Star Group LP (SGU) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Star Gas fiscal 2011 first-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 turn the call over to your host, Dan Donovan, Chief Executive Officer. Please go ahead.

Good morning and thank you for joining our call and webcast. With me today 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 first quarter ended December 31 2010. This will be followed by some comments from Steve regarding Star's operating results. As always, we will be then happy to take your questions.

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

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 on Form 10-K for the fiscal year ended September 30, 2000 and its quarterly report on Form 10-Q for the quarter ended December 31, 2010. Also 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 over to Dan Donovan now.

Thanks Chris. I'm pleased to report solid growth in both revenue and EBITDA this quarter versus last year. Our results reflect the positive impact of recent acquisitions and colder-than-normal weather, as well as the continued efforts of our employees to efficiently run the business under difficult conditions. Working outdoors in the winter is never easy, but this year has been compounded by extreme weather conditions that have made getting to our customers' oil and propane tanks a strenuous task in and of itself. Our office and customer service people have also done an incredible job just getting to work under such trying weather conditions. While other people may have enjoyed a snow day or two, our employees were doing all they could to get into work and endure long hours on the job. We appreciate their efforts.

Temperatures were 5.5% colder than the last year's first quarter, but unfortunately heating oil prices also reached their highest levels in over two years. The last time we saw crude oil and heating oil at these prices was in October of 2008. Actually, if you take the run-up during the winter of 2007/2008 through the price collapse the following summer and fall, we are looking at the highest oil prices ever.

New York Harbor stock prices for heating oil were on average $0.38 per gallon higher than the previous year's first quarter. The month of January saw a continuation of this trend as spot prices for heating oil began at $2.54 and are currently at $2.71. Both in the last week or so, they were as high as $2.77. Obviously, this causes people to take notice and makes our customer retention job all the more difficult in a competitive market. However, due to our emphasis on serving the customer and training our employees to demonstrate our value as the most reliable company in the market, we were able to maintain margins, minimize customer attrition, and continue delivering the excellent service that we offer to homeowners. That's quite an accomplishment that reflects the talent of our regional management and customer contact personnel.

In spite of rising oil prices, our net attrition remained approximately the same as the previous year's first quarter. Both gains and losses in the 2011 fiscal first quarter include the impact of acquisitions made after the first quarter of fiscal 2010. In a time of rising prices and given the size of our acquisitions last year, we are pleased at our progress with regard to attrition levels but will, as always strive, to do better.

Our acquisition program continues to be active. In the quarter ending December 31, 2010, we closed on one purchase, a dual heating oil and propane marketer of modest size based in Pennsylvania. We continue to evaluate a number of attractive candidates, including both heating oil and propane companies in the Northeast and Mid-Atlantic regions.

Before turning the call back over to Rich, let me also say that we were pleased to announce an increase in Star's quarterly distribution to $0.0775 per common unit for the fiscal 2011 first quarter, which represents a 14.8% increase over the minimum quarterly distribution. As always, we continue to take measures to enhance unit holder value in everything we do.

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

Thanks Dan.

For the quarter, both heating oil and propane volume sales increased by 17% versus last year, or 17 million gallons, to 113 million gallons, as the additional volume provided by acquisitions and colder temperatures more than offset the impact of net customer losses. Temperatures were over 5.4% colder than last year and 2.4% colder than normal. Excluding acquisitions, our home heating oil and propane margins increased by 2%, or $0.018 per gallon, versus fiscal 2010. Our recent acquisitions have a slightly different margin profile and operating cost structure than the base business, and so, including these acquisitions, the per gallon margin increase was under $0.01 per gallon.

Our delivery and branch expenses rose by 16%, which was in line with the higher level of volume. Delivery costs were somewhat impacted due to the stormy weather conditions experienced towards the tail end of December 2010.

During November, we issued $125 million of notes that are due in 2017 and repaid $82.5 million of debt that mature in 2013. In connection with this refinancing, we recorded a charge of $1.7 million.

Over the past several years, we have utilized a good portion of our net operating loss carry forwards, and at December 31, 2010, we estimate that our NOLs were approximately $16 million, of which $7 million were acquired in the Champion acquisition. After we exhaust our NOLs, our cash taxes will increase significantly, which will reduce the funds available for distributions.

