Star Group LP (SGU) 2014 Q4 法說會逐字稿

Welcome to the Star Gas FY14 fourth-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Steve Goldman, Chief Executive Officer. You may begin.

Good morning. Thank you for joining us today. With me today is Star's Chief Financial Officer, Rich Ambury. After some brief remarks, Rich will review the fourth quarter and the fiscal year ended September 30, 2014. 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 Steve. 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 that 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, 2014.

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'd now like to turn the call back over to Steve Goldman. Steve?

Thanks, Chris. It is great to be able to review the results of this past year with our investors. We believe FY14's overall positive performance has further strengthened everyone's belief that our organizational strategy is sound. We have come through a year where the weather has both pleased and disappointed us, yet we were able to produce some of the best operating results our Company has ever seen. Whether looking at EBITDA of $108 million or our attrition of less than 1% or even our ability to incrementally expand our service offerings and geographic footprint, FY14 was certainly one for the record books.

What we accomplished this year illustrates that we can achieve solid financial performance while continuing with our tradition of excellent customer service. We were also able to complete three acquisitions in FY14, with the biggest one being one of the largest transactions we've ever done, Griffith Energy. At the same time, we've been very focused on strengthening the organization through training at every level. At the end of the day, even with our overall solid performance, there is still plenty of room for us to further improve.

We continue to focus on how to balance the cost of expanding service offerings, while maintaining the profit margins we expect. This is an ongoing learning experience for all of us and has been quite challenging at times.

We were reminded of this during this summer when cool weather resulted in disappointing results in many areas where we have expanded HVAC operations. The bottom line is that we always need to keep on our toes when it comes to expense management, since both weather and margin expansion opportunities are very unpredictable.

Our low attrition this past year has made us very proud, given how hard we've worked to get to this point. We believe that all of our employees are finally living up to the expectation to do everything possible to ensure customer retention and to make certain we are the best home comfort Company for the services our customers need. We know we must continue working to maintain what we have achieved. We certainly are committed to doing that.

One of the ways we can achieve results like these going forward is through a comprehensive management development program. This grassroots approach, what began with a fundamental mentoring program, has now been expanded with the intent of developing bench strengths for the organization and opportunities for our best employees.

The results of these initiatives have been very good so far. We have been able to source many internal candidates instead of going outside the Company for Management talent, which we have had to do in the past.

In the area of acquisitions, it has been a very good year for Star Gas. While we only closed on three acquisitions in 2014, we looked at more than 40 companies during the past 12 months. With the help of our dedicated VP of Acquisitions, we know that we have many companies that, while they haven't proven to be a good financial fit and operating fit at this point, the criteria makes us believe that some of these businesses will ultimately be acquired in the future.

One last note, on this year's acquisition of Griffith Energy. We have been very pleased with the performance of this business. The team at Griffith has done a great job integrating its operation with Star Gas.

Our commitment to product expansion for our customers has never been greater. We are seeing a continued positive response to our ability to offer our customers a broader breadth of products and services.

I think it is very important to mention that the results of this past year did not come easy, nor without challenges. They reflect sound management, a dedication to customer service and a great team of employees. With that, I'll turn the call over to Rich Ambury to provide some comments on the quarter and the year's results. Rich?

Thanks, Steve. For the fourth quarter of FY14, our home heating oil and propane sales volume increased by 8% versus the same quarter last year or 1.6 million gallons to 22 million gallons. Sales of other petroleum products rose by 97% or 13 million gallons to 26 million gallons. The much higher volume of other petroleum products primarily reflects the impact of the Griffith acquisition, which was completed in March 2014.

Our home heating oil and propane margins increased $0.03 year-over-year during the quarter to approximately $0.94 per gallon. As a reminder, the fourth quarter is a non-heating period with relatively low overall volumes, so margins can be impacted quite easily. Total product gross profit rose by $5.6 million due to the higher home heating oil and propane volume, an increase in home heating oil and propane margins and an increase in other petroleum products. Gross profit, largely again, attributable to the Griffith acquisition.

