Star Group LP (SGU) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Star Gas fiscal 2011 fourth quarter year-end 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 is being recorded. I would now like to introduce your host Dan Donovan, Chief Executive Officer. Please go ahead.

Thank you. Good morning, and thank everybody for joining us today. With me today is Star's Chief Financial Officer, Rich Ambury, and our COO, Steve Goldman. After some brief remarks from myself, Rich will review the fiscal fourth quarter ended September 30, 2011. This will be followed by comments from Steve regarding some operational results. We will then take your questions. Before we begin, 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 materially different from the performance indicated or implied by such statements. All statements other than statements of historical facts included in this conference call are forward-looking statements. Although the Partnership believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Partnership's expectations are disclosed in this conference call and in the Partnership's annual report and Form 10-K for the fiscal year ended September 30, 2011.

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 would now like to turn the call back to Dan Donovan. Dan?

Thanks, Chris. We are pleased to report that for fiscal 2011, our volume climbed by nearly 15% due mainly to acquisitions and colder than normal weather while adjusted EBITDA increased by $13.8 million, or 20% for the same reasons. That said, the challenges we face this year were framed by persistent high prices, unpredictable volatility, and continuing, difficult economic conditions that affected many of our customers. In the fiscal fourth quarter, New York Harbor spot prices for No. 2 heating oil averaged $0.94 per gallon higher than the same quarter in fiscal 2010, and they averaged 76 per gallon -- $0.76 per gallon higher for the entire fiscal year. Versus 2009, the differential is even greater in that it averaged over $1.15 for both the quarter and the fiscal year.

Obviously, all these challenges are still present in the market today. However, fortunately for us, we sell more than just a commodity. Our product is service. We protect our customers' largest asset, their homes. Our task is to continue to deliver that service in the best way possible so that our value is a real one that customers experience consistently.

On that note, attrition for fiscal 2011 improved over fiscal 2010 by 1.5% and by about 4.1% versus fiscal 2009. Customer gains have come from our expansion into propane and from an increase in client referrals while losses have been tied -- no surprise here -- to the high pricing situation I referred to earlier. That is along with customers failing to maintain sufficient credit standards and a bit of an uptick in conversions to natural gas.

Steve will comment in a minute on our efforts to start organic propane operations within our operating areas. But, we have also made two acquisitions outside of our existing footprint that we feel will enable us to increase our propane business going forward. In August, we acquired the assets of Southern Propane Services, or SPS, of Orangeburg, South Carolina. SPS serves over 2,000 customers and is a well known brand name that has a strong community presence. It is a solid, service-oriented organization, well positioned for expansion outside of its current business boundaries.

In addition, during October after the end of the fiscal year, we purchased John Ray & Sons, a company that has been in business since 1904 in the Albany, New York area. Ray services over 10,000 oil, propane, and diesel customers. This acquisition not only represents an excellent territory expansion for us, but we feel its quality reputation for servicing customers will be a foundation for further acquisitions in this area.

I might add that last week, we also closed on a heating oil acquisition in northern Suffolk County on Long Island. It has about 1,900 accounts and about 2 million gallons a year, and it's another excellent company that we feel is going to be a great addition to Star Gas. All of these companies will continue to operate and market themselves under their long-established, well known brand names that have made them successful in which their customers recognize them for their outstanding services that they provide. As with all 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 also continue to evaluate other acquisition candidates, and we hope we will find some that will be strong, profitable fits for Star Gas.

So in closing, my comments, given the adverse economic conditions recently and the volatile oil markets, we are pleased with the overall operating results this fiscal year. We successfully maintained margins while lowering net attrition, expanding services, and completing some very attractive acquisitions. We feel the Partnership is well prepared for fiscal 2012. With that, I will turn the call over to Rich to provide some comments on the fourth quarter and the fiscal year-end financial results.

