Star Group LP (SGU) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Star Gas fiscal 2015 first-quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Steve Goldman, Chief Executive Officer. Sir, you may begin.

Good morning and thank you for joining us today. With me today is Star's Chief Financial Officer, Rich Ambury. After some brief remarks, Rich will review our first-quarter financial 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, Steve, 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 quarterly reports and its annual report on 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. Our first-quarter results were certainly a great way to start the new year, with higher EBITDA, better margins, and net customer gains. We are accustomed to the unpredictable weather patterns that seem to accompany the first few months of each fiscal year and we've become more responsive and customer-focused as an organization following several years of unusual weather patterns.

It seems that the start of the winter always includes a different set of challenges and rewards for us, and with this year being significantly lower oil costs, which bring benefits that can sometimes offset shortfalls and weather, such as we experienced in the first quarter. One of our key corporate strategies is to satisfy our customers in order to create a stronger, more enduring relationship.

But nothing makes a homeowner happier during the winter than a reduced bill to heat their home. Lower oil prices have impacted us in many ways this quarter, including more easily collected receivables, lower working capital-related interest expense, and a better cash position. Hopefully this will lead to fewer conversions to natural gas going forward and into the spring.

One important element of our success is our constant drive to look for ways to improve what we are doing. We as a team look at opportunities for better performance, no matter what time of year it is. And we've spent much of our focus this past quarter working to expand the scope of services to our customers and develop future leaders within the organization. These are very long-term strategies and are both a work in progress, but we are very happy about their development thus far.

In addition, we have had continuing discussions with several potential acquisition candidates and we believe we will see a few of these finalized in the coming months. That said, we were able to close two transactions, one at the end of the quarter and another one in early January, which was a small but important one because it represented an expansion of our business into the state of Georgia.

And lastly, a discussion of this quarter would not be complete without mentioning the excellent job being done by the team at Griffith, which we acquired last year. We are not only pleased with their operating performance, but their organic growth as well, having been a strong contributor to this quarter's customer increase. Their team has integrated extremely well with Star Gas in every way and we are happy they are part of our team.

Overall, I must say that across our entire organization, I see many positive developments and so I'm very optimistic about the outlook going forward.

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

Thanks, Steve. For the quarter, our home heating oil and propane sales volume increased by 3.8 million gallons or 3.6%, as the additional volume provided from acquisitions, primarily Griffith, more than offset the impact of 5.5% warmer temperatures, net customer attrition, and other factors impacting volume. Sales of our other petroleum products rose 72% to 26 million gallons, again reflecting the significant motor fuel volume provided by Griffith.

Our product gross profit rose by 20% or $21 million due to the growth in sales volume as well as higher home heating oil and propane margins. The decline in home heating oil and propane product costs contributed to the per gallon margin expansion.

Service gross profit did decline slightly by $300,000 as the additional gross profit provided from acquisitions of $1.1 million was more than offset by an increase in expenses attributable to the buildout of our service businesses. Delivery and branch expenses rose $10 million or 15%, reflecting the increase in total volume of 12% as well as 5.5% warmer temperatures. Depreciation and amortization expense rose by $2 million, again largely due to the Griffith acquisition.

In the first quarter of fiscal 2015, we recorded a non-cash charge of $5.3 million for our derivatives, largely due to a decline in the market value of certain hedges, driven by the decrease in home heating oil costs. In the prior year's comparable quarter, we recorded a non-cash credit of $5.3 million and that was tied to an increase in home heating oil costs.

We posted net income for the quarter of $15.6 million or $3.7 million less than the prior-year period, as the non-cash derivative change of $13.8 million and 5.5% warmer temperatures more than offset the impact of the Griffith acquisition and higher home heating oil and propane margins. Adjusted EBITDA did increase to $45.2 million, up $9.4 million or 26% as the impact of the Griffith acquisition and higher home heating oil and propane per gallon margins more than offset the impact of warmer weather and an increase in operating costs.