Delivery and branch expenses rose by 24% or $10.8 million, again primarily due to the Griffith acquisition which accounted for over $7.6 million of the increase. We've also saw a higher sales and marketing expense of $1.1 million in the base business and reserves for insurance expense also rose as well.

We posted a net loss for the quarter of $26 million, $12 million higher than the prior year period, largely due to an unfavorable non-cash change in the fair value of derivative instruments of $11 million; along with the Griffith acquisition; higher marketing expenses; and an increase in insurance expense. In addition, a decline in service and installation profitability in the base business also drove the increase in the additional loss.

During the fourth quarter of FY14, the price of home heating oil declined by over $0.30 per gallon, which reduced the market value of certain hedges purchased for the upcoming season and drove it's $11 million increase in the non-cash derivative increase. Also as expected, Griffith operations contributed to a larger loss during the quarter, as would normally be the case during a non-heating season period.

Marketing expense rose and service and installation profitability declined due to certain initiatives undertaken in the quarter to grow sales of other products as well as reduce net customer attrition. The adjusted EBITDA loss for the quarter increased by $7.2 million to $22.4 million due to the adjusted EBITDA loss associated with Griffith and several small acquisitions totaling $1.1 million, higher marketing expenses of $1.1 million, a decline in the service and installation profitability in the base business of $3 million; and an increase in insurance expense.

Now let's review the year results. For FY14, Star's home heating oil and propane sales volume increased by 11% versus last year or 36 million gallons to 361 million gallons, as the impact of 9% colder temperatures and the additional volume provided by acquisitions more than offset net customer losses, conservation and other factors. Sales of other petroleum products rose by 45% or 27 million gallons, again, which reflects the impact of the Griffith acquisition.

Our total gross profit -- product gross profit rose by $58 million or 18% to $385 million. The increase in volume and higher per gallon home heating oil and propane margins drove the improvement in product gross profit. In addition, gross profit provided by other petroleum products rose in FY14, again, due to the Griffith acquisition.

The colder winter drove an increase in service costs in FY14, while the prior-year period benefited by higher installation and service work related to various storms including Storm Sandy. In addition, the costs of several growth initiatives also impacted service and installation gross profit. As a result, the gross profit from service and installation in the base business declined by $7 million in FY14 compared to FY13.

Delivery and branch expenses rose by 13% or $32 million in FY14, due to the 16% increase in total volume and higher sales and marketing expenses of $2.9 million. In addition, during FY14, the Partnership recorded a $1.7 million charge for certain sales and petroleum taxes for years prior to FY14. Depreciation and amortization expense increased by $4.3 million, again largely due to the Griffith acquisition.

General and administrative expenses rose by $4 million, primarily due to an increase in profit sharing expense of $1.5 million, higher acquisition related costs of about $1 million, again largely tied to the Griffith acquisition and an increase in overall legal and professional expenses of $1.1 million.

Net income for FY14 was $36 million or $6 million greater than the prior year period, as the impact of colder temperatures and higher per gallon margins more than offset the higher delivery and branch expenses, G&A, depreciation and amortization. Adjusted EBITDA increased to $108 million, up $18 million as an increase in home heating oil and propane volumes, higher home heating oil and propane per gallon margin and an increase in gross profit from other petroleum products more than offset the decline in net service and installation profitability. As a reminder during FY13, the Partnership's home heating oil and propane volume was negatively impacted by Storm Sandy, while service and installation gross profit and gross profit from the sales of other petroleum products was positively impacted.

Now, let's take a peek at our balance sheet. As of September 30, we had $49 million in cash and long-term debt of $125 million. In FY14, we were able to pay distributions of $19.9 million and fund acquisitions and capital expenditures of over $81 million, while our cash balance declined by only $36 million. With that, I would like to turn the call back over to Steve.

Thanks, Rich. At this time, we would be pleased to address any questions you may have. Operator, please open the phone lines for questions.

(Operator Instructions)

David Spier, Nitor Capital.

First, I just want to congratulate you on what appears to be a quite impressive year operationally.

Thank you.

