Star Group LP (SGU) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Star Gas Fiscal 2010 Third-Quarter Earnings Conference call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host today, Dan Donovan, President and CEO. Please begin.

Okay. Thanks, Sean. Good morning, and thank you for joining our call on our webcast.

With me today is Star's Chief Financial Officer, Rich Ambury and our Chief Operating Officer, Steve Goldman. After some brief remarks, Rich will review the fiscal third-quarter results ended June 30, 2010 and this will be followed by some comments from Steve regarding Star's operations this quarter. We'll then be happy to take your questions.

Before we begin, Chris Witty of our Investors Relations firm, Darrow Associates, will read the Safe Harbor. Go ahead, Chris.

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 than 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 on Form 10-K for the fiscal year ended September 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 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 like to turn it back now to Dan Donovan. Dan?

Okay. Thanks, Chris.

As was mentioned in our press release, this quarter saw some large swings in both temperature and petroleum pricing that impacted our results. But Star Gas remains well positioned to manage these issues and post continued improvement in our operations going forward.

Rich and Steve will go into the quarterly details in a moment, but first I'm very pleased to announce that the Board has authorized an additional repurchase plan of 7 million units. More than anything, that speaks to our confidence in the Company as we view the purchase of our stock as a very sound investment. Every quarter, the Board meets to decide how to utilize our cash in a way that enhances shareholder value, be it through debt reduction, acquisition, stock repurchases or distributions. We believe we're taking the right approach to ensure the best returns for Star and for our unitholders.

With regard to acquisitions, since announcing our purchase of Champion Energy in May, we have completed two additional transactions that we feel offer great potential. Taken together, these companies, one is located in Long Island and the other is in Rhode Island, add over 7,000 oil heat accounts, 500 security accounts, and 2,900 propane accounts to Star's base. Both companies will continue to operate and market under their existing well-known brand names with the same staff that has made them successful operations with customers who value the outstanding services they provide. As with all of our acquisitions, our plan is to continue utilizing the same management teams to maintain and grow their customer base and when practical, enhance them with operational and marketing synergies from Star.

We are also evaluating several other acquisition opportunities that we believe will be strong profitable fits with Star Gas. As I mentioned in our last call in May, our main challenge heading into the 2011 fiscal year is the significantly higher price levels that customers are seeing versus this time last year. The average New York Harbor wholesale spot or cash price for heating oil in July 2009 was $1.64 per gallon; in August of 2009 it was $1.87 per gallon. Today, that price is $2.15 and it has been as high as $2.28 per gallon. This increase means that customers are seeing higher pricing from retailers, which could trigger many to shop around. While this can prove challenging, we feel that all of our operating divisions are well prepared to handle such issues should they arise with our customers.

Regarding attrition, we have shown significant progress through the third quarter versus prior years. Net attrition has been reduced by almost 3% compared to the same period last year with the biggest improvement coming from fuel loss accounts. While we gained 8,600 fewer new accounts from the previous year, we reduced our losses by nearly 20,000 accounts versus the nine months ending 06/30/2009. As we have stated in the past, lowering net attrition is the primary goal of our Company.

With that, I'll turn the call over to Rich Ambury to provide some comments on the third quarter's financial results. Rich?

Thanks, Dan, and good morning everyone. And thank you for joining us to discuss the results for the third fiscal quarter and the nine months ended June 30, 2010.

Let's look at our topline volume for the quarter. We sold 35 million gallons compared to 43 million gallons last year. The decrease of 19% was largely due to 28% warmer temperatures than the prior period. Our home heating oil margins reached $0.98, up from the $0.90 realized in the prior period. Contributing to this increase was the benefit of some relatively low-cost inventory.

We realized gross profit from our service and installation business of $6.5 million, which represents an improvement of $2.7 million, as the warm weather did drive an increase in our air-conditioning installation and service businesses. In looking at our operating expenses, they increased just $0.75 million. While our acquisitions did add $3.2 million in additional cost, we were able to react to the warm weather and shed expense, limiting expense growth.

Due to the seasonal nature of our business, the third fiscal quarter normally generates an adjusted EBITDA loss. This loss widened by $2.5 million to $7.5 million, as the impact of higher per gallon margins, the improvement in service and installation profitability, and a reduction in operating expenses before acquisitions mitigated most of the impact of the warm temperatures.

Our acquisitions, which were completed after the heating season, accounted for approximately $1 million of the increase in adjusted EBITDA loss. We posted a net loss of $10 million for the quarter, an increase of $8 million, as an unfavorable change in the fair value of derivatives of around $12 million and the weather-related decline in home heating oil volume was reduced by an increase in deferred tax benefit.

