Star Group LP (SGU) 2012 Q1 法說會逐字稿

Good day and welcome to the Star Gas Partners fiscal 2012 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). I would now like to introduce the host of today's conference Mr. Dan Donovan, Chief Executive Officer. Sir, please go ahead.

Thank you. Good morning , and thanks for joining us today. 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 be giving a review of the fiscal first quarter ended December 31, 2011, and this will be followed by some comments by Steve regarding Star's operating results, and then of course as always we would be happy to 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 the conference call are forward-looking statements.

Although the partnership believes that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance as 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 the 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 over to Dan Donovan. Dan?

Thanks Chris. Let me start by talking about the weather. While last year's first quarter results reflected much colder temperatures than normal and frequent snowstorms, this year has been noteworthy by the reverse of that, unusually warm weather with very little snow. Managing our heating oil business in either extreme is very difficult, and a high price environment makes it all the more challenging. This year our emphasis has continued to be on delivering the highest level of service to our customers, while putting major emphasis on expense control which Steve will discuss in a moment.

To put the weather in perspective temperatures were 22% warmer than last year's first quarter, and 20% warmer than normal. One thing that both quarters do have in common is the high price of heating oil, as prices remained at the highest level since the summer of 2008. This year's average spot prices were higher than the period ended December 31, 2010 by $0.62 per gallon, or 26%. In addition the fiscal first quarter of 2011 was higher than the previous year's first quarter by $0.38 per gallon. This means that for over the past two years, heating oil prices have climbed by $1.00 a gallon, or 51%.

Turning to customer retention. During the first quarter of 2012 our net attrition was 900 accounts, or just under 0.2 of 1% of our home heating oil and propane customer base. This is 1,300 accounts less than the first quarter of fiscal 2011 when we lost a net of 2,200 accounts, or 0.5 of 1% of our home heating oil and propane customer base. The year-over-year improvement was largely due to the success of our propane marketing initiatives, as we added 700 more net propane accounts during the first quarter of this fiscal year compared to the first quarter of fiscal 2011. Again, the combination of rising prices especially at these high levels and warm winter temperatures made controlling attrition an especially demanding tacking.

Our acquisition program continues to be very active. In the quarter ending December 31, 2011 we closed on three transactions. A dual heating oil and propane market in upstate New York, a Long Island heating oil dealer, and a small propane company in South Carolina. Combined these acquisitions added approximately 30 million gallons, or 13,000 customers with about $4 million in EBITDA to Star. As usual, we continue to spend a good deal of time evaluating both heating oil and propane candidates.

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

Thanks, Dan. For the quarter our home heating oil and propane sales volumes decreased by 19% versus last year, or 22 million gallons to 91 million, as the additional volume provided by acquisitions was more than offset by the impact of warmer temperatures of 22%, and net customer losses for the trailing 12-months of 3.3%. Our home heating oil and propane margins increased by 6.5%, or about $0.06 per gallon versus the first quarter of fiscal 2011.

We achieved higher per gallon margins despite an increase in wholesale product costs of over $0.55 per gallon, or 23%. However, total gross profit declined by $14 million as the higher margins could not offset the impact of the much warmer weather.

Gross profit from other petroleum products increased by $0.75 million despite the warmer weather, reflecting our recent acquisitions, and we also improved our service profitability by $600,000. Delivery and branch expenses rose by 2% primarily due to the impact of recent acquisitions which were not contiguous to our existing operations. Recall that we recently expanded into the Troy, New York area, and into South Carolina. In addition, given the fixed nature of some of our operating expenses, we have been able to reduce costs in the short-term, as we would have liked because we expected the upcoming January to be normal.

We posted net income in the quarter of $3 million, which was $18 million lower than the prior year due to the after tax impacts of the and abnormally warm weather, and an unfavorable change in the fair value of derivative instruments. Over the past several years we have utilized the substantial majority of our NOLs, or net operating loss carry forwards, and at December 31, 2011 we estimate that NOLs were approximately $13 million, such as the annual limitations of $1 million to $2 million annually. Adjusted EBITDA decreased by 44% to $19 million as the impact of the warm weather could not be offset by acquisitions and higher home heating oil and propane margins. As of December 1, 2011, we had borrowed $47 million under our revolving credit facility, and as of this morning our borrowings were a total of $18 million from our bank facility.