We posted net income in the quarter of $21 million, which is about $8 million higher than the prior period. Adjusted EBITDA did increase by 28% to $34 million, which was greater than the increase in volume of 17% due to the additional EBITDA generated by our recent acquisitions and the impact of colder temperatures.

As of December, we had borrowed $13 million under our revolving credit facility, and as of last night, our borrowings were up approximately $62 million. We do have a $290 million credit facility, and currently we have the capacity to borrow an extra -- an additional $178 million.

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

Thank you Rich. Good morning everyone.

We are very pleased with our first-quarter operating results. Our dedicated staff demonstrated excellent cost management as well as superb planning and execution. No matter what the weather additions were this past quarter, we had the right response.

During mid-quarter, we saw the need to tighten our belt as continuing economic pressures dampened both service activity as well as equipment sales and installations. December was a completely different story in which we needed every ounce of manpower we could muster to respond to our customers' calls during the much colder-than-normal temperatures. This December, we responded to over 76,700 service calls, which is a 9% increase over our plan. But our operations were undaunted and able to deliver in every area of our footprint regardless of the weather conditions.

We were also very pleased with our continued efforts to streamline Star's overall operating cost structure and broaden our service revenue streams. For example, in the geographic areas where we have begun to grow propane and plumbing, we've seen a very encouraging response from our customer base. Because of such positive results, we are aggressively targeting these growth opportunities.

Dan mentioned that we closed another heating oil and propane acquisition. Due to multiple factors, we are seeing strong inquiries from other multi-fuel businesses. We have now clearly established ourselves as one of the key companies to entrust your business and brand to when selling.

Higher product costs, the challenging housing market, and unemployment are definitely some of the things on the minds of customers in our marketplace. These issues remain threats to product sales, margins, and customer retention, but our operational teams are prepared to deal with such challenges. We will strive to deliver the best performance possible in every area and keep customer attrition to a minimum.

In closing, let me just say that we certainly appreciate the colder temperatures, which have increased product demand. But more importantly, the recently experienced drastic weather conditions have provided an opportunity for us to differentiate our level of service from companies who try to mimic our platform. Nobody really can offer what we do.

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

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

Certainly. (Operator Instructions). [Chester Kirschenbaum], Private Investor.

Yes, first of all, this is my third conference call. I'm quite a large investor of the Company. I must tell you, A, I love the restructuring of your debt that you have been doing, buying back stock, raising the dividend, and looking for acquisitions. In fact, I saw an ad in Newsday about a company, a disturbing company, in eastern Long Island, and I called Chris Witty and I gave him the phone number. I don't know whatever happened with that, but it seems they were looking to sell their business with a fair amount of a customer base. So I'm very happy and very happy with what you guys are doing. I think you're doing a terrific job, but I have some questions. One is how much do we have left on our buyback purchase?

It's about -- give me a second, I'll give you the exact number. That's 5.8 million units.

I didn't hear that clearly.

5.8 million units.

(inaudible) buyback.

(multiple speakers)

I know we ran into trouble about six years ago with hedging. Are we doing any hedging on our pricing?

Yes, we hedge each and every day if our customer elects to a fixed price or a protected price program.

How do we protect ourselves in that situation if oil spikes up a lot in that regard?

Mr. Kirschenbaum, let me explain it to you this way. When we offer a protected price to a customer, if we don't hedge, that would be more dangerous. So if we know that we are giving a price to a customer, whether it be a fixed price or a ceiling price, we have to make sure we can deliver on that promise because we have a written agreement or an electronic agreement with that customer. So by us hedging, we keep -- the customer knows they're bound to that agreement and we have to be bound to it. The only way we know that we could deliver is if we go out and hedge that product in the futures market.

I hear you. Let me just say this, that I would like you guys just to keep doing what you're doing. I am very proud of the Company; I'm very proud of what you guys are doing. I know you're very into this and I appreciate that as a unit holder. I own quite a bit of shares. Keep doing what you're doing. And I thank you.

We appreciate your comments. Thank you.

Michael Prouting, 10K Capital.