And now moving over to the balance sheet for a second. At the end of the quarter, we had cash on hand of just over $28 million and no borrowings under our bank facility. Our short-term liquidity has benefited from the drop in home heating oil and propane prices. As of today, we still have not borrowed under the bank facility and have a cash balance of $15 million.

And with that, I'd like to turn the call back to Steve.

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

(Operator Instructions) Andrew Gadlin, Odeon Capital Group.

This is Elan Zanger filling in for Andrew. Congratulations on a great quarter. First question -- you guys picked up a substantial amount of gross margin per gallon this quarter. What can you guys attribute that to?

It's basically attributable to the decline in home heating oil price on the way down.

Okay. And also what are you guys seeing in the market right now, specifically regarding price competition as oil prices have been coming down?

I would probably characterize the market as being fully adjusted down to a lower cost position that our customers have now grown used to after the last several months -- and so have our competitors -- to a lower price point than we were a year ago for the same period. So we are back to competing as we were this time last year relative to our ability to provide differentiated service and get the prices we need to produce the profit that we expect to.

Okay. And lastly can you just talk a little bit about the acquisition pipeline? What did you guys pick up this quarter?

Well, in the quarter and the one after the end of the year, we spent about $2.2 million in acquisitions. And that was roughly 5,500 accounts or so.

Okay, great. Thanks, guys. That's it.

David Spier, Nitor Capital.

I applaud you. Really another terrific quarter. I think you guys said it yourselves -- volumes were up. We added more customers, gross profit per gallon increased by double digits, leading to about 25% increase in EBITDA.

I just wanted to check the following with you guys. But by our numbers, it looks like you did around $30 million in cash flow this quarter, which was around pretty incredible, a 60% increase from the prior year. Based on this quarter, looking at next quarter, it looks like in the first half, you should be able to do over about $100 million combined in the first half of the year. And with seasonality, should leave you with about $70 million in annual cash flow and over $100 million EBITDA, which, again, is outstanding.

And -- but you are paying right now $20 million in dividends. And based on historical CapEx, around $10 million in CapEx. So we could be left with around $40 million in cash at the end of the year.

So I bring all this up, I guess, to urge you to really realize the numerous opportunities that we are presented with. I think we could easily increase the dividend to $0.12 per quarter. We'd still be left with plenty of cash for buybacks and a very healthy distribution coverage.

But more so, we are trading at $6.50, which is 4 times EBITDA. And you could look at larger propane guys, like Suburban, Ferrell -- all above 11 times EBITDA. We have 500,000 customers and the market is valuing at $380 million at a less than $750 per customer, where you guys paid I think over $1,000 for Griffith.

So we have an incredible opportunity to either significantly ramp up this buyback or increase the dividend, because you guys are just running this business, you know, and in a tremendous way right now and it seems like we have a lot of tailwinds.

So I'm just curious. I know I've just presented a lot there. But you know, if there -- as a response to that, because it just seems like we have a great opportunity to buy this back at a real discount to what the Company should be actually worth.

Well, I'm glad you are able to put some of those numbers together.

I hope they are right.

I'm not going to comment on your numbers, because we don't comment as to whether projections are accurate or not accurate. But yes, we have our unit repurchase program in place. And each year, I believe it's at the next Board meeting, we will evaluate -- I think it's the one after that -- we evaluate whether we are going to increase the distribution or not. So we do that annually and we still need to tuck away some money for acquisitions.

Yes!

If a $50 million or $60 million acquisition came along, we need the cash to make that type of acquisition -- or five $10s million or two $25s million.

No, I -- believe me, I understand. It's more regarding that if you look at your valuation now versus the amount of customers you have, it seems like you are the best deal around and especially the way you guys run the business, you know. I have a lot of confidence just buying back that product versus, you know.

Obviously, you need to do acquisitions to keep the business growing, but still, it seems like an incredible opportunity right now to buy back the shares at a faster pace.

