with any cash we might have. First and foremost would be acquisitions, which we continue to work on. Even though we haven't been able to close on any, we have been working on looking at acquisitions, and obviously paying down the debt and repurchasing units were the other priorities.

But we felt some point in time we wanted to do something along the lines of returning some of this cash back to the unit holders, but obviously the Company has been down the road of paying a distribution that made no economic sense in the past, I'm talking about prior to 2004, and we want to be conservative with it, and we feel that a 7.4% increase, going from $0.27 to $0.29, is appropriate.

One more question. In terms of the tax timing, you guys mentioned on the last call when you thought you would exhaust NOL, and when you would be going back to being cash tax payer; is there any update on that?

Not really. I said we had about $51 million worth of NOL, so that will give us a couple years of shelter, depending on how cold it is and what kind of year we are having.

Okay. Thank you.

(Operator Instructions) We'll go next to Carlos Rodriguez with Hartford Investment Management.

Good morning, thanks for taking my question. Just trying to understand big picture here, what we should infer from the -- I guess the restarting of the distribution, as well as the buying back of the bonds? Is this some sort of commentary on the acquisition landscape, multiples being asked by sellers? I'm trying to understand how the Company is going to mitigate some of this loss of growth in volume, whether that's a priority? I mean, I know you got a number of initiatives to try to retain your good customers, but I'm just trying to understand how this all plays into the growth of the Company.

You got it exactly right. Obviously, we are trying make the Company healthier by increasing our gains and reducing our losses. That's very important for having a sound company, no matter how we grow. But obviously, acquisitions are going to be important to us. We've got to be patient on this, and we are not just going to run out and buy companies for the sake of saying, hey, we've increased our customer base, and have a bunch of customers where we are not making money or where the return is sub-par. So we continue to look at acquisitions.

Where -- we feel that are acquisitions out there we will be able to make, both in heating oil and possibly in propane, and I'm not so sure that the multiples being asked are unrealistic. Maybe some of multiples being paid by some buyers are unrealistic or don't make any sense, but we feel that there is going to be acquisitions for us to be able to make, and we hopefully will see them coming in the next year.

Great. What would be the mechanism for financing those acquisitions? I mean, if you are trying to be opportunistic and the climate changes as far as sellers' asking prices, how would you finance it? It looks like your cash is going to be at a fairly modest level after the bond buy back. Are you looking at the revolver as a means for financing acquisitions? Would you access the equity markets or the bond markets again? I mean I'm trying to understand, you're buying back bonds, how would you -- I guess, does that suggest there is really no acquisition activity on the horizon of any substance?

That does not suggest that. What it does suggest is we are paying $10.25 on the bonds, and where we are investing cash is not generating much today. And a negative spread on $50 million is $5 million, and that would go right to the bottom line or go right to distributable cash flow. While we are borrowing under the revolver today, this is our busy season. This is where we would expect to borrow. As we collect our receivables and collect our inventories, we will be able to generate cash and use that cash to making acquisitions in the future. Our ability to borrow for working capital under our revolver is almost $200 million at the end of December.

Okay.

There is a significant cushion or difference between what we can borrow versus what we have borrowed for working capital, so there is some play there that we would finance the acquisitions internally. That said, after a certain point, sure, we will run out of cash on our balance sheet after we make certain acquisitions of size, and we probably will need to access -- probably the hopefully the bank market and/or the debt market.

Could you comment at all on your pipeline of potential acquisitions, or is it just not really a focus at the moment?

It's always a focus. We are always looking at acquisitions, we are always talking to other dealers, and right now we are looking at several, and as we come out of the heating season that will probably pick up a bit. But we are very careful, and we pay a fair price, we pay a competitive price, but obviously we are looking to make sure that it justifies a decent return on what we buy. But we are always looking at acquisitions, because we are always being asked the question ourselves from other dealers.

Thanks very much.

You're welcome.

We'll go next to Howard [Brause] with [Wonderlick] Securities.

Two questions, please. One, in terms of acquisitions, just following up with what the last questioner had, what multiple of EBITDA do you look at in terms of acquisitions?

Well, the multiple varies. It can be anywhere from as low as three to as much as five. Depends upon the acquisition. Depends upon the type of company we are looking at. Depends upon their margin, and depends upon the EBITDA that they will contribute to our Company.

Okay. Second question. In your Q at page 22, you discuss changing from an MLP to a corporate structure. Could you discuss the benefits to the shareholders or to the unit holders?

One of the benefits would be to eliminate the whole K-1 process that we have outstanding, with each unit holder gets a K-1 and it has to go into their income tax, so we would gain that benefit. And there would be some administrative expenses and some tax expenses for filing those returns. That is two of the benefits that unit holder would get.

Could you quantify that in terms of dollar amount? Because the unit holder is treated differently if you are a corporation versus an MLP.

While we are an MLP, what shows up on the K-1 is dividend income, which is the same as being a [C Corp] and getting dividend income. So far as what a unit holder sees on his tax return, it's actually the same, we just have this process because we inherited the MLP structure that we had five years ago, but we are just trying to eliminate this structure.