Thanks, Dan, and good morning, everyone. Starting with the quarter, home heating oil and propane volume declined about 8.4% to 19.7 million gallons as the additional volume provided by acquisitions was more than offset by the impact of net customer attrition, conservation, and some other factors. Our total gross profit though did increased 4% to $30.5 million as the additional gross profit from service and installation and higher per gallon margins offset the decline in volume. Having said that, our margins did benefit some [FICO]-favorable costing in the fourth quarter of fiscal 2011. Our total operating expenses were basically, virtually unchanged. They increased by less than 1%, or $400,000, versus the prior-year period. Looking at our net loss, we posted a net loss of $26.7 million for the quarter, about $12 million higher than last year, reflecting an unfavorable change in the non-cash benefit of -- or, the non-cash impact of hedges, as well as a decline in the effective income tax rate.

As previously mentioned on prior calls, we've utilized the majority of our net operating loss carryforwards, or NOLs. At December, 2011, we estimate that these NOLs will be about $13 million and will be subject to annual limitations of $1 million to $2 million. The adjusted EBITDA loss for the period decreased approximately $1 million to $23.7 million as the increase in total gross profit was reduced by slightly higher operating expenses.

Turning over to the fiscal year results, home heating oil and propane volume increased by 45 million gallons, or 14.6%, as the volume from acquisitions and the impact of 8.6% colder temperatures was partially offset by net customer attrition, conservation, and some other factors. Our total gross profit rose and increased by $45 million, or about 15%, reflecting higher service and installation profitability and the increase in home heating oil and propane volume. Our per gallon margins declined a little less than $0.005 due to the impact of acquisitions. Once you peel back the acquisitions and exclude the acquisitions, our margins increased by a little less than $0.005 per gallon. Operating expenses rose by $31 million with acquisitions accounting for $20 million of this change. On a same store basis, operating expenses rose by $11 million due to higher delivery expenses associated with the increase in volume, higher bad debt in credit card fees relating to the rise in sales, and higher insurance costs. Net income though did decrease $4 million to $24 million as an increase in pretax income of $3 million was more than offset by an increase in the effective income tax rate. Adjusted EBITDA increased by 20%, or $14 million, to $82.5 million as the impact of colder temperatures and a $17 million increase in adjusted EBITDA provided by acquisitions was somewhat offset by net customer attrition in the base business and higher delivery and branch expenses.

In looking back over the year, we refinanced our senior notes which are now due in 2017, and we extended our bank facility which now expires in 2016. Both of these refinancings were at lower interest rates. We also have purchased 2.1 million in 2011 of our common units, and we're continuing our unit repurchase plan in fiscal 2012. As of September 30, 2011, we had working capital of $93 million and -- which included cash of $87 million. Now, let me turn the call over to Steve for some comments on our operations.

Thank you, Rich, and good morning, everyone. While we are currently certainly proud of our overall results, the true measure of this past year is found in the accomplishments of our team. These last 12 months have challenged us with many of the same market conditions we've seen in the past several years as Dan has mentioned, including more aggressive competition, escalating home heating oil costs which pressure consumers to conserve or evaluate conversion to other fuel sources, and weather conditions which range from abnormally warm to incredibly snowy. Despite these obstacles, our team once again delivered a year which was not only a fiscal success, but one which was very important to strengthening our service business and the growth of our propane operations.

During the period, we expanded our propane business organically, opening up eight new operations spread throughout our heating oil footprint in New Hampshire, New York, Rhode Island, and Maryland. These joined several existing operations we already had in Pennsylvania, New Jersey, New York, and Rhode Island. Thus far, the response from our customers towards this offering has been quite positive as we have already seen a steady flow of new accounts.

In addition to these organic startups, we have completed several propane acquisitions this year which have expanded our footprint into areas we did not previously serve including parts of New York, Massachusetts, Vermont, and South Carolina. As our investors know, we have a strategy of selecting companies which operate with service value similar to our own. And, we believe these businesses have been great additions to the Star Gas family. Along with expanding our customer base, such transactions have brought on board several very knowledgeable and talented managers along with their entire teams of dedicated professionals.

