Star Group LP (SGU) 2015 Q2 法說會逐字稿

Good day and welcome to the Star Gas Partners LP fiscal year 2015 second-quarter results conference call and webcast. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Mr. Steve Goldman, President and Chief Executive Officer of Star Gas Partners. Please go ahead, sir.

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 the fiscal second quarter ended March 31, 2015. 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 annual report on Form 10-K for the fiscal year ended December 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. Star Gas' fiscal second quarter was certainly one for the record books on so many levels but we were all definitely pleased with the Company's overall performance. We ended the first quarter of the year still hoping we would see colder temperatures since the weather during the quarter had been somewhat disappointing with temperatures 7% warmer than normal. We certainly got what we wished for and more. In fact, we experienced so much cold and snow during the second fiscal quarter that we were pushing the limits of our operating capacity in most of our locations.

While Boston grabbed most of the headlines for the record snowfall, many additional areas in which we operate experienced snow related conditions which challenged our ability to provide the level of service our customers have come to expect. In many cases, we took unusual steps and went well above and beyond the call of duty all in the name of customer satisfaction.

Some of the adjustments we made worked very well and I believe will enhance our ability to deal with extreme conditions in the future. However, our operations performed (technical difficulty) even under the pressure of extreme weather conditions it was not without significant expense. The month of February was particularly a difficult one with nearly a third of our paid hours being counted as over time. However, we obviously saw benefits in terms of volume growth.

We also continue to benefit from oil prices that were significantly below last year for the same period. This lower cost of product helped us in many ways, including our ability to expand margins and possibly reduce conservation. It may have also positively impacted attrition, although this is very difficult to know for sure at this point. Our net attrition for the quarter was 0.5% and for the full six months, we saw net customer growth of nearly 0.5%. Overall, our net customer attrition for the six-month period was consistent with the same period last year.

Our customer account totals continued to be positively impacted throughout the past quarter by growth in propane accounts across our footprint as well. We were also able to add to our propane account base by completing a small acquisition in early January. With this transaction, Star Gas has begun operating in the northern portion of the state of Georgia, and this is our first entry into this marketplace.

While this quarter was otherwise relatively quiet with regards to acquisitions, it has not been due to lack of activity in the area of productive dialogue with many potential parties. As always, we are very optimistic that some of these companies will become part of Star Gas in the months and years to come. It has never been as apparent to us as during the past quarter that our special team of employees make us a very unique company in today's marketplace. As we continue to improve this team and our structure, we remain committed to producing strong results as we expand our service offerings and the geographic area in which we operate.

Lastly, Star Gas recently announced that it has raised the quarterly distribution to $0.095 per unit. Based on a never-ending effort to strengthen the business and shareholder value, we believe that this increase is part of a rational approach consistent with current and future cash flow expectations.

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

Thanks, Steve, and good morning everyone. For the second quarter, our home heating oil and propane volume increased by 22 million gallons or 12% as the additional volume provided from acquisitions, primarily Griffith, and the impact of 5.8% colder temperatures more than offset the net impact of customer attrition and other factors. Sales of other petroleum products rose 37% to 27 million gallons, reflecting the significant motor fuel volume provided by Griffith. Total sales decline, however, by 15% to $762 million this quarter as an increase in volume was more than offset by the negative impact of a 37% decline in per-gallon wholesale product costs. Total product costs -- total product gross profit rose by 21% or $43 million to $243 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 costs contributed to the per gallon margin expansion.

Having said that, the extreme cold temperatures created spot outages at times and added to the complexity of margin management. As such, our service and installation gross loss grew by $3.4 million, largely due to the impact of colder weather, numerous storms, and the intensity of the winter weather. Temperatures were 19% colder than normal during the quarter, which not only taxed our customers' heating systems but our operations as well. We are grateful for the hard work of all our employees during this period, as Steve mentioned.

Delivery and branch expenses rose $14 million, or 15%, reflecting the 14% in total volume. These costs increased in the base business by approximately 3% on a cents per gallon basis. This increase, along with the higher service expense experienced during the period, necessitated an increase in per gallon gross profit margins.

Depreciation and amortization expense rose by $1.3 million, largely due to the Griffith acquisition, and interest expense was lower by 11%, reflecting a decrease in average bank borrowings of $147 million. In the second quarter of fiscal 2015, we recorded a non-cash credit of $12.6 million for derivatives largely due to closing out of hedges that were marked at a loss in the previous quarter. In the prior year's comparable quarter, we recorded a non-cash charge of $4.1 million.