I would like to put the impact of the warm weather into perspective. While the quarter was 22% warmer than the prior year and 20% warmer than normal, the core heating season commencing November 1 was 27% warmer than the comparable period last year. As you might recall, we had a fluke winter storm that added some degree days in October, but this did not impact our deliveries as power was out in many homes which lowered usage for these customers. Having said that, variations in temperatures are not uncommon for the two months ending December 31, and have actually ranged from 23% warmer than normal to 28% colder than normal during the last 30 years.

Unfortunately, the warm weather has extended into January. Temperatures for January 2012 were 15% warmer than normal, and 22% warmer than January of 2011. Home heating oil and propane margins sold for January 2012 was 18 million gallons less than January 2011. In fact, this is shaping up to be unfortunately one of the warmest years in the past 112 years. While we did not record any benefit under our weather hedge as of December 31, 2011, we currently estimate that we will record a benefit in January 2012 of $3.3 million, which will reduce the impact of the decline in volume for January. We will continue to manage our finances conservatively under such conditions.

Now let me turn the call over to Steve for some further comments on our operations.

Thank you Rich, and good morning, everyone. At the start of this past quarter if I had been asked what will you do if normal winter weather does not materialize, I would have said two things. First that this most likely wouldn't happen for the entire quarter, and secondly that we would have no alternative but to continue providing the highest level to our customers while managing operations in the most cost-effective way possible. Well this winter certainly has proven to be an unusual one.

While the primary weather forecast indicated we would see relatively normal seasonal patterns for the first quarter this is certainly not what happened. During November and early December we began our yearly ramp-up of staffing anticipating a typical winter start. However in keeping with our expense management focus, we were continually reacting to noticeably warmer than anticipated days by cutting controllable expenses when it was possible. As the forecast unraveled in December we began cutting back on spending and staffing more aggressively, still knowing that our traditionally coldest period was yet to come in the months of January and February. Halfway through the period of December we started instituting even more dramatic and longer term expense cuts where they would not have significant impact on our customers' experience or on customer retention.

We believe our execution on controllable aspects of operating were done appropriately, keeping the right balance between our customers' needs and ability to reduce hours related to weather driven demand. It was simply not possible during these months to cut more than we did without damaging service and risking attrition. I would like to add that many of these cuts came through the cooperation of our employees who have seen dramatic decreases in hours, and in many case altered work periods and temporary layoffs. We have adjusted our plans and controls to manage our operations as tightly as possible without risking our reputation. In some cases, this may have involved structural operating changes at the local level.

Our team is as motivated as ever to quickly recover from very challenging weather conditions. While the weather this past quarter was unexpected and unusual, some of our other challenges continued from periods prior. These included but were not limited to the high cost of product, very aggressive competition from natural gas providers, a weak economy, and struggling home sales, and the renovation market. These conditions continued to put pressure on our efforts to gain new accounts as well as retain our loyal base of customers. Given such parameters we are certainly pleased with how attrition has improved as Dan discussed a moment ago.

In addition, during the past quarter there were several areas not negatively impacted by the unusually warm weather. Our health and safety initiatives appeared to be taking root and producing very positive results, and our quality assurance programs are helping us better communicate with our customers. In addition we continue to evaluate an active pipeline of attractive acquisition opportunities within heating oil as well as propane, and we have also seen steady organic growth in our propane businesses. In conclusion, I would just like to say that we will continue undeterred by this year's unusual weather. With the dedication of our management team and the efforts of all of our people, we will strive to serve our customers at the highest possible level, while carefully managing expenses at the same time.

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

Thanks, Steve. With that we will answer any questions you might have. Carolita, could you please open the line for questions.