Good morning guys. Nice quarter. I had just one question this morning. Dan, in the press release, you said at the end of your comments that you are dedicated to taking the right steps, including additional acquisitions and other strategic initiatives, to enhance unit holder value going forward. I'm just wondering what might be encompassed in the so-called other strategic initiatives. Thanks.

Sure. Steve Goldman sort of referred to it a little bit in his comments, but we are looking definitely a lot more aggressively at some propane acquisitions. We are also looking at expanding what we do in offering plumbing services to our customers. Those are part of them.

In the area of propane, we've actually been organically beginning to grow propane in areas that we neither have an acquisition nor an existing propane business, which is an opportunity for us to invest in our business, primarily beginning with our own current customer base where, in their home or their properties, they use dual fuels. We did some experiments with this in the past several months, and as I commented in my comments, we see very positive response. Those customers have already come to know us as a reliable service provider and see that this is the natural progression to add another service. We are aggressively pursuing this throughout our footprint.

Good. I guess a follow-up question then -- obviously, this is somewhat subject to what you find and also to pricing, but any thoughts in terms of how much cash flow you might be able to put to work in acquisitions in the current fiscal year?

Well, we raised from our high-yield offering about $30 some-odd million of extra cash in our recent high-yield offering. That said, we don't really have a budget for acquisitions. If the opportunities present themselves, we will evaluate the acquisition, but we don't sit around here with a budget, per se, of how much we are going to be spending.

Carlos Rodriguez, Hartford Investments.

Thanks for taking my question. Can you give us an update on the M&A landscape generally? Are you seeing more motivated sellers, particularly during the heating season, as opposed to the traditional season, post-winter heating season?

I don't think the activity is any greater right now. A lot of dealers want to start talking about the possibility of selling the business as you come out of the season. We are coming out of the season now, and probably this week is the first week you'll see normal degree days start to decrease. We expect an uptick in activity. We do have a lot of people who have contacted us and we are working on trying to obtain information, model that information, and talk to potential acquisitions. But I don't think it's any greater than, say, last year. But coming out of the season with the stronger working capital requirements that are required to run this business, you're talking about since 2000 -- the same time 2009, the price of oil is up about $1.40, and it's up about $0.80 versus this time last year. We expect a little bit of an uptick coming out of the season.

Do you see the multiples for pure heating oil businesses at less than five times still?

We see them still between four and five.

Just a quick update following your comments on potentially growing your propane business. What is the mix between heating oil and propane now, just generally?

We are predominantly heating oil. We had a covenant not to compete to get into propane that didn't expire until a year ago last September -- last December, I'm sorry. Since that time, we've made about three small propane acquisitions that -- a combination of oil and propane but very small. One of the ones that we grew, though, gives us an opportunity, as Steve alluded to, to grow organically. In other words, we might not -- we don't need an acquisition. We're just going to use that as a base to grow propane into other areas in which we might have a customer base or might not have a customer base. But it's a long process.

The one thing we want to do is what we've been doing all along since 2004, 2005, is anything we do, we want to do it in a disciplined fashion so that we make sure we are not going to do something that's going to lose us money. We want to make money on anything we go into.

Is there any aspirational target in sort of near or -- intermediate-term as to the mix you would like to see, propane versus heating oil?

Off the top of my head, no. But we are -- we feel that we have a real good niche for a lot of these smaller heating oil/propane companies that some of the bigger MLPs are really not that interested in because of the heating oil component. We just -- the one we closed on in December was exactly that type in eastern Pennsylvania. We think there are other companies like that that we'll be talking to over the next several months.

The propane business and its expansion, we are very -- as with everything else, very careful in how we approach it. It's a business that you have to be fundamentally sound. There's obviously a great safety concern. It's different than heating oil, and it also a capital-intense expansion. It requires different vehicles, investment in tanks and other equipment, as well as training for the people doing the work.

We believe obviously we have an enormous opportunity to keep expanding from the position we are at right now. But we will continue to expand just as we do with all other services and sales that we have as long as they are profitable. That's our real measure. The ability to continue to grow that phase of the business in a profitable measure within the confines of our operating budget is really our guidance right now. That will probably become more defined and stronger in the next several years as we continue. But right now, as Dan mentioned, we're just back in this since last December -- not this December but one year ago December. We don't want to stumble through this. We want to do it properly and make sure that our foundation is set right, and we believe we are doing that. Based on the things we hear on this call from investors, they realize that we try to do things not just conservatively, but in a fundamentally correct way to produce the result that we've been producing.