In moving over to the nine-month results, our volume sales were down 41 million gallons or 13% due to warmer temperatures of 9% versus the prior period and net customer attrition. Our home heating oil margin increased by $0.033 per gallon or about 3.7% for the nine-month period.

Total gross profit declined by $22 million, as the impact of higher margins and an improvement in service and installation profitability could not totally offset the volume decline. In looking at our operating expenses, which includes delivery, branch and G&A, these costs actually declined by $10 million or approximately 5% for the nine months due to lower insurance expense of $3.6 million, lower bad debt expense of $2.8 million, and a decline in vehicle fuels of about $3.3 million.

We posted net income of $42.5 million for the nine months, a decrease of $56 million largely due to an increase in non-cash deferred income taxes of over $30 million. Adjusted EBITDA for the nine months declined by $12 million to $93 million, as the decline in volume due to warm weather and net customer attrition more than offset the effects of higher margins and lower operating expenses.

As of June 30, 2010, we had cash of $44 million, over $105 million in working capital, zero bank borrowings, and long-term debt of $82.5 million.

I would now like to turn the call over to Steve for his comments.

Thank you, Rich, and good morning everyone. I would like to begin my comments by saying that we continue to be very pleased with the overall performance of our operations. Many of the changes we've implemented over the past two years have made us much more adaptable to varying market conditions. For example, our local management teams have invested a lot of time and effort in creating a much stronger base for expanding value-added services and we are seeing the results of this in our improved service revenue numbers. That said, we clearly believe we have more room to grow in additional service areas such as air conditioning, natural gas, propane and plumbing to name a few.

We were also very excited that with one of our recent acquisitions, we have begun to expand propane sales once again. On the subject of acquisitions, I would like to say that we continue to see interest in all areas of our operating territory from potential sellers. Our job obviously is just to like those businesses that will best fit within our organization. While the remaining aspects of a potential acquisition we look at when analyzing the opportunity, one of the most important dimensions is the culture of that business when it comes to their employees and customers.

One of the best examples of a great fit has been our recent Champion transaction. Our Champion team has been able to make a nearly seamless transition to becoming part of Star Gas, and we are very pleased with how Champion and all of our other acquisitions are performing.

With regard to the current operating environment, we continue to see some reluctance from customers to make major equipment purchases, or take on large home improvement projects likely due to ongoing economic conditions. However, we have positioned ourselves to take advantage of any programs that may arise from new legislation that would encourage sales of energy-efficient equipment. We are already seeing some advantage in this area due to the tremendous expertise among our local teams of technicians when it comes to improving home energy efficiency.

Thanks to the solid gains we have made in stabilizing our business in recent years. We are now enjoying an opportunity to increase training to drive higher service revenue. Our team is extremely energized and look forward to utilizing these skills. We know that our future lies in ensuring that our customers believe we are the best company to trust when servicing their home across a broad spectrum of service needs for their home.

With that, I'll turn the call back over to Dan.

Okay. Thanks, Steve. At this time, we'll be pleased to address any questions you may have. Sean, could you please open the phone lines for questions?

Yes, thank you. (Operator Instructions) Our first question comes from Carlos Rodriguez with Hartford Investment Management.

Yes. Thanks for taking my question. Can you give us a sense for what EBITDA multiple was paid on these two recent acquisitions?

Yes. The multiple was between -- our normal multiple is between four and five, this was somewhere around 4.5, low-4s.

And how does that compare to the Champion multiple?

Champion multiple was a little bit higher, I think, as we disclosed. Within equity purchase it was a five.

Five. Okay. Okay, that's all. Thanks.

You're welcome.

Our next question comes from Michael Prouting with 10K Capital.

Good morning, guys. Nice quarter.

Good morning, Michael.

Just a couple of questions. As you look at the operations that you've acquired recently, any surprises versus what you anticipated when you entered into the deals?

No, not really. We knew, as I've mentioned in my comments, that we were going to be facing a time of year where we do our renewals and the price of oil is higher than it was this time last year. So we went in that with our eyes wide open and we had a plan to do that and we're still in the process of implementing that plan. But other than that, we've seen nothing that surprised us.

Okay. And on the -- this is good news -- on the customer attrition, I mean is there a big step-down in the March quarter on a year-over-year basis? I guess June quarter was basically flat. Any thoughts on future trends there?

No, not really. Our trend (inaudible) hoping for, of course, is more gains and less losses. We're, of course, disappointed that we don't have more gains, but the marketplace has been very quiet. We feel that we're well prepared and trying to have a good selling season come the end of August, September, October, November, when most of the selling is done and that's one big side of the attrition equation.