So I just wanted to say, the way we look at Star Gas, especially at the current price, is there someone to own this business outright? They would essentially own a business that is generating -- close to 20% cash on cash returns. Based on the fact that excluding Griffith, the acquisition, the Company generated around $86 million free cash in 2014. So this current lower-term world that we're in, where you're getting about 2% in a 10-year treasury. That's an incredible proposition, especially for a Company that's generating recurring revenues and using minimal leverage in the way you run the business. So, I just wanted to state that first off. But in the current market where crude has fallen significantly, nat gas has held up quite well. One would think that's quite beneficial for your business. Could you clarify on that? I assume that's correct. Also, maybe quantify what type of a benefit that will lead to going forward?

Sure. We love lower heating oil prices, I mean that's just -- that just makes it easier for us to retain and attract customers. We have lower working capital interest expense, as one would imagine, with lower cost of product. As well as, we do have 1,000 trucks on the road and 1,000 servicemen on the road, so we'll have lower costs to the power those vehicles. So overall, operationally, lower heating oil prices are just good for us.

Also in terms of attrition and the fact that your biggest competitor is natural gas, is that a big factor there as well? Where it will limit the desire to potentially switch?

That would really be kind of -- our real -- our largest competitor is the other 4,000 to 5,000 other home heating oil dealers in our footprint, not necessarily natural gas. Switching to natural gas is more of a long-term decision, as opposed to where heating oil prices today might be versus natural gas.

Got it. Then, back to more of my first comment. But in terms of acquisition, again it looks like you're doing about $100 million EBITDA annually. Based on the net debt, which you mentioned is around $76 million, your enterprise value right now is at a $450, give or take $450 million.

Now, considering the Company has made several accretive acquisitions at higher multiples, wouldn't it be fair to say that buying back a substantial portion of your shares at the current price would be quite accretive? Obviously, you'd have to balance with the acquisitions in terms of growth, but in terms of the current value of the Company versus what the Company is doing in terms of earnings, wouldn't you say buyback is quite compelling at this price?

Yes. Buybacks are quite compelling at this price. But we have to balance buying back units along with acquisition opportunities as well.

No, I would just say, because obviously you, in terms of operationally, you are the exception. Quite -- further -- much better than a lot of the deals you've been buying. So the fact that you're trading at a lower multiple than a couple of those acquisitions is just pretty -- it represents a pretty good opportunity. Then, in terms of the business structure, are there any updates regarding that?

The business structure? No. No real update.

All right. So the Partnership is basically staying intact for the time being?

That is correct.

If you were to make another -- an additional acquisition? What would be -- is there a tax impact if cash were to leave the holding company?

Well, any acquisition that we do make -- it is tucked into our C Corporation, which is basically the only asset or the stock that the Partnership owns. Those C Corporations are full taxpayers.

Understood. Okay. I just wanted to clarify that. I appreciate it. Thank you very much.

(Operator Instructions)

Timothy Healy, Healy Group, LLC.

Gentlemen, would you reiterate how many units are outstanding here at the end of this fiscal year?

As of the end of November, it's 57.3 million.

Okay. That's essentially unchanged over the course of the recent say 18 months period?

That is true.

It was sort of stabilizing down here in the middle 50 millions, say.

Yes. Okay. Calculating the equity value per unit would be? I missed that if you spoke about it earlier.

Well, the units are around $6 currently.

All right. So they're at $6. Okay. Now, one other thing. Before Griffin -- did I pronounce that right? Griffin or Griffith?

Griffith.

Griffith. Okay, my apologies. Number of lost accounts this year before -- x Griffith? The business going in to the merger, how many lost accounts did you have, roughly?

Well, it was, roughly, 1% this year including Griffith. But Griffith did not really change the overall -- let me just get you that number.

You've done a great job (laughter) a declining number of lost accounts since 2009 on a moving average basis, so I just wondered what the number was here at the end of this fiscal year?

Yes. The number of accounts that we lost including Griffith -- but we only had Griffith --

-- for a little while.

Yes. It was 4,100 accounts. We don't add in our gains --

Down again.