Thanks. Nice quarter.

(Operator Instructions). [Ed Olson], Private Investor.

Good morning. How many shares were bought back in the quarter, the most recently ended quarter?

We didn't buy back any units in the quarter.

Zero. Okay. The pattern on the website indicates that the Company only declares or increases the dividend in the first fiscal quarter and at a $0.02 rate. That means it'll take us about seven years to get to that all-important $0.45. Is that assumption correct?

It probably -- we don't look at it that way. I'd love to be at $0.45 right now because, as you know from reading the partnership documents, the management team has a vested interest in getting up the distribution. But as Steve was just alluding to, we like to do things in a very disciplined fashion. We've got to get to A and B before we get to C and D. We just feel that the uses of the dollars that we have now, whether it be an acquisition, whether it be in buying back units, you've got to remember too in Rich's comments, we're going to become a taxpayer soon. So we have to make sure we have the cash available for that. We don't want to jump the gun on anything like that, but obviously our goal, long-term, is to pay out a higher dividend.

I think that's fair, and I'd like to see the $0.45 rate as well, but I'd also like to get it in the period when I'm still able to spend it. Does anything in your covenants or any other document prevent you from paying an extra?

An extra dividend? No.

Well, there is in our loan -- or there's a covenant in our bank agreement that we do have to have a coverage of 1.25 times. So if we paid a large special distribution, we'd need to get approval from the bank group.

Also --

Is the assumption that there won't be one a correct assumption?

No, because we've mentioned in our comments on various conference calls over the last few years that we look at acquisitions first; we look at buying back units; we look at paying down debt, which we did. We also look at this possibility of a special distribution. That is not something that we don't consider. We do consider that as part of the mix.

I can understand it. If you can buy -- if you can make acquisitions at four to five times and given where the stock price is trading, that's a tough decision. However, being very dividend-conscious, I would like to see more money returned to the shareholder in the form of repurchase or dividends, and particularly an extra.

By the way, the impact on the taxable issue, you mentioned that would impact the amount available for distribution. Does that mean there is a potential dividend cut?

It doesn't mean there's a potential dividend cut, but when you look at our numbers going forward, once we run out of our NOLs, we're going to be a full taxpayer with a full 42%, 43% effective tax rate. Over the last couple of years, we paid several million dollars annually in taxes. Going forward, we are going to be a full taxpayer.

I understand, but given the growth of the dividend and so forth, I think the stock is probably assuming that we're going to have a very slow payout. What do the first five weeks of this quarter look like relative to the last one? I'm sorry, the last quarter?

We really don't comment on this quarter officially, but obviously I think everybody knows it's been colder, but it's also been very snowy. It's been a very -- it's expensive to deliver oil and service your customers in that type of weather conditions. But we are optimistic that, if the weather holds, that we could have a good quarter.

Again, I just would like to emphasize to try and get the dividend up at a faster pace. Thanks guys.

Jeff Bronchick, RCB Investment Management.

Good morning guys. Just on the comment on the usage of capital again, so would it be fair to say that, with the stock where it is, that making acquisitions has moved to be a higher priority than share repurchase or dividends, or, i.e., why didn't you buy any stock in the quarter?

We didn't have the same cash that we had last year obviously, but again, acquisitions has always been, even when our multiple was a little lower than this, acquisitions have always been our number one priority because we want to grow the business, and especially if it's a real good acquisition. We know the difference between -- we look at probably -- since 2006, we've probably looked at over 150 or more acquisitions, and we've only made about 18 or 19. There are a lot of companies that we look at that just don't fit what we think will be profitable and give a good return to our investors. So I would say that acquisitions is still at the top of that list.

I'm showing no further questions at this time. I'd like to turn the call back over to Dan Donovan.

Thank you. I want to thank everybody for taking the time for joining us today and for your ongoing interest in Star Gas. We look forward to sharing our second-quarter results with you in May. Thank you.

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