On the loss side, we're always working at that and we feel that we're going to continue to do an excellent job in holding on to our customers who value our services.

And if you look at the customers that you've acquired, is there any reason to think that attrition there will be either better or worse than your organic customer base?

No. As a matter of fact, we think it probably could be a little bit better because of how we're going to operate those companies as individual operations as if they were running the way they were before we acquired them.

As I mentioned in my comments, when we select these companies, that's one of the aspects of what we look at and what a typical company looks like that we're buying, has a historical basis of attrition that's probably better than ours. Their retention is better and that's part of our strategy of keeping the management staff and the team or if it's a family-run business, the family embedded in the relationship to retain the customers.

That's part of a strategy that we can incorporate in the larger company and some of the previously held businesses, but we can going forward with these other businesses and it's a strategy that seems to be changing the balance for us and working very well.

Okay, great. Any updates in terms of your thoughts whether to retain the LP structure or otherwise?

No updates on that.

When do you expect to make a determination there?

I would say probably towards the end of the calendar year. So it'd probably be December.

Okay. And then finally, just in terms of, let's say, uses of cash and how you want the balance sheet to look and all that kind of stuff. Obviously, you've paid down a pretty significant amount of debt over the last couple of years. Any thoughts on appropriate gearing or targets of where you think that it should be and I guess strategies to get there?

Well, it's really the use of the debt. I mean right now we have $82.5 million and we have $45 million, $50 million worth of cash. A year or so, we had $217 million worth of cash. So we've repaid some debt, we've made some acquisitions and we bought in some of our units. There's no real reason to load up on the debt until we have a need for either an acquisition or a big unit repurchase.

Right. Although I guess the interest expense does provide you with something of that tax shield, particularly as you get closer to using up your NOLs?

It does provide you with a tax shield, but you're still paying the interest expense and the cash is going out the door. Even after tax, you got the cash going out the door.

Yes, agreed. Any thoughts -- just wondering if you've talked to your investment bankers, any thoughts on, say, if you were to refinance the debt, what you'd be paying in today's market?

[I was sanctioned] to say, it'd be somewhere between 9.5% and 10%.

Okay. All right, great. That's all the questions I had.

Thank you, Michael.

Our next question comes from Rishi Goel with AEGON.

Hey, guys. Have any of the acquisitions changed your timing in terms of when you think the NOL will be used up?

Not particularly because we did -- this large acquisition that we made this year was done after the -- was done in May. So the majority of the profitable months, which is January, February and March are behind us. So I don't have the numbers committed to memory are right in front of me, but I would imagine that that acquisition for the calendar year is going to be roughly breakeven on a taxable income point of view.

Okay.

But going forward, we probably will eat into the NOLs, probably little more quicker than what we would have originally thought we'd see with the large acquisition that we did just make, you're absolutely right. So we probably will move that forward a bit.

And if I remember correctly, it was some time mid-next year you thought you would originally complete through?

2011 or so. 2011 or 2012 depending on where there is and where price is going and which money we are making.

Okay. Following up on the last caller's question, in terms of the senior notes, has there been any discussion about as the call schedule steps back down to par in a couple of -- or six months of just taking the rest of those notes out?

Well, we don't have the cash to take the rest of those notes out. I mean, we only have $45 million, $50 million and we need some cash flow going into the winter. But it is possible we could refinance those notes at some point in time if the market comes that advantageous for us.

And then in terms of the new share repurchase program, has any in the second -- or start since June didn't accomplish out of the $7 million or are you guys just starting fresh on that?

Well, it's a new program and we do say in the 10-Q that we intend to put in that program because we can only really put in that program during a open-window period, if you will, and that open-window period doesn't open for us until this coming Friday. So we have not made any purchases under the new unit repurchase plan.

And then in terms of reevaluating the dividend, is it still kind of closer to the maximum that you guys think that the Board is comfortable and/or the shares, the bonds or debt outstanding allow you guys to have it or is that something that also continues to be reevaluated in terms of being able to increase that?

That's something that the Board looks at each and every quarter. We're always looking at our options. Do we want to pay down debt? Do we want to buy back units? What does the acquisitions look like? Do we have good acquisition candidates, or has that dried up?

And as we go into the winter, we always like to be prepared for price spikes and cold weather. So you want to have the cash available for that. I think the Board feels right now that the $0.29 versus the $0.27 is something that we should be doing, but they evaluate that each and every quarter.

Okay. Thank you.

You're welcome.

