Star Group LP (SGU) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to Star Gas fiscal 2010 fourth quarter earnings conference call. At this time, all participants 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 call is being recorded.

I would now like to turn the call over to your host, Dan Donovan, Chief Executive Officer. Please go ahead.

Thanks. Good morning, and thanks everybody for joining our call and webcast today. With me is Star's Chief Financial Officer, Rich Ambury, and our Chief Operating Officer, Steve Goldman. After some brief remarks by me, Rich will review the fiscal fourth quarter ended September 30, 2010. And this will be followed by some comments from Steve regarding Star's operating results. We will then be happy to take your questions.

But before we begin, as always, Chris Witty of our Investor Relations firm, Darrow Associates, will read the Safe Harbor Statement. Please 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 material 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 10K for the fiscal year ended September 30, 2010. 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.

With that out of the way, I will turn it back to Dan Donovan. Dan?

Okay, thanks Chris. Although our fiscal 2010 results show a decrease from last year's adjusted EBITDA due to warm weather and losses from end-of-season acquisitions, I would like to highlight the many positive developments that Star Gas has experienced these past 12 months. The comparison to 2009 is a difficult one, due to the fact that we experienced 9% warmer weather this year. And at the same time, sold much higher wholesale heating oil prices. In fact, prices on the spot market were $0.25 to $0.80 per gallon higher than during the previous fiscal year.

However, due to our emphasis on servicing the customer, and training our employees to demonstrate our value as the best company to protect our customers' homes, we were able to maintain margins, and increase our net service and installation profitability. That is quite an accomplishment, and reflects the talent of our regional management.

Our net attrition improvement of almost 3% this year versus the prior fiscal year, amounting to 12,600 fewer losses, was achieved in spite of rising oil prices. The cornerstone of our business philosophy has been to only obtain and retain profitable accounts that allow us to offer the extensive 24/7, 365-day services that we are known for. In the long term, keeping our credit standards intact, results in more consistent financial outcomes, and the ability to provide the high level of service that our customer base deserves.

In addition, since we reinstituted localized customer service operations, we feel that our ability to provide the utmost in customer service has improved even further. This is driven by the additional authority we have given each general manager to ensure that customer service within their individual districts is not just lip-service, but instead, a key ingredient of our daily operations. Our managers are greatly assisted in this endeavor by quality assurance employees, who regularly monitor the operating performance of our employees within the district, and provide feedback that enables us to continue to improve our customer service standards. We feel like this is vital to our operations, since the services we provide protect what many of our customers consider to be their most valuable asset, their homes.

We also continued to keep a tight control over SG&A. Lower operating expenses, and increased emphasis on cost management, have become a key part of our overall business strategy. We look at cost management not as a one-time project, but as a sustainable system whereby we continue to deliver the best value to our customers. Whether through disciplined acquisitions, increased back-office efficiencies, additional service offerings, or local re-organizations, we plan on ensuring that delivering value remains a major priority in our strategy. Of course, we will never shortchange our customers in keeping them warm in the winter and cool in the summer.

Lastly, our acquisition program continues to be very active. In the fiscal year ending September 30, 2010, we closed on five acquisitions, wIth Champion Energy being the largest. We are confident that all five will perform as expected during the 2011 heating season, and are busy looking at new acquisition candidates, including both heating oil and propane companies, as Steve Goldman will review in a moment.

Before turning the call over to Rich, let me also remind our listeners that Star Gas recently finalized a $125 million senior note offering that extends the maturity rate of our long-term debt, or lowers our effective interest rate, and provides additional cash for acquisitions and other corporate activities. We believe this is certainly in the best interest of our unit holders, and will provide the Partnership with financial flexibility in the years ahead.

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

Thanks Dan, and good morning, everyone. Starting with the quarter, our volume was even with the prior year, as the increase provided from acquisitions, rather minimal during the summer months, was offset by net customer attrition, and a carry-over of the mild weather as we experienced this past spring. Our total gross profit was unchanged at $29 million. While the hot summer weather drove an increase in air conditioning and service revenues, these benefits were reduced by the contraction in summertime home heating oil margins. In the fourth quarter of fiscal 2010, we experienced a greater run-off in home heating oil prices than the fourth quarter of fiscal 2009. This increase was over about $0.25 per gallon.