While we have only closed on four acquisitions, we have certainly spent a lot of time evaluating others and are still analyzing potential future opportunities. In fact, one of these closed in early fiscal 2012 as Dan has already mentioned. We have already said on these calls that our results are due to the efforts of our entire, incredible team. While we strongly believe in our workers, we are always looking for ways to improve our people and operations. This past year, we focused on training in several areas where we thought we could have a significant impact. The areas where we chose to step up training were customer service, work safety, insurance claim prevention, home energy efficiency, and gas service. We see these as instrumental to customer retention, revenue generation, and cost control which are key to all of our financial goals. We have began to see very good results from the new training across-the-board, and we will continue to work on further improvements at Star Gas in the coming years.

One area it is important to emphasize when it comes to our successful results is cost management. There is not a day that goes by that we do not discuss this part of our business. Although our management team is empowered to make decisions that satisfy our customers and our goals, we believe it is important to constantly challenge what we spend and why we need to spend it and what will it do for our business and our customers. We are confident in the strength of our team and the direction of the Company through our commitment to growth, service expansion, customer retention, and cost management. We are proud to have been able to report these results in such a difficult year and not to alter our dedication to excellent service despite tremendous economic pressures. We know that if we lose our focus on constantly providing the best service, we lose the difference which makes us the business we are. With that, I will turn the call back over to Dan.

Great. Thanks, Steve. Stephanie, at this time, we will be pleased to address questions that anybody listening may have so if you could open the phone lines for questions?

(Operator Instructions) Our first question comes from Gregg Brody from JPMorgan.

Hello. This is Jason Homler in for Gregg. Two quick questions. I know you don't -- there was no disclosure on counterparty risk to MF Global. I was wondering if its demise had any effect on your business or hedging?

No, we didn't have any positions with MF Global. The majority of the positions we have are with folks in our bank group with the exception of Cargill. I guess the answer -- short answer is no. It did not have any effect.

Thanks. I know that you touched on acquisitions there at the end -- that you're analyzing opportunities now. You had a little lighter year in '11, and you spent the money already in the first quarter. I was wondering if you had an allocated number you could provide? Or, some more color on that? You spent about $68 million in 2010. Is that a good benchmark maybe this year? Since you've already spent a little over $20 million?

We really don't have a budget for acquisitions or a goal. If we come across an acquisition that we think is going to be a good fit for us, we're going to try to make it. In 2010, we had one relatively large acquisition which was about $50 million so that was one transaction. So, we were able to spend a lot of money, if you will, with one transaction. And, yes, we did close on one in fiscal 2012, but we were working on that the majority of 2011. We kind of think of that as a 2011 acquisition. We really have no budget.

It's kind of hard to budget on something like that because we're always evaluating acquisitions. And, since 2006, we've probably evaluated well over 250 potential acquisitions, and we've only made about 28 or 29, I believe it is. I'm sorry, 31 acquisitions. There is always some in the pipeline. We have an idea of what it may cost us, and we're always looking at that. But, we don't set a strict budget on, okay, here is what we're going to spend on acquisitions. If an opportunity comes along that is a really good company that's a really good fit for us, we are going to be interested.

Thank you very much.

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

Good morning. Thanks for taking my question. Wondering if you could give us a quick update on receivables, collection -- post the end of September?

We have made some inroads in our Accounts Receivable since the end of September. We've -- they are still a bit higher than they were at this time last year, but we've reduced the over 90s by about $8 million, and the Day Sales Outstanding, instead of being higher by 11 days at September of this year versus last year -- at November, they are higher by about five or six days. So we have managed to make some inroads in collecting our receivables.

Okay, that sounds real encouraging. Any thoughts as to why that ticked up at the end of September?