Our next question comes from Mac Sykes with Gabelli & Company.

Hi, good morning or about to be afternoon, I guess. Is it possible to give us a run rate now for adjusted EBITDA just based on the businesses that exist now?

We usually don't make projections on what our run rate EBITDA is.

I think a couple of quarters ago you talked about it being about $75 million, I think.

I don't believe so.

Okay. On the acquisition strategy, can you provide some color on where you see the most opportunities, whether I guess it'd be propane, oil heating? And then, are there different multiples for those different businesses or are there other things that you might be looking at?

Right now, the acquisitions that tend to come to us are still primarily heating oil. Although, we've started to get more of a mix of heating oil and propane and a couple of small propane-only businesses, I would say less than 10% of the activity has been propane in nature.

We are more aggressively getting our name out so that potential sellers understand that we are back in the acquisition market for propane and we have, to some degree, expanded the range of the footprint we'd look in because we see some opportunity a little farther north than we already are, with the acquisition of Champion puts us back in New Hampshire. So we see some opportunity there as well.

The multiple ranges, Dan mentioned, four to five, some businesses are not in as good a shape as we'd like and it could drive the multiple lower than that. Propane at times will add a little bit to the mix and it could drive it to the higher end above five, and we'll evaluate that based on the nature of the business that we're looking at.

But there's several keys, brand recognition in the market that we're evaluating an acquisition, the strength of the sales for the last several years we look at, the team that we're acquiring with the business and what we see as an opportunity of growth to that business. We don't want to just take something on that it's going to be the way it is. We're looking for things that are going to be accretive to the business.

Great. Thanks.

Our next question comes from Michael Prouting with 10K Capital.

Hi, guys. Sorry, just couldn't resist.

Mike, back again?

Yes. So on the share repurchase, just to follow on a previous question. How do you think about implementing that? Is that something that you tend to do on a consistent basis, or are you more opportunistic in terms of waiting for more attractive price levels or just how do you think about that?

Well, the plan that we enter into is basically on automatic pilot where we get a broker who is under the SEC rules and there's guidance to how many shares you can buy during the course of the day, and they just will buy those shares during the course of the day. We're not saying, today is a good day to buy, today is a bad day to buy, the price is low, the price is high, it's basically an automatic program that you have Safe Harbor with under the SEC.

Okay. So given that you have Safe Harbor, I'm surprised that you have [wonder periods when you can] action that?

Well, we have to make sure that everybody has -- I don't break the SEC rules.

Yes, okay.

And that's the rule.

All right. All right. And then just one comment, I just want to, at least, give our views and I'm sure other shareholders have their own views or maybe different views, but in terms of capital allocation, we would definitely support further unit repurchases as opposed to an increase in the dividends. I mean, just if you think about the long-term value of the Company, the smaller the unit base, the potentially greater increase in dividends you can make on a longer-term basis.

We agree totally.

Yes. Anyway, that's it from me. Thanks.

Thank you, Michael.

Our next question comes from Carlos Rodriguez with Hartford Investment.

Quick follow-up. On the two acquisitions that you just announced, what was the mix of cash versus units?

It was all cash.

Okay, all cash. And the Champion acquisition, was that all cash?

That was all cash.

So I'm struggling to understand how you keep the existing management teams motivated to continue with managing the business to low customer attrition levels. What's the incentive for them if they've cashed out?

Well, first of all, the owners might not stay with us full-time, they might be part-time, they might not stay with us at all. But most of these businesses have been around a long time and the owners of the business might not really be as involved in the day-to-day operations as you would think.

When we look at an acquisition, we evaluate who the management team is. In other words, who is running the day-to-day operations and one of the questions we always ask is who's speaking to the customers, who knows the customers. Those are the people we want to have on the ground floor because those are the people who are going to help our attrition.

So it's not usually the owners, it's usually the management team that they employ. In some cases, in the small acquisitions, the managers will stay on with us and we have employees with Star Gas now who had been owners or managers of other companies and we have lots of those people.

And a lot of these people, owners and other family members and other management people from these acquisitions, they're looking to join a stable company with an opportunity of growth, different dimensions that may be the business they're working in didn't offer and their incentive is their work ethic. It's one of the things we do look at, who are the people that we're getting, who can we leave in charge, do they fit our management mantra, and the ethic that we want of our people and those are the teams that we're selecting.

And to Dan's point, some of them have gone on and taken greater roles in Star or gone on to be some of our General Managers in our other Star entities. It is a very difficult and somewhat ambiguous mix of things to explain on a call like this. But I mean if you would speak to any of those people, they're very motivated and we pay very special attention to those aspects.