Thank you. (Operator Instructions). You have a question from the line of Ed Olson. Please go ahead.

Good morning.

Good morning.

With the stock hitting another new you low today I hope you don't mind that shareholders are a bit irritable. Two questions. One, would you all talk about the repurchasing in fiscal 2011 and 2012. In 2011 Q1, Q2 and Q3 you bought nothing, then all of a sudden bought $1.835 million in August, of which $1.5 million was from an insider, and then in December you bought another $1.5 million from the same account averaging about $5.24. Looks like you bought from us the public and the shareholders around $1 million at significantly lower prices. Can you discuss the thinking behind that?

You are talking about our buyback of units, Ed?

Yes, Dan, that is correct.

Well, we made the buyback at $5.24 that is where the market was. We have a program that where, that we disclosed to everybody that we are buying back units, and of course, if at that time we knew that the winter was going to be 20% to 25% warmer, maybe we wouldn't have done that, but we never know what the weather is going to be, nor do we know what the price of oil is going to be, nor do we know what the price our units is going be. We made that purchase based on the program that we set out and disclosed to everyone.

I understand that. But it looks like the insider benefited to the point of $5.24, and the public received a much lower price.

We were buying from the public based on whatever the market was during the course of the time, and that is a weighted average per share from the public. What we made the private transactions at were approximately where the market was, and there probably was a slight premium that you might have to pay for a block of that size.

I understand you have to pay for size. The only question I have is it just seems as though the insider has benefited greatly, and the public has gotten a much lesser price. Have you gotten any inquiry on any of these from any regulatory body?

I don't know if I agree with what you said, Ed. Our buyback program is on automatic pilot, and when a block comes we are paying what the market is so I don't see where we are giving anybody an advantage.

I beg your pardon but in the first quarter, second quarter and third quarter you bought zero, and if that is automatic pilot you need to get another broker.

The automatic pilot is within the parameters which we set.

Right, therefore you did nothing for three quarters. That is all I am asking. Okay, I made my point. Okay. Next question on I see you bought $1.2 million in January. What have you bought in February?

We have bought round numbers around 100,000-some odd shares. I don't have that number in front of me.

Okay so your authorization has just about run out?

That is a fair estimate, yes.

Okay. The next question I have deals with shareholder value. The stock has broken down completely, and I would address this question and I assume your Chairman is on the line, so maybe he would like to answer the question. What are you going to do about shareholder value? What are you doing to address that? You have lost most of the institutions as I'm sure you can see from the transfer sheets?

Could you define what you mean by shareholder value, Ed? Because when I am looking at it, we are not looking at this thing quarter to quarter. We are looking at this long-term. Given the recent weather conditions, we kept the distribution at what it had been, which is an increase from the $0.27 to the $0.31. And we look at this distribution regularly, and as you know we have said this several times on this call, and we have said it to you a few times too, is we are owners of the stock too, and we are aligned with the shareholders in the desire to see these distributions rise over time, but we are not looking at a quarter to quarter. We are looking long-term. We have acquisitions we would like to do. We have a warm winter we are dealing with. We have a possible higher cost of oil coming in, and we feel the way we are handling it with distributions makes perfect sense.

Dan, my beef is not with the operating guys. You also said on page 66 that you don't anticipate any dividend increase for the rest of this fiscal year.

Well, I --

But my question really deals more with shareholder value, and the structure that you are operating under is costing shareholders. You have said that yourself. The costs could be anywhere between $0.5 million and $1 million or 2 million. What are you all going to do about addressing shareholder value?

What we are going to do is continue to run the Company the way we were talking about this morning. In other words, we are trying to control attrition. We are trying to deliver excellent customer service to our customers, grow our Company via acquisitions, and continue for the long-term to run a solid heating oil company. We think that is going to add to shareholder value over the long-term.