We posted net income for the quarter of $76 million, or $24 million more than the prior-year period, due to colder temperatures, acquisitions, and a $17 million favorable change year-over-year in non-cash derivative accounting. Adjusted EBITDA increased to $128 million, up $25 million, or 24%, due to higher home heating oil and propane per gallon margins, acquisitions, and 5.8% colder temperatures.

Now, turning quickly to the year-to-date results, for the six months ending March 31, 2015, our home heating oil and propane volume increased by 26 million gallons or 9% as the additional volume provided from acquisitions, primarily Griffith, and the impact of 1.6% colder temperatures more than offset the impact of net customer attrition and other factors. In analyzing these results, please keep in mind that the first quarter of 2015 was warmer than the first quarter of fiscal 2014 while the second quarter of fiscal 2015 was much colder than the second quarter of fiscal 2014. On balance, the aggregate temperatures for the six-month period were colder than last year as well as 8.5% colder than normal.

Volume of other petroleum products rose 52% to 53 million gallons, again reflecting significant motor fuel volume provided by Griffith. Total sales declined by 11%, however, to $1.3 billion as the increase in volume was more than offset by a decline in wholesale product costs of 32% per gallon.

Year-to-date, product gross profit rose by 21% or $64 million $369 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. However, as I said earlier, the extreme cold temperatures created additional service requirements. Service and installation gross profit declined by $3.5 million, again largely due to the impact of the colder weather and the storms experienced in the second fiscal quarter of 2015.

Delivery and branch expense rose $24 million, or 15%, reflecting the increase in total volume of 13%. These costs, though, did increase in the base business on a cents per gallon basis by approximately 4%. As previously mentioned, this increase as well as the increase in service expense drove an increase in per gallon gross profit margins.

Depreciation and amortization expense rose by $3.1 million, largely due to the Griffith acquisition, and interest expense was lower by 8%, reflecting lower working capital borrowings.

We posted net income for the quarter of $91 million, or $20 million more than in the prior-year period. Adjusted EBITDA increased to $173 million, up $34 million, or 25%, due to higher home heating oil and propane per gallon margins, acquisitions, and 1.6% colder temperatures.

Now, moving over to the balance sheet, at the end of the quarter, we had cash on hand of just over $37 million and nothing borrowed under our bank credit facility. Our short-term liquidity has benefited from the significant drop in home heating oil and propane costs. As of today, we have a cash balance of approximately $70 million.

And now I'd like to turn the call over to Steve.

Those are our comments for this call, and we are open at this point for questions.

(Operator Instructions). Andrew Gadlin, Odeon Capital Group.

Congratulations on a terrific quarter. The first question, I missed your commentary on the acquisition from early January. I was wondering if you could talk a little bit about that and then follow up a little bit on the acquisition pipeline.

Okay. We completed a relatively small acquisition in the northern part of Georgia. Obviously, it's a propane acquisition. There's a few thousand accounts. You know, like most of our acquisitions, it was a company that had a very strong brand in the area. We have retained a very strong general manager to run it. We believe it's an opportunity not just as it is but to cut into that territory of northern Georgia and the surrounding area. The pipeline has been relatively good. There's been a lot of conversations going on. It's a mixed bag of people now feel they have one more real good winter behind them and maybe they could consider transitioning out of the business, so there's been some increase in conversation. And at the same time, someone might think -- still thinking about do they want to roll the dice another year? So while we are having a lot of conversations, what will actually take place as a completed acquisition this year is still up in the air. But we are pretty optimistic that we will see some movement with some of these conversations.

And in the conversations, are you seeing a lot of smaller sellers or potential sellers or some larger ones as well?

The full spectrum, small and large, medium, everything. From end to end, we're getting contacts, some propane, some heating oil, some HVAC. We've had pretty much conversations going full-time. And I mentioned several calls ago that I've put in place a full-time acquisition person just to facilitate those discussions, and it's good that we have that because they are relatively long conversations. There's a lot of things to discuss, whether it's just getting to understand their business or the eventual timing of getting a deal done.

And then you mentioned there were some operational initiatives undertaken in this quarter in order to meet your customer service standards. Can you talk a little bit about some of that? And is that still ongoing as well?

Well, most notably, we talked a little bit and we didn't really lay out the math of the demand of the period late January and February, but degree days were over 30% of our expectation during that period. And no efficient operation would plan to have 30% more capacity than you'd need on a normal basis in your planning. Typically, we have 10% to 15% expansion capabilities.