Basically, two reasons. One, the price of oil. The price of oil throughout last winter was the highest its ever been for a winter period. We had four months in a row of record high prices. The only time it was higher than that was in July of 2008 when you really don't sell too much heating oil, and then, the price dropped like a rock after July 2008. This particular year that we've just come out of the price was high in December and January and February and March, and it stayed that way. And, due to economic conditions, people are having a harder time to pay. It's something that we've worked with our customers on. We're still working with customers on, and we have tried to have as much empathy as we can, because we want to keep them as customers and show them that we are the type of Company that will work with them to keep them buying from us.

Let's not forget that 2011 was colder. It was 8.6% colder so we sold more product to these homeowners. So, they are going to have just a larger balance due to selling them more product.

Sure, okay. On the attrition -- by the way, congratulations on the reduction on the customer attrition in the quarter. It looks like it was mostly driven by an uptick in gross adds. I'm just wondering -- to the extent to which -- A, what is driving that? And, B, is it your hope that that could continue?

Of course, we hope it continues. We are, I think, seeing in the first few months of this fiscal year -- we are seeing the gains to be on a positive side. Losses are doing okay, also, and they did okay last year. Granted, their losses were a little bit more, but based upon the conditions that we were facing with the high price of oil that I just mentioned previously and the colder weather and competition we were having, a lot of our customers were very happy to have the types of protected price that we offered. And we feel that we did pretty well on that. We are hoping that we can continue doing that, and besides the price of oil, which was a problem as I mentioned in my comments, it's also -- credit standards -- people who just can't pay their bill. They can't pay their mortgage. We know they're not going to pay their heating oil bill. So, we look at stuff like that. And then, there was a slight uptick in conversions to natural gas because, as everybody knows, natural gas is priced for the first time in a long time -- the last year or two, it is priced lower than heating oil. We're looking at that as something that may be an anomaly -- maybe not in the short-term but in the long-term because probably something like 16 out of the last 20 years, oil has been cheaper than natural gas. But, that's not the case today.

Was there anything different you were doing in the September quarter as far as trying to gain new customers?

No. We work on the same fundamental stuff all the time. In other words, we worked on our moveouts which is our greatest source of leads. 7% to 9% of our base is moving out of their homes, and we have to retain that homeowner that's coming into that home. We have developed a very good system. We have a good marketing program. We have a very good sales program. We have, I think, a fantastic sales center in South Plainfield, New Jersey, where we can bring in a lot of accounts -- people who are attracted to us for various things. One, we help them save money. We help them burn less oil. We have also some different programs that allow them to do that whether it is set-back thermostats or whether it's boiler resets, whether there are indoor-outdoor resets that help people sell oil. We actively market those so we can help people stay with us, and yes, they're going to burn less oil. They are going burn less oil with these devices, but they're also going to be very happy Star Gas customers.

Rich, the book tax rate for 2011 -- why was that higher than in 2010? And, what is your thinking on what rate to use for 2012?

We are going to start to become a full taxpayer, so I would say at least 42%, 43%. There are some expenses if you look at the 10-K that are at the Partnership level that are non-deductible, if you will. So, that also increases the tax rate by about 3% or 4%. So, a 45% rate might not be so bad, plus or minus a percent or two.

What are the expenses at the Partnership level that are non-deductible?

Sure, there are some audit fees. There are some management expenses that are -- pertain to the Partnership and not to the C-Corporations down below.

Okay. All right.

Processing the K-1s, for example as well.

Got you. Any further thoughts on simplifying your corporate structure? I know that's something you've looked at before.

No additional thoughts, no.

Okay. A couple quick questions on acquisitions. With the deal that you closed post-September, what did you pay there as a multiple of EBITDA?

On that one -- that was a -- because there was propane involved. There was propane and heating oil, and a good deal of propane, really. About 3,400 customers on the propane side. About a 5.7.

Okay. So, I guess that's -- .

On the heating oil-only one that we closed on recently, that's about a 4.0.

Okay.