Now, Dan, again, my --

We have no control --

And great job at attrition by the way, and the costs, and so forth. And my beef is not with the operating guys. Let me make a couple of suggestions. One, you ought to look at the structure, and make a decision based on shareholder value. Number two with the high yield market where it is, which is wide open right now, why not reopen the high yield and tender for the stock?We need some bold action here, and I have a real concern about morale, Dan and I have expressed this to you before. The people that will benefit from a $0.45 distribution have got to get a little impatient here, so I worry about your morale, and the other managers who would benefit from a $0.45 dividend.

I got to tell you our morale is fine, because we are looking at this a lot longer term than you might be looking at it, and we he think that the way the Board is running it. I don't separate myself from the Board too much. I agree with what the Board is doing and long-term it makes sense to me.

Okay. Go ahead.

And to be technical on a couple of things that you said already. We did not buy any shares back from an insider as defined by Securities law. Those --

Well, that is not quite right, because if you read SEC Form 4, then Darrow Partners is described as an insider.

It is no relationship to the company.

No, but they are declared as an insider. There is a unit holder -- And the other thing is I don't see management buying any stock.

Management can only buy stocks during an open window.

Well --

We have a window which will be opening after this call, and stays open for a few weeks. We don't have the opportunity to buy anything except during that window period.

Okay. As I said, shareholders are a little bit irritable with the stock hitting $4.35 today. I made my points, thanks.

Okay, Ed.

Thank you. (Operator Instructions). We have a question from the line of Henry Bilsland. Please go ahead.

Yes. My question is, I notice the Accounts Receivable were considerably higher as of this year versus last year. Would you care to comment on that?

Well, I think they are higher versus the close of our fiscal year. I don't believe that they are higher than at this time December.

That is what I was going by. I was going by your close of your fiscal year.

Especially if you look at Days Sales Outstanding. I think it is pretty consistent with the last two years.

We have the same DSOs as last year, and the sales were approximately the same for the three months, and I believe at December of last year our Accounts Receivable were pretty much the same. We had about $178 million on Accounts Receivable last year, and we are in that ballpark this year at, give me a second,at $182 million.

Okay. I am not sure if I read this, I must have mistakenly read the figure.

We had $183 million of receivables last December. This year we have got $178 million of Accounts Receivable. Now, we are up from September but this is our peak season.

Last year if we had a normal winter it would have been up because the price of oil was up.

Okay. So you are not concerned in the least where your Accounts Receivable are then?

No, we had 37 Days Sales Outstanding which is the same as we had last year. And the same the year before basically.

Okay. That is good.

Within a day or two.

Do you think you will be able to maintain your dividend?

Yes.

Thank you.

Thank you. (Operator Instructions). We have a question from the line of Gregg Brody with JPMorgan. Please go ahead.

Hi, guys.

Hey.

I was just curious just give us in terms of the acquisition market, can you give us a sense of what it looks like out there, if there are more or less opportunities than the past? Just some general commentary would be helpful.

We are in the middle of the winter now, well, it is supposed to be winter. And normally the market picks up as the winter is ending, because a seller would want to sell well before the beginning of the next heating season. And we expect to see an uptick in that. And we have seen a lot more questions being asked, and been approached by a few more companies than we normally would throughout the winter, but we haven't seen a huge uptick yet, but that may be coming. It depends upon how dealers view finishing with a warm winter. Some may decide to say wait until they have a better winter, but you we don't know yet.

And just obviously it has been a tough heating season. Are any of the other residual businesses suffering as a result of that?

Well, we have seen, we have had good operating results with our propane business, and we also do plumbing in several locations, and those are not being affected as much by the weather. But a big stock and trade, of course propane heat and oil heat is obviously affected by the weather. Other than that, I don't think we see much of a change in any of the other things that we might be doing.

Alright, guys. Thanks for the color.

Thank you. (Operator Instructions). At this time there are no further questions. I would like to turn the call back over to Mr. Donovan, Chief Executive Officer, for any closing comments.

Okay, Carolita, thank you. I thank everybody for taking the time to join us today, and everybody's interested 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. This does conclude the program, and you may now disconnect. Everyone have a wonderful day.