Yes, one of the things I would say about all of that is -- and it kind of ties to Rich's comment. While what you just suggested is a calculation of possibly what could be, based on past activity and results, there is certainly no certainty of that, obviously.

But what we did a couple years ago was we shifted our decision-making on any adjustment to distribution to the second quarter, because a good portion of our earning period would be gone, passed for the year, getting out of the winter into the spring. And also we'd have a decent view -- not necessarily a complete view -- of what acquisitions we thought were within our grasp or in progress.

And obviously, that's the only stuff we know at that time, but it helps us make a well-balanced and healthy decision of what the best expenditure of that capital is. And I think if you've been following Star Gas for the last several years, what you will notice is when we're done doing all the things we need to do, there hasn't been a lot left over. That we wind up paying, again, a reasonable distribution, doing the acquisitions that we can, investing in CapEx, making decisions that help the Company continue to grow and move forward in the directions it needs to be to be as competitive as it can be in the areas that we are now stretching out into.

It's not just an expansion of service, but again, one of the things in my comments was we have now broadened our presence into another state, which is Georgia. You know, a couple years ago, we went into the Carolinas. And those are areas that are not built out. And one of the things that we need to do to sustain and facilitate continued growth and hopefully expanded profitability is to invest in some CapEx in those areas beyond those acquisitions.

So I certainly think your comments are fair and they are not unusual for us to hear on this call, but our approach has been steady and balanced and I think that's what you continue to expect from Star Gas.

Yes, no, don't get me wrong. You guys have done an absolutely incredible job with this business. And again, as I say, I applaud you for that. I just -- when every day, I look at Star Gas and I say to myself, this is a huge opportunity. That's why we are buying shares.

But it would seem to be that selling -- the market is not properly valuing this Company and you might as well just take advantage of it. That's the only -- the last comment I'd make.

And we appreciate that.

But again, I appreciate it. Great job, guys, and looking forward.

(Operator Instructions) Michael Prouting, 10K Capital.

Thanks for taking my questions. So I guess to echo comments made by other callers, certainly congratulations on the margins. In terms of capital allocation, which I think was the thrust of the last questioner's issues, you mentioned in your prepared remarks that you are looking at several acquisitions.

Can you give us a sense of the size of those deals you are looking at? And you mentioned the need for -- to retain additional cash in case a large deal comes along. Are you seeing a likelihood of a large deal?

We look at acquisition each and every day. We can't comment as to whether a large one is going to pop -- let's say $50 million or $60 million -- or even $0.5 million. We just really can't comment. We look at these each and every day.

Okay. Thanks, Rich. And then as far as valuations go, can you update us on what valuations you are seeing in the marketplace?

I'm sorry. I missed the first part of your question.

Yes, valuations on potential acquisitions.

Again, we've said that we make acquisitions between 4 -- hopefully less than that -- it's 5 or 5.5 times EBITDA, depending on the acquisition and depending on how strategic it is for us.

Okay. And I guess to echo the previous comments, as you know, Rich, I have been singing the same song for many years now. And as far as capital allocation goes, I think it would certainly make sense to continue to increase the dividend at a measured pace. Any reason we should expect a deviation from that going forward?

Again, we will evaluate it at the next Board meeting, which would be after the heating season. Okay?

Okay, terrific. Rich, as you know, aside from fundamental investors looking for dividends, there's also a lot of funds out there that scream for dividend increases. And so to the extent that you are interested in my advice, my advice would be to continue the consistent increase in the dividend.

So as far as acquisitions versus buybacks, I would echo the comments of the last caller that it seems like it would make a lot more sense to be buying back stock more aggressively, given your cash position. [Or instantly], it seems like a better use of cash to buy your own stock at 4 times EBITDA versus acquisitions. What's -- or how do you go about thinking about that?

