Star Group LP (SGU) 2011 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to Star Gas Partners fiscal third-quarter conference call. At this time, all participants are in the listen-only mode.

Later we will conduct a question-and-answer session with instructions following at that time. (Operator Instructions)

As a reminder, today's call is being recorded. And now I'll turn the call over to Dan Donovan, Chief Executive Officer. Please begin.

Thanks, Tyrone. Good morning and thank you for joining our call and webcast.

With me today as always is our CFO Rich Ambury and Steve Goldman, our Chief Operating Officer. After some brief remarks that I will make, Rich will review the fiscal third quarter ended June 30, 2011. And this will be followed by some comments from Steve regarding our operating results and then of course as always, we'll be 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.

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 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 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 statement.

Unless otherwise required by law, the Partnership undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise after the date of this conference call. I would now like to turn the call back over to Dan Donovan. Dan?

Thanks, Chris. Our third quarter just completed show 26% volume growth over the last year due primarily to acquisitions and colder temperatures. During this non-heating season, our adjusted EBITDA loss was virtually unchanged with last year as the positive volume impact was offset by lower gross margins and higher operating expenses. Rich will review these items more closely in a moment.

As I have mentioned several times on previous calls, our main challenge recently has been the significantly higher price levels that customers are seeing versus prior periods. The challenge last year was due to a near 30% increase in the price per gallon of heating oil. The rise this year has been even greater.

The New York Harbor wholesale spot or cash price for heating oil in mid-July 2009 was $1.56 a gallon. In 2010 that price was $1.99. And this year, that price was $3.11, up over 50% from the previous year.

These increases have meant that customers are still facing severe pressures that may trigger them to shop around. However, we feel that all of our operating divisions are well-prepared to handle the conversations that this continues to generate with our customers. It's a demanding and difficult task but as always, we're dedicated to customer satisfaction and keeping attrition at a minimum.

Attrition for the quarter was actually favorable versus the previous year's third quarter by some 1900 accounts. While games were slightly favorable, losses were also less than last year's third quarter by 1200 accounts.

Year to date our net attrition is in line with fiscal year 2010 results. This at least speaks to the quality of our service and the attention we've been giving to customer satisfaction.

In times of rising prices especially at these levels, customer retention is clearly a challenging task. And while our employees are trained to handle erratic market conditions, we view the coming months as equally challenging, when more of our customers are going to be deciding whether they're going to sign up for another year with or without price protection. So our commitment to customer service and personal communications will be more important than ever and we feel we are up to the challenge.

Before turning the call back over to Rich, let me just add that during the most recent quarter, Star Gas acquired one heating oil location in Connecticut that brought in approximately 5000 accounts. In the past 12 months, we've completed four acquisitions in total located in New York, Pennsylvania, New Jersey and Connecticut which have added over 6000 oil heat accounts and 1200 propane accounts.

The combined EBITDA contributions from these organizations is projected to be approximately $1.6 million on an annual basis. These companies will continue to operate and market themselves under their own long-established, well-known brand names that have made them successful and which their customers recognize for 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. As always, we are going to continue to evaluate other acquisition candidates that we hope will be strong profitable fits with Star Gas.

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

Thanks, Dan, and good morning, everyone, and thank you for joining us to discuss our results for the third fiscal quarter and nine months ending June 30, 2011. Let's look at our topline volume for the quarter.

We sold 44 million gallons compared to 35 million gallons last year. This increase of 26% was largely due to colder temperatures and acquisitions.

For the quarter, our home heating oil and propane margins were $0.94 or about $0.04 less than last year. While our per gallon margins were down from the third quarter of last year, our margins during this non-heating season period were actually up by about $0.045 or 5% versus the third quarter of 2009, to give you some perspective, and it was about $0.0125 higher than the margins we achieved in the second quarter of fiscal 2011.

During this quarter, we built our inventory and this was a period of rising prices, and we estimate that our margins during the quarter were negatively impacted on a comparable basis by about $0.035 simply due to weighted average costing. As I mentioned during last year's call for the third quarter, the $0.98 margin that we did realize benefited from some relatively low cost inventory.

Our gross profit rose by about $8.3 million in the quarter due to the increase in volume as well as an improvement of about $1 million in our service and installation business. Our delivery branch and G&A expenses, they rose by $8.3 million during the quarter of which our acquisitions accounted for approximately $3.5 million of the change.

Credit card processing fees and bad debt expense were higher by $1.5 million due to the increase in sales and we increased our reserve rates for doubtful accounts in response to a slight increase in our day sales outstanding. We also increased the reserve for insurance claims by $3 million.