We're still looking at that same between four and five for heating oil companies, and propane companies, it's between five and seven.

Okay. And then, your stock, obviously, still trading at a pretty cheap level on a free cash flow basis. Like a 10% free cash flow yield based on just the last year, and if you average free cash flow over a multiple-year period, it is substantially higher than that. Is it possible that you could get more aggressive in terms of buying back additional stock? That is my last question, thanks.

Well, we can only get as aggressive as the program allows us, which is to buyback on a daily basis for the average, I believe, it's the last 60 or 90 trading days. 20% or 25% of that. That said, we will entertain private transactions if folks would want to put the stock back to us privately. But on open market purchases, I really can't control what gets on an automatic pilot.

Thanks.

(Operator Instructions) Our next question comes from Ed Olson, a private investor.

Good morning, and welcome to South Carolina.

( Laughter) Good morning, Ed.

Forbes has a note out today that the stock costs through the 200 moving day average which is theoretically to some people bullish, and those of us who live in South Carolina would attribute your latest acquisition for the reason behind that. In all seriousness, would you break out the propane, please. Give us a progression there and future plans?

When you say future plans, we are trying to grow the propane organically as Steve mentioned in his remarks. Meaning that we have started Petro propane operations in several places which Steve also mentioned. And, that's like starting from scratch. We do it very, very slowly and very, very carefully because propane is not something that you want to rush into. You want to make sure that your people are very up-to-date on safety measures, et cetera. So, we are doing that on a slow basis, and obviously, we look at acquisitions, too. We feel our niche is more the oil/propane Company.

In this particular case in South Carolina, it was a propane company that obviously entertained offers -- I'm sure they did, I really don't know. But, I know they entertained offers from some of the bigger MLPs. But, why did they want to sell to us. Because they didn't want to be absorbed into an MLP and lose their identity. Maybe lose some of their employees' jobs. They looked at us as a Company that is going to run them the way they were running, and they felt and we felt that there was great growth potential in that area. Obviously, we still feel that way.

So, that is probably our niche is the oil/propane. Last year, we did a company like that. The company we bought in Troy, New York was also oil and propane. Southern propane, it was just propane. We will look at either. We just feel that if they are interested in selling to a company that is going to maintain the same management team, and they've been successful at what they have been doing. And, they're not going to be absorbed into a larger entity, then we are the person that they should sell to.

How about some hard numbers though. What is the -- you don't break it out. And, that might help the multiple if you did, but what is the growth rate and some hard numbers on propane?

Well, we are actually positive on our growth rate in propane. Off the top of my head, I don't know exactly what the number is, but we are probably -- I would use the term -- we are net ahead of our gains and losses by at least 9%, if not more. And, we feel that going forward, we are going to continue that on the gain side. Obviously, there are losses, too, when people move out. There's a little bit less price competition because in most cases, the Company owns the tank, not the customer. So, we feel that there are opportunities there. On the numbers side, on an acquisition, the propane companies -- if it's propane alone, it's going to be somewhere between five and seven.

I'm not talking about the multiple. I'm talking about the volume.

Sure, I can give you the volume. In 2011, of the 335.6 million gallons we sold, 4.5 million gallons were propane versus the prior fiscal year of 310.3 million gallons that we sold, 2.3 million gallons were propane. So, propane, in and of itself, is up 94%. But, it's only 2.2 million gallons. We are still a heating oil company, and we're trying to slowly grow the propane side of it.

Is it reasonable to take that jump and apply it to 2012?

Considering that we've made acquisitions, and the latest acquisition we made which was in -- what is that month -- October, which was half propane. Sure, we should see increases of that going forward in 2012.