What we did was we exercised some outside resources for the first time as extra utility. We've never gone to that degree where basically we contracted with some companies to bring in resources from outside of our footprint. We had to do some additional training, but we believe that there is maybe a newborn partnership that gives us the ability to have additional resources that won't be on our continual payroll but will give us expansion ability beyond our normal staffing if we are faced with challenges such as this or even going back to what happened a couple of years ago with Sandy. It was something we were somewhat hesitant to do but it actually worked out very well. All the expense for the short period is relatively expensive. The rapid transition of the quality of people that we engaged was very good. So relatively quickly it took some pressure off some certain operations that were under a great deal of duress with the high demand.

Customers were happy with them? There weren't any customer issues with staff that you hadn't been training for years?

No, it was relatively seamless, honestly. Obviously, there were customers unhappy about just the ability to do what we normally do in some areas most of because of the inhibitions we had because of road closures and the amount of snow in areas like New Hampshire, Rhode Island, Boston, parts of Long Island, even parts of Pennsylvania and Maryland during certain days and weeks of the storm. The amounts of snow that weren't cleared during those periods by municipalities was very high compared to what we've experienced in previous years. So that was the greatest challenge we had.

We, I think, were able to mobilize people from all sections of our company and departments to get out in the field and help the customer in a satisfactory way. The thing we couldn't overcome was the actual weather conditions. But I think, all in all, what we've seen as we talk to customers coming out of the season is, for the most part, our customers are pretty happy.

And I assume your competition wasn't able to do the same thing. I assume that problems were tougher for them.

I don't have a good feel for all of them. Some certainly would've had some challenges. They don't have the strength in staffing that we have, especially the smallest of companies. Everybody was facing a good deal of duress. And you know, they were operating in the same situation. They didn't have the resources that we had to call upon and I'm sure, in many cases, we outperformed them.

Okay. Thank you very much.

Bill Gibbons, Locust Wood Capital.

Great quarter and thanks for taking the question. I was just wondering how the Company is weighing the dividend policy versus repurchasing shares with free cash flow, just given what seems to be attractive valuation of the shares right here despite the run-up.

Well, we went up $0.03, right? We went up from $0.35 to $0.38 on our distribution. We are looking at possibly buying in shares, but we've got the acquisition alternatives as well to fund. So we are looking at all -- and we've got some debt out there at an effective interest rate of 9%, so we're looking at acquisitions. We are looking at possibly doing something with the debt and we're also looking at unit repurchases.

Great. And then how do we think about, just given the seasonality and the collection of the receivables, how should we think about the cash balance? Obviously, the $37 million grows as we collect those receivables. How do you think about your -- if we take it on an average basis, how do you think about the cash balance of the Company?

Prices were down over $1 this year versus last year. So when we start looking at cash balances for the future, I'm not so sure $1.60, $1.70 home heating oil prices is what we're going to face in the future. I mean we prepare the Company for heating oil prices somewhere in the $3 per gallon range. I'm not going to say that there is going to be a lot of extra cash because of where heating oil prices are today. If prices go up $1 or so, we don't want to get pinched. But having said that, we are having a pretty good year. So, there will be -- if I had to give you an estimate of what the cash balance is going to be up or down versus last year, I would basically tax effect the growth in EBITDA.

Got it. Thanks very much.

(Operator Instructions). David Spier, Nitor Capital.

Great quarter, really very impressive. So, you continue to do a great job creating shareholder value. You're making very prudent acquisitions, obviously continue to reduce the share count and growing your distribution. I know I've given you some pushback in the past, but it seems like the method and the strategy really just seems to work and I get it now.

So, it looks like you know you mentioned before to previous callers that you are seeing working capital close to $140 million. The question I have is is there any way you can give us an idea of how much further room there is to scale this business up from your current 452,000 full-service customers? Like more or less how big could this business get if you continue on this pace?

That is a really hard question to answer from the standpoint of time looking at it because we -- you know, obviously, our greatest growth is by acquisition, even though we are expanding services, and that's unpredictable. We saw a very large increase in the number of accounts we were able to acquire last year when we acquired the Griffith Company. There were other companies out there like that. We believe, over the next several years, we'll have opportunities to do the same and we are, as you mentioned, prudently managing our capital and our ability to do acquisitions like that down the road.