Moving to reported adjusted EBITDA, let me remind our listeners that due to the seasonal nature of our business, the third fiscal quarter normally generates an adjusted EBITDA loss. The loss was unchanged at $7.5 million versus last year as the impact of colder temperatures and the additional EBITDA provided from acquisitions and an improvement in service and installation profitability was offset by lower per gallon margins and higher operating expenses.

We posted a net loss of $18 million for the quarter, an increase of $8 million over last year. While adjusted EBITDA remained the same and other non-cash income and expense changes were minimal, the non-cash change in the fair value of derivatives of $14 million resulted in a tax affected increase in our loss of approximately $8 million. In looking at the nine-month period, our total volume rose 47 million gallons or about 16% as the impact of about 9% colder temperatures and acquisitions were somewhat reduced by net customer attrition.

Our home heating oil and propane margins decreased by less than $0.01 per gallon for the nine months due primarily to our acquisitions which had a different operating cost structure and margin profile than our base business. Margins for the base business were virtually unchanged from last year.

Star's total gross profit for the nine months decreased by $44 million due to the increase in volume and an improvement in service and installation profitability. Our operating expenses, they increased by about $30 million year over year. Acquisitions accounted for $19 million of the change and reserves for insurance were higher by $6 million while bad debt and credit card fees rose by $3.5 million.

It does seem like a long time ago, but we did have a very severe winter this year, and the impact of the storms and higher volume in the third quarter also cost us about $3.5 million in additional delivery costs. We posted net income of $51 million for the nine months ended June 30 which was about $9 million higher than last year. Adjusted EBITDA for the nine months increased by $13 million to $106 million.

Before I turn the call over to Steve, I have a few comments on our balance sheet and I'd like to recap what changes we've made to our capital structure this year. As of June 30, 2011 we had cash at $50 million, over $141 million of working capital, no bank borrowings and long-term debt of $125 million.

We did have accounts receivable of $154 million which represents six days of sales outstanding for the third fiscal quarter. Please keep in mind that last year at this time, our day sales outstanding were approximately 57 days. We are diligently working to reduce our outstanding balances and collect our money.

In November 2010, we pushed out the maturities on our long-term notes from 2013 to 2017 while lowering the interest rate from 10.25% to 8.875%. In June of this year, we also extended our bank facility from 2012 to 2016 and lowered the spread over LIBOR by about 1.75% along with reducing unused fees by around 37.5 basis points.

Recently, we did file a shelf registration for $250 million. We can issue either debt or equity under the shelf.

I want to be clear in stating that we do not have a pending transaction in sight other than our normal ongoing acquisition program. We simply thought it would be prudent to be ready to access the capital markets if and when an attractive transaction of size presented itself. Now I'd like to turn the call over to Steve. Steve?

Thank you, Rich, and good morning, everyone. I would like to begin my comments by saying that while we are pleased with our operating results, as Dan mentioned, the pressures of rising expenses such as labor, benefits, materials and fuel continued to drive us to look for new ways to manage costs without impacting our ability to offer great service.

We have been seeking out solutions both internally and externally to provide the same levels of service but reduce expenses at a greater rate. One key area of success has been to engage higher quality employees who are now available due to the current economic conditions.

We are also looking at some of our recent acquisitions for lessons they can offer us in lean management and expense control. Our operating team knows that we must be both relentless and innovative when it comes to driving our performance for excellence at all levels and continuing to drive profitability.

Speaking of acquisitions, this past quarter has been a very active one in regard to looking at transaction opportunities both large and small. We have been reviewing acquisition possibilities which can expand our current operating footprint and are very excited about such potential additions.

And we have been approached to evaluate companies containing both heating oil and propane operations. The pressures of the current economy have definitely caused many owners to reassess their desire to continue operating on their own.

Our reputation as an acquirer continues to grow and is attracting many owners who want to ensure high customer service and solid career opportunities for their valued employees. Dan mentioned the challenging conditions impacting our results in the area of attrition.

We continue to believe our future lies in the relationship we build with our customers and the breadth of services we can provide for them. This past quarter was a very strong one for us in the area of organically growing our propane, air conditioning, natural gas service and plumbing service offerings.

Our core culture which pervades across all of our brand names makes our participation in added services a welcome one for both homeowners and businesses who have used us in the past for heating oil supply and service. The success of our expansion in these areas lies in the strong team of general managers and their incredibly dedicated employees.

They remain committed to growing our fundamental business as well as ensuring continuous development of our outstanding employee base which provides outstanding and excellent service to our customers at every level. With that, I'll turn the call back over to Dan.