What I would say is the organic piece of this is going to grow at a steady rate between 9% and 15% based on the plans that we have in place and the locations that we have set up. Additive to that, would be any acquisitions, and we're certainly looking at acquisitions throughout our footprint that, as Dan mentioned -- primarily mixed multiple fuel. But, we also are looking at some small- to medium-sized propane-only businesses. As our name is getting out there in the propane world again, we are getting more and more contacts. They take a long time to sift through. They are not as easy, necessarily, to close. Dan mentioned the one in Troy, New York took almost 11 months to close. So, we may start one now -- we are already a few months into this year. We may not see the result of that until 2013 if it was something of substantial size. But, what we are doing is solid, sound, and I think you can't look at it just for this year. You have got to look at it what will it mean in the next two or three years. I think it's something that we can perpetuate which I think we are very happy with.

The shareholders are happy, too. Those are actually the numbers I wanted. Thank you. Going back now to the dividend -- I mean, to the acquisition. In 2010, you bought 7 million shares. In 2011, that slowed down to 2.1 million. If you look at the volume, you are not buying anywhere near what you could buy. You're not restricted.

Yes, we are. We're restricted to the amount of shares that we can buy under SEC rules. We absolutely are.

Yes, but wait a minute. If you bought 200 and some odd shares in the month, and there is 64 -- you are only buying about 3,000 shares a day.

We're buying what we are entitled to buy. And, we have an agent that is doing it, and it's on automatic pilot. We are doing exactly what we can do.

Somebody mentioned that you could buy 20% to 25% of the daily volume.

If the agent proves that he is not messing around with the market.

Okay. Listen, I think the guys that are running the Company -- the Management is terrific. I think you have done a great job. The propane business -- by the way, I think if you broke that out and gave the investors a little more detail that would affect multiple on the upside. But, I have to say that -- this is a message for the Board really, and perhaps, actually, right to the Chairman. The slowdown in acquisition of shares and a meager increase in a dividend each year -- it seems to me that if the Board and the Chairman applied the same aggressiveness to that side of the business that you were operating in, we would all be a lot better off. And, I hope you will deliver that message.

We will.

But, the operating guys -- I have got to tell you -- that's fantastic. Very good results in exactly what you guys said you were going to do.

Okay. Thanks, Ed.

(Operator Instructions) Our next question comes from Michael Prouting from 10K Capital.

I lied. I had one more question. Are there any synergy -- given the way you operate the businesses you acquire, are there any real synergies either when you buy an oil business? When you buy a mixed business? Or, when you buy an oil/propane business?

Michael, there are always some type of synergies. Whether it is a pure oil or propane. The difference is the speed of assimilation of those synergies. Some businesses, because of proximity, we see the benefits right away within the first couple of months or weeks. Some may take a couple of years. The more density we have, the better the synergies are.

There's actually some reverse synergy sometimes, and they don't materialize economically right away. I mentioned in my comments that we're picking up a lot up talent in some of the newer acquisitions, and that just is about propane. Some of it is either heating oil or other fuels, such as diesel, that we may not have had in our base business or maybe not have in that geography. And, those are beneficial. They don't necessarily show in the immediate results. I would say that's certainly one of the ways we do operate, and what we do when we evaluate the value of these acquisitions. That's part of why something is a three multiple or a 4.5 multiple. What do we get out of it besides the raw economics.

I would like to just add to that saying that synergies is not our number one priority when we do an acquisition. Our acquisition is -- the main thing is are we going to be able to make the EBITDA we project. Are we going to be able to keep the attrition to the level we had as low as possible. And then, the synergies come next. If the synergies are right there, we're going to take then. But, over time, synergies do become more and more important, and they develop very easily. We don't like to make the synergies the number one priority because usually what happens is your EBITDA and your attrition suffer if you do.

All right. Thanks.

I'm showing no further questions at this time. I will now turn the call back to Mr. Donovan for closing remarks.

I thank everybody, as always, for taking the time to join us on the web and on the phone. We appreciate your ongoing interest in Star Gas, and we will talk to you again. The next time will be first quarter 2012 results, and that will be in February. Thank you very much.

Ladies and gentlemen that does conclude today's conference. You may all disconnect, and have a wonderful day.