That's helpful. And one last question, you mentioned that the range for heating oil acquisitions is between four and five to normal range. What would be the lift in that multiple for the propane, or it's something that's more propane-weighted?

We're out in the market competing with some propane businesses that seem to be looking at multiples above six. We're really not trying to be in that sphere, but we use that as a base of looking at it. It was a high-end propane business. We would use that as a consideration when evaluating the mix of heating oil and propane and factor that in, so the business was a four at 60% and propane, let's say, closer to six.

We do a weighted average if the base of the business is all the same. That's where we're at at this time, that could change, it could be better, it could be worse. Right now, I'd say, our toe is in the water. The company that we did buy probably represents one of the higher-quality businesses that we've seen out there for the mix. And to Dan's point, it was around a five.

And the trend of multiple over the last year, are we trending lower or are we stable, trending higher?

I would say it's stable.

Okay. Thanks very much, appreciate it.

You're welcome.

(Operator Instructions) I have a question from [Ed Ofin], an individual private investor.

Good morning, guys. Nice that management dealt well with nature's sense of humor. Just a little perspective on the retail side on the dividend, there was a huge turnover after the reorganization where the institutions basically handed their stock over to the retail.

So I hope you all would look at us as sort of the season ticket holders, and the season ticket holders need a little perk now and then and after 40 years in the institutional business, institutions have the tendency to rent the stock. I think the retail has a much stickier base and also a much higher interest in the dividend level.

So having said that, I'll finally get to a question. Would you spend a little time talking about the long-term security and propane and what your plans are, and very good news that the Company is getting back into the propane business and that security business is particularly interesting? Okay, I think that's it. Thanks, guys.

Ed, it's Steven Goldman. I want to comment on the latter part of the actual question. Security isn't new for us. First of all, [median] security has been an ongoing part of the business, but I will say about that, we have recently, in the past year, reorganized the management structuring of that and I think to the better to stabilize that business.

It's a very challenging market, but we see it as a customer stabilizer, mostly on the oil customer side, it's an advantage, it's an additional service and it's well executed, the customer sees us as a person that could provide numerous services to their home and you see a lot of back-and-forth trust with that.

As I mentioned, every median location of ours has a service business, a security business, and for the most part, we've stabilized the customer base there. We're continuing to have a good profit contribution and we are looking for, if there is small pockets of acquisitions that will add to that or as an ability to organically grow that, we will try to continue to do that in the next 12 months and more.

On the propane side, we see a lot of opportunity, not just through acquisition. We actually see ourselves positioned very well with some of our local operations to get ourselves back into the business. There are several markets where we see co-usage of the propane and oil products in homes, whether it's for cooking or the swimming pools, that we've already experimented in one of these markets in particular and we've seen very quick organic growth through our existing customer base.

Again, it's selective, there's probably five or six areas in our footprint that we believe will lend us that. We have no numeric plan yet where we think that will drive us to in the next 12 months, but we think we can have a very aggressive local plan in the hands of the General Managers to grow what could be a very good supportive business for our general business.

Yes. Steve, let me just add to that, too is that the type of propane company that might look to us versus maybe some of the larger propane people that you see out there are the dealers that are smaller dealers and have a component of propane with heating oil. Obviously, we know the heating oil and we do know the propane and also -- and they look to the way that we do an acquisition where we maintain a management team and we look to grow their business as is as an advantage to them. And sometimes it's a pride thing and the company that they've built up past all of those years.

So we're looking at those types of companies to help us grow and I just want to comment too in regards to the dividend, the distribution as you call that. The management team, we're season ticket holders ourselves, and as you know there's a long-term management incentive plan that we're very interested in, but it's only activated when there's a distribution over and above the minimum quarterly distribution and that's just a reason when it's made to the GP.

And we are paid only from what the GP's proceeds, we're not paid from anything else other than what the GP gets. So we have an incentive to look at increased distributions ourselves, but we feel to change -- to do something like that now would be very shortsighted, especially when we feel that paying down debt, repurchasing units, and having enough cash on hand to do attractive acquisitions probably takes priority over that, but long term those are goals. We're hoping that that's something that's going to happen and we feel that we're on the right path to do that.

I am not showing any other questions at this time. I'd like to turn it over to Dan Donovan for closing comments.

Okay. Well, thanks, Sean. As always, we just want to thank everybody for taking the time to join us today and for everybody's ongoing interest in Star Gas, and we look forward to sharing our fiscal 2010 final results with everybody later in the year. Thank you.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference, you may now disconnect. Good day.