Total operating expenses, which include delivery branch and general administrative expenses, rose about $5 million versus the prior year, of which $6 million was due to the additional costs associated with our recent acquisitions. So, in our basic business, expenses were actually down.

We posted a net loss in the quarter of $14 million, which compares to net income of $32 million of positive net income in the prior period. It is important to note that we recognized a non-cash tax benefit in the fourth quarter of fiscal 2009, as we reversed the valuation allowance on our deferred tax assets. We have utilized a good portion of our net operating loss carry-forwards or NOLs, and we expect to become a full tax payer in the near future. Adjusted EBITDA was a loss of the quarter by $24.6 million, and it increased by $5 million, of which $2.7 million was due to our recent acquisitions, as we expected, as well as both lower home heating oil volume, and per gallon margins in the base business.

Turning to the fiscal year results, our volume declined by 41 million gallons, or 12%, to 308 million gallons, due to warmer temperatures of 9%, and customer attrition. Excluding acquisitions, our total gross profit declined by $28 million. The decline in gross profit of 8% though, was less than the 13% decline in home heating oil volume, due to increased home heating oil margins, and higher service and installation profitability.

Our operating expenses, again, of delivery branch and G&A, decreased by $5 million, but our operating expenses included $9 million from our acquisitions. Exclusive of our acquisitions, operating costs actually declined by $14 million, due to lower vehicle fuel expense, a reduction in bad debt, and our ongoing cost containment measures. For fiscal 2010, we posted net income of $28 million, or $103 million less than fiscal 2009. The reversal of the valuation allowance on our deferred tax asset, as I previously mentioned, amounted to $82.5 million. In addition, lower earnings after-tax reduced net earned income by about $18 million.

We achieved adjusted EBITDA of $60 million for fiscal 2010, down $17 million, but of that, $3.6 million was attributable to the acquisitions that were made after the heating season. Including the same operations in 2010 as 2009, we had generated adjusted EBITDA of $72.3 million, or $13.5 million less than 2009, as the positive impact of higher home heating oil margins, improved service and installation profitability, and lower operating expenses were more than offset by 9% warmer temperatures and net customer attrition.

As been touched upon, in November we raised $125 million of senior notes due 2017, and we will use the proceeds to repay our existing $82.5 million of high-yield notes on December 20. After expenses of the transaction, we increased our cash balance by almost $37 million. These funds will provide the partnership with financial flexibility for initiatives going forward. As of today, we have invested cash of $55 million, exclusive of the $82.5 million set aside for the note repayment, we have zero borrowings under our working capital facility.

Now, I would like to turn the call over to Steve for some additional comments.

Thank you, Rich, and good morning, everyone. While we were pleased with our overall results this fiscal year, considering the weather conditions, economy, and oil pricing, we continue to drive our operations to even better performance. The Star Gas operating platform is now working very well, and we have shown that we can perform in the most challenging of conditions, and thrive under the best conditions.

Several significant changes to the way we operate were introduced over the past 12 months, creating a spirited system of internal competition at all levels of the Company, to make individual districts and departments more accountable for their respective contributions to Star Gas operating results. These competitions have fostered not only a new energy in our service performance, but also helped inspire greater creativity among our operating personnel. We also first introduced the concept of quality assurance teams this year. And they have evolved as we have expected to create further improvement.

The five companies we acquired this year have shown great promise in terms of their performance, while also serving to introduce us to other opportunities. All of the acquired operations have transitioned very seamlessly into our Company, and their people have become very dedicated Star Gas employees. At the same time, we continue to look for other great organizations that can expand our footprint. And as our investors know, we have broadened our acquisition search this year to include not only heating oil companies, but propane providers as well. We believe we are the ideal acquirer for those businesses that service all types of heating fuels.

We have begun organically to expand our propane operations, and although this part of our strategy is still in its early phases, we are very confident of success. In fact, with the strong growth opportunities across several of our service areas, all the teams developing our propane business are extremely excited about this new source of customer and revenue. In addition, our general managers have been working hard this year to expand service revenues to new offerings, and are seeing very good results from these efforts as well.