What kind of savings -- can you quantify the dollar amount of savings for the two? Is it $100,000, is it $1.5 million?

It's somewhere between $500,000 and $1 million.

That then would drop bottom line. When do you expect to do this?

We are still exploring it. We are not 100% sure we are going to do it, because it is a very complicated matter.

Thank you.

You're welcome.

(Operator Instructions) We'll go next to Ed Olsen, private investor.

I have been with you guys since before the rights offering, and since then you've done everything you said would do, just putting one foot in front of the other, and I appreciate that as a shareholder.

Couple of quick questions, buy back, your 4.9 over 7.5 is what you expect to do; how quickly would you reload after you get to the 7.5? On the dividend, how of would you revisit that -- dividend increases? And third part of that, is $0.45 a maximum dividend that you would foresee, and could we get a yes or no answer to that part of the question? Thank you.

I think the decision the Board made is something they look at each and every quarter, to determine where we are in the landscape for the year, how our year looks, whether we think we can justify that. As I said before, want to be very careful in making sure that we don't make a distribution that makes no economic sense. We don't like to run the business quarter to quarter, where -- we definitely have a long-term look at how we want to operate things. So far as saying there a limit on what the distribution would be, I would say no.

And the buy back?

The buy back is governed by buy back -- governed by SEC rules. That will take us possibly 6 months to 12 months to even finish out the rest of the program. We were fortunate enough to buy a couple of large blocks, which kind of put us over the hump, if you will. But I doubt we will be reloading over and above the 7.5 range in the near future.

Thank you. Keep doing what you are doing.

Thanks, Ed.

We will go next to Mac Sykes with Gabelli & Co.

Great quarter. Just a quick question about sort of the health of the economy, and it's impact on your business. Are you starting to see some turns here in terms of customer elasticity towards oil consumption, or are we still just getting out of the process?

We still see conservation, people are weary about what they pay because sometimes it's very related to what they are paying at the gasoline pump, and we still think that there is a good deal of conservation built into our numbers. We think that's one of the reasons that our volume was down, besides weather and attrition. So far seeing any economic turndown, we still see discretionary spending to be holding back but it -- there are some signs that it may be picking up a little bit. But we don't see anything overwhelming to convince us of that. Our receivables are in good shape. We feel that that's more our controls than might be the consumers have more money to pay their bills, but we are hoping that might be part of it also.

Just one follow-up question. Just -- I may be asking this naively, but just thinking about the customer inventory, not your inventory, so if I'm homeowner with an oil tank, is there enough turns I guess during the winter in filling up that, if people monitor their sort of their levels of their tanks -- I guess my question is, is it possible then on aggregate level your customer levels may be lower than say a year ago, or is that pretty much constant across the seasonal basis, I guess?

One of our selling points is most of our customers are on automatic delivery, and they could care less about the level in their tank. They don't look at that. There are a few will call customers who like to monitor that and will call us when they need oil, but for the most part we keep people on automatic delivery, and we our drop size within a range that we feel is safe. For instance, you have a big snowstorm supposedly coming this weekend; we want to make sure we deliver to those homes that people who may be close to running out, maybe deliver a little bit early. We look at the geography; if somebody happens to live in an area where it's hard to get the oil truck to get to their home, we are going to deliver those early.

The only thing I might add is that when the weather comes like it did in December, at the end of December in the last two weeks, you can't deliver all that volume in December, so some of it slips into the next month. Same thing in November, though. November was a very warm month, November was 80% of normal, the ten-year normal, and you know, you went i to December with no head of steam whatsoever, so the drop sizes were very low. So that's something that our operating people monitor on a daily basis to see what is the drop size, how much are we getting into a 275, how many gallons are we dropping into a 550, and we watch that to make sure that we keep our customers satisfied, yet at the same time maximize productivity.

Okay. So just being that close to the monitoring, then, in terms of your business there really not that much risk of a general movement in inventory either way, where customers do it? So it sort of normalizes for the most part. Is that what I'm kind of understanding?

It does, basically. We not knowing the weather, how the month is going to end, volume floats from one month to the other based upon that. We have a heating curve of what think approximately customers use historically in the month of January and February, et cetera, but it definitely changes from year to year.

Terrific. Thank you, guys.

You're welcome.

We will take a follow-up question from Richy Galel with Agon.

Sorry about asking one more question.

That's all right.

In January, do you have any color on how the weather is trending year-over-year, as well as versus historical in your region?

January is about 11% warmer than last year.

Okay. Thank you.

Last January was a very cold January. In our footprint, we had about 1,150 degree days; this January, we had about 1,000 degree days. But as I mentioned, we did have some volume from the December period that moved into January.

Do you know roughly what kind of level that would be?

Our volume is probably going to be about 10% to 11% less than the previous year, but probably 10% to 11% greater than we had planned.

That's helpful, thank you.

At this time we have no further questions. I will turn the conference back over to Mr. Donovan for any additional or closing remarks.

Thank you, operator. I want to thank everybody for, again, taking the time to join us today, and for your interest in our Company. We definitely look forward to sharing our fiscal 2010 second quarter results with you, and that will be in May. Thank you very much.

That concludes today's conference, we thank you for your participation.