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

(Operator Instructions) Michael Prouting, 10K Capital.

Good quarter. Rich, just one quick question.

Any thoughts on where you expect to end the fiscal year as far as receivables are concerned either in absolute dollars or day sales outstanding? Thanks.

Well, we're hopeful that they will return to the same levels we had at the end of last fiscal year. We're only up -- we had 60 days at the end of June. At the end of June last year we had 57 days, so it was an increase of three days which isn't a whole heck of a lot. It's just the customers do owe more money because of the increase in prices.

Rich, I might add to that too besides the higher price of oil, we also have a later winter meaning we got colder weather later in the year. The month of March was cold and we've made a lot of deliveries at March and April that we might not have made in previous years, and that money will be paid at a different time based upon when we made those deliveries. So we are hopeful that -- we feel that our credit group is an excellent position to collect this money but it's always a very challenging task.

Thanks, that's all I had.

(Operator Instructions) [Ed Olson].

Can you break out just the propane growth in the quarter year over year?

We have that -- hold on one second.

It wasn't broken out in the report.

This is going to be a bit of a guess -- but it's probably about -- our gains were about 1800 accounts and losses were about 650 accounts. Total gains were about 1100 accounts and of course we had an acquisition in this year in Pennsylvania, a propane acquisition.

What does that represent in terms of a percentage increase in propane sales?

It's a pretty big increase. Off the top of my head I don't have it.

But propane has been something that we're growing steadily not only through acquisition, but organically. We've basically opened up from scratch propane operations in at least three or four areas.

Ed, what I would mention is that we've basically focused for the last nine months on bringing up operating sites that have never had propane. And while the numbers are relatively small at this point, even though the percentage is high, the foundation that we are laying is a reasonably solid one and we believe what you will see coming is a reasonable growth rate that matches what a typical propane business would see that's competing with good service.

The numbers that we've demonstrated so far probably are somewhere on average in the places where we've already been operating, somewhere between 10 and 20% growth in those areas. But again the bases are very small.

So it's easy to look that good. We believe that we will see great stability in these businesses and we hope to have -- or I know we will have 10 operating sites up and organically growing by the fall.

Yes, that's an exciting part of that business. Question about acquisitions. Has the size of the acquisitions you've been looking at grown considerably?

No, because we could look at large acquisitions, we look at small acquisitions. We've had some acquisitions as small as 500 accounts and there are a lot of companies out there that we talk to that some are large -- they're not in the same size as say a Champion acquisition which we did last year -- but they could be mid-size acquisitions. But there are a lot smaller ones too. As I have mentioned several times on these conference calls, we like the small acquisitions because they usually are very good companies, well-run companies, solid margins and we know we can retain the customers and sell to them for many years.

That is fair enough. But just as an observer, the [S3] I think really kind of in my mind represents a Black Hawk helicopter. When effective, it's armed and fueled and I don't think you did that to buy mom-and-pop.

No, we just did that so we could have in place in case an acquisition did come up -- and we don't have anything in target -- so that we could easily do a debt offering or raise equity. And we're not saying that we can raise equity but we didn't want to go through this 144A process of raising debt and then have to do an exchange offer when we can easily have the SEC mechanism to tack onto our additional high-yield notes.

That's fair enough, but you wouldn't potentially double the size of the Company from a capitalization standpoint if he did do stock if it was just for mom-and-pop?

Correct and one thing about acquisitions -- and I think while all that line is not just potentially for acquisitions, one of the things you have to realize about acquisitions is it is a long process and we have been developing a pool of potential acquisitions through our relationships with them and we are seeing that broaden.

So we see opportunity and they do include a lot of mom-and-pops. It's probably more likely we're going to have a lot of mom-and-pops, more than one or two very, very large companies. Those are what we're seeing.

A lot of them -- they're good quality, they match our vision as a business and our service offering levels, and they are tending to be -- and that's one of the reasons that it's slow to try to get them to sell -- they're tending to be more profitable businesses and we are hopeful that in the coming years, it's not weeks and months but the coming years that they'll join our fold of businesses that we run.

There's no question, and you know you've got the capital gains thing that will expire at 18 months and I'm sure people are looking at that. But there's also some corporations that are getting rid of businesses that are not core. So good hunting.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Dan Donovan for any closing remarks.

Okay, Tyrone, thank you. I know this is a big vacation month in August month and I do appreciate anybody taking the time out to join us today and participate in this. We appreciate your ongoing interest in Star Gas and we look forward to sharing our fiscal 2011 results with you later in the year. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.