We have successfully grown our plumbing, home energy inspection, and natural gas service in most regions where we operate. We are clearly investing in our future. That said, cost management remains a key component of our business culture. We have increased our intensity in this regard, and have seen significant results across the board. We know we need to balance our cost-cutting initiatives with our ability to serve, and we continue to find new ways to consolidate resources and eliminate waste.

In closing, we are most proud of our continued high level of service, our efforts to focus on the customer, and the importance of servicing them in a way which unquestionably is the best in the home service arena. This is paying off with better customer retention, and we know will lead to future new customers as well.

With that, I will turn it back over to Dan.

Okay, thanks, Steve. At this time, we will be pleased to address any questions you may have. Melina, could you please open the phone lines for questions?

Certainly. (Operator Instructions). Our first question comes from Michael Tenreiro with Doubloon Capital.

Yes, hello, everyone.

Hi.

My question is, these recent cold temperatures in the eastern US, how does that translate into incremental revenue or EBITDA for you guys? How should we be looking at you guys from a weather perspective? For instance, if there is a certain average regional temperature, is there some sort of formulaic translation that we can look at?

Yes, Mike, what we do is, we plan our year based upon normal weather. To us normal -- we take our footprint and we look at the 10 year average of degree days in that footprint, and each individual district plans their weather based upon what that 10 year normal is for them, whether it be Boston or Baltimore or Long Island or whatever. The month of October, by the way, was an 80% month, 80% of normal. And November was about a 99% normal, or close to normal. And obviously so far, December is running colder than normal, but we still have a ways to go. Some really warm weather at the end of the month could drop that down to normal.

So basically, we always plan on normal, because there's two things that we really always want to make sure that we realize that we don't know. One is the weather, and the other is where the price of oil is going. But in order to do that, we just base all of our projections on normal weather. As it gets colder, of course, we ramp up our operations because we have to serve the customers. And we just make sure that we keep our deliveries in line with productivity.

Okay, so for, let's say, every degree over normal, is there some sort of formulaic translation in terms of your incremental revenue?

No, because it depends upon a lot of factors. It depends upon the state of mind of the customers, too. As it gets colder, they may decide to turn up their thermostat, they may decide to leave it where it is, they may decide to put on sweaters. For instance, when you get degree days in the beginning of the season and at the end of the season that are over normal, a lot of times you really don't see any ramp up in volume because people aren't really turning up their thermostats yet. Where you will see that is when you get into the middle of the season, which we are entering right now. Winter hasn't quite started yet, but it's been colder than normal earlier. And people will turn up their thermostats, and we'll see our volume ramp up, and it is usually a lag effect. As the weather comes in, you will see deliveries increasing five to six days after you get the cold weather.

And you know, when you look at the heating season, it is made up of six months. And while at the end of the season you might end up being at normal, I guarantee it's going to be made up of six very -- abnormal months, being plus or minus 5% to 15% would be, would be normal to be plus or minus 5% to 15% in each month, going either way. The fact that it's colder now, it's kind of normal that it is colder because we are probably going to get a warm period as well.

All right. If I could just sneak another one in here. When can we expect the Company to benefit from Champion EBITDA? What is the attrition rate on Champion customers?

On your first question, we planned obviously for Champion this heating season from October 1, 2010 to September 30, 2011. Basically, what we planned for at the time we did the acquisition is our plan for that first year. So we expect them to have a very positive EBITDA contribution to us in the first year.

And on the attrition, their attrition has been running about what we expected. It's run a little bit higher in the first quarter we had them, which was our last quarter. But as ours did, too, because of the fact that you had a big ramp up in heating oil prices from the time we bought them until right now. But for the most part, we are satisfied with how the gains and losses at Champion have been handled, and we see some really positive things happening right now.

Would you be willing to give a number on the attrition rate?

Well, we only had them -- I can only give you a rate up until September 30, and their attrition numbers were in line with our projections that we made in our model, which would be somewhere between 4% and 5%.

Okay, thank you.

Thank you. (Operator Instructions). Gentlemen, I am showing no further questions at this time.

Okay, Melina, thank you, I appreciate that. And I thank everybody for taking the time to join us today. And obviously, we are always appreciative of people having an interest in Star Gas. And we look forward to talking to you again in February when we announce the first quarter results from this fiscal year. So, thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference, and you may now disconnect.