We don't add into our gains, acquisition gains.

Okay.

But we do add -- since we bought Griffith, we add in whatever marketing activity Griffith had, which would be gains and/or losses.

I would say that from 2009 on, you've had a steady decline from 30,000 to 4,000. You have seemed to acquired loyalty from your base. Would you value those at $500 apiece for the sake of argument, roughly?

I would think that they would be more than that. But that's for somebody else to figure out.

Okay. All right. But it's down -- hey, you're going in the right direction. Continually, you're going in the right direction. You're building -- clearly the loyalty is building up on a moving average basis. It seems to me from your numbers.

Correct.

Great. Thank you very much.

You're welcome.

I'll yield to the next speaker.

Andrew Boord, Fenimore Asset Management.

I'm a little new to the story, trying to figure some things out. I'm a little surprised by the cost of your debt. It seems like such a stable business. You're paying a lower interest rate. I wondered is that something that might change? Could you refinance that debt? Or is something, I guess, unique that I don't quite understand yet?

Well, we did do that chunk of high-yield. We did do that in 2010, when the markets were a tad bit different. But I will tell you, one of the obstacles we do have is that we are relatively small in relation to the high-yield market. So, there's a premium for, I guess, being so small. It's only $125 million outstanding.

Yes. I guess, that's a good point. Okay, thank you very much.

You're welcome.

(Operator Instructions)

David Spier, Nitor Capital.

I just have one follow-up. Just, is there a way you could give comment or color on how the winter season is shaping up right now? What do you see going forward?

Well, if we could predict the weather, I'd probably be in a different business. But degree days up until yesterday were pretty much normal in the New York metropolitan area. With the lower heating oil prices, as we discussed before, that's pretty good for us.

All right, great. Then do have -- to the last caller's question. Do have any plans or intentions, in terms -- I know there's a call option on that bond. Is there any intentions regarding what to do with that mid [panter] call?

There's no intention right now. But we do talk from time to time internally about when might be the best time to refinance.

All right. Great. All right, I appreciate it. Thanks again.

Michael Prouting, 10K Capital.

My question has been answered. Thanks.

Okay, Mike.

Victor Stabio, Private Investor.

Good job, guys. I remember in 2008 when oil went down so much that you had customers walking away from contracts. Are you seeing that now? If so, how hard is it for them to unwind if they've locked in their prices?

We are seeing more activity from our customers than we may have normally anticipated in conversations about what their pricing is, because of the market change and the amount of coverage in the news and the awareness that the markets have fallen. But since that period of time, our customers, a lot of them, have put themselves into more adjusting plans by nature, just because of what happened during those couple of years with the spike in the market.

So we're not seeing the struggle we saw back then. We certainly are having a lot of customers who are at prices higher than they believe they would want to be. They feel it hasn't moved down enough, in touch with us, because the pricing is generated out of an ongoing inventory cost. It's not connected to that day's market in most cases. So sometimes, there's a disconnect between what they expect pricing to be and what it might be at any given moment. But for the most part, we're dealing with it, I would say. We're doing okay with it.

To follow up a little bit on that, Vic, and for everybody else on the phone. Back in 2008, 45% of our customers or so, were on a pricing plan without a fixed plan. Today, that number as of September 30, is 5.7% on a fixed. So that means the balance are either on variable pricing or on our ceiling program, which basically is a cap.

So, on our ceiling program if prices come down, our cost comes down and the selling price to our customers can come down as well. So, we've changed that dynamic from 2008 today, by significantly reducing the number of customers who are on a fixed price plan. Ultimately, reducing the exposure of -- for those customers. We've reduced off that exposure again for over 40% of our customer base to less than 6%.

Okay, good. Well, that's great. Thank you.

You're welcome.

(Operator Instructions)

I am showing no further questions at this time. I'd like to hand the call back over to Mr Goldman for any closing remarks.

Thank you, Nicole. Thank you for taking the time everybody for joining us today and your ongoing interest in Star Gas. We look forward to sharing our first-quarter 2015 results with you in February. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.