And you know, we've I think consistently been able to incrementally add to the business on the propane side. There is probably some greater opportunity organically to do this. We certainly have barely got it into our expansion of propane. And I don't think you are going to see anything in the way of a robust explosion of addition of accounts. So --

No, but I'm say -- the question more is over time. How big is this, you know, in your sweet spot of the market?

I don't know that -- now that we've expanded back into propane and we are expanding more on the service side, we don't see ourselves as having real limits. You know, there is no -- obviously our footprint is the limit for heating oil, our old footprint, but it's not a limit when it comes to propane although we have to carefully look at what's the right propane for us. There are a lot of areas that have very low margins and may not be as attractive to us, but we think there's a lot of opportunity in front of us.

And what are the acquisition multiples looking, you know, I guess an idea of what they are looking like right now as compared to when you were (multiple speakers) with Champion?

They are, on the heating oil side, they are probably anywhere from 3% to 4.5% and on the propane side, 4% to -- reasonable companies are saying 4% to 6.5%.

Still relatively attractive, especially compared to the overall economic or financial market where multiples are going out of businesses.

Yes, I think so. We haven't seen any unusual pressure, especially in the last two years, of anything that's not reasonable.

And I know you mentioned this with the last caller as well, that you are looking at the debt. And I ask does it make sense, especially versus -- I'm not saying to hold off on acquisitions but if you were able to pay off that debt and potentially reduce interest expense by $10 million or essentially increase income by around $10 million a year, how do you weigh that decision? Is that a somewhat attractive that you would be able to derisk the balance sheet while also increasing the bottom line pretty substantially?

You know, Rich, myself, our board, we continue to have those discussions as we did back several years ago when Dan was running the Company. It will -- will we do -- we are looking at trying to make the best financial decision for the Company. And acquisitions for the most part, if we had to make a decision of reducing debt that was more fiscally prudent, most of the acquisitions would wait for us, and if not, there will be others. We would make a decision on the basis of what's best for the business first.

Got it. And then the last question I have is in terms of attrition rates. The last few years especially, you've been really able to maintain pretty low rates. How have you been able to do that? Is that the net impact of running a larger scale business and I guess the benefit of that, how has it so dramatically improved from especially 2010, 2009?

Well, a couple of things. One, I think we've been relatively fortunate by having the weather we've had for the last two years.

Right.

That is an incredible gift, if nothing else. I don't want to take credit for some luck. Go back three years ago, we had Sandy. The last two years, we've had very cold winters. And we've always talked about that our value is in our ability to provide service and when people realize what we can provide that other companies can't, there is a good and strong reason to stay with us. In addition to that, we've certainly worked hard at trying to strengthen our mechanism to communicate with our customers better and being more sensitive to the risk involved in our relationship with customers although I think we have a ways to go in that arena as well.

But I'm saying that the overall larger scale of your business, you've mentioned in the past, because you have a larger scale business, that there's a certain area, you can divert trucks that way. Has that enabled you to have much obviously stronger attrition rates in that (multiple speakers)

I don't think so. I think, if anything, the rates are relative. The only thing expansion of areas does do is gives us the ability selectively to try to choose areas that maybe we wouldn't have as much attrition risk due to natural gas conversion. It's one of the things we are looking at when we do acquisitions. How highly vulnerable is an area? We are wishing to get more areas that are little more resistant to the incursions of natural gas.

Got it. All right, great. I appreciate the time. It seems like you guys are really in a solid position right now and looking forward to what's to come.

Michael Prouting, 10K Capital.

It seems redundant, but I guess I'll add my congratulations for the quarter. Just a couple of questions on the debt. Is the debt callable at this point?

Yes, it is.

It is. Okay. And can you remind me? I know you called your debt last time around. I think you had -- how much earlier you called versus when it was due to mature?

Without looking it up, I can't tell you off the top of my head. I don't -- I really don't know. I forget.

Okay, no worries. I can look that up. And so the last question on that, so if you were to retire the debt, do you see yourselves raising additional or -- I don't know what the word is -- raising debt for future acquisitions or other uses of cash, or would your expectation be, as a prior caller assumed, that you would retire the debt and not issue additional debt?

It all depends on the acquisition pipeline that we have before us. Having said that, the bank market to a certain extent is pretty robust, so there might be some capital with our bank group that we might be able to put to use. But we are looking at all our alternatives right now. We are in a fairly good position.

Okay. And then just related to that, obviously yields have moved up a fair bit in the