We measure what we think that the excess cash that we are going to generate each year and we look at the acquisitions available. We do -- even though attrition is down, we do have to make some acquisitions to kind of keep our customer base relatively flat. And we've made great inroads with that.

But yes, we have a great cash position today. Let's not forget that this is the lowest heating oil prices have been in an awful long time. And if prices go up to $3.00 a gallon or even $4.00 a gallon, our costs -- there's going to be a significant erosion in the favorable cash position that we have today.

Okay. All right, thanks for taking my questions.

Let's just keep in mind that these lower prices -- it's something that we really haven't seen in a long time for an extended period of time.

Yes, actually, just to add onto that. Rich, again, this is something you and I have talked about before. As far as acquisitions go -- and as you've stated many times on calls previously -- there are not a lot of synergies, certainly on the cost side. And it would seem also, even on the market side, given the competition you see in the market, so there's really no synergy rationale for making acquisitions.

My question, I guess, at base -- and I think other people have raised this question as well -- is that at one level, why even make small acquisitions? Certainly, I see the rationale of making a large acquisition, like Griffith.

But I mean given that the owners of a lot of these businesses are going to retire, why not compete those customers away rather than pay 4 times EBITDA for them?

Well, I guess it's a basic understanding of this industry that there is an enormous amount of brand loyalty. Probably 80% to 85% of customers are not very movable, even by aggressive pricing. And the only way to maintain and/or capture more share or even expand your business is by buying acquisitions.

I want to go back to one thing you said, saying that there's really no synergies. That's not really true. Especially in the long term, there are synergies over periods of time.

What we usually say is we don't bake in a large amount of synergies in our initial calculation of buying an acquisition into the valuation of those. We do model them for ourselves and it could take two years, three years, four years to achieve all the synergies that we expect to derive out of multiple or even medium-sized acquisitions in certain geographies.

So that characterization that it's almost wasteful to do an acquisition isn't really accurate. The businesses that we end up buying -- and I think we've mentioned again before. We probably look at 25 or 30 acquisitions to every one that we wind up buying. The ones we buy are carefully selected that they do contribute to what we are doing. And we see an avenue where, in turn, they will give us a return that's equal or greater than buying back our shares.

And Rich goes through this exercise periodically for us internally and for our Board when we're making decisions about what would be the best point when we are buying back shares as well as what level of multiple we are going to pay for certain acquisitions so we get a return.

Okay, that's helpful. And then I guess just a quick follow-up and I'll get off the call. As you model those longer-term or medium-term synergies, can you identify or, you know, just breadbasket, put brackets around the source of those synergies, whether on the cost side or the revenue side, and to the extent that they are on the cost side, the contribution towards that?

I could do that relatively easily. And I can't give you dimensions and I can't give you dollars or a way to calculate how it will impact anything.

Sure.

But most immediately, there are back-office synergies in the way that we purchase certain services, whether it's legal or buying supply or insurance or buying fleet replacement. Because of our size, there are certain synergies that we have benefit of that many of these small dealers don't enjoy.

The other things that -- is a baked-in synergy. And the reason why you want to keep doing acquisitions to get the return out of this business is we have fixed operating costs to just maintain this business, whether it's facilities or senior management groupings or all the other things that come along with running a business of this size. Corporate compliance. And those things are not really scalable down, even though we try constantly to reduce expense.

So one of the ways to balance all of that is to increase what we do as far as bringing in new sources of revenue. Some of that is -- our goal is to bring in new sources of revenue by expanding other product lines. But one of the easiest ways is to identify acquisitions that we could buy at a reasonable or really good multiple that would help offset and defray some of that expense.

Okay. I appreciate the additional color.

(Operator Instructions) At this time, I'm not showing any further questions. I'd like to turn the call back to Mr. Goldman for any further remarks.

Thank you. We thank you for taking the time today to join us and for your ongoing interest in Star Gas. And we look forward to sharing our second-quarter 2015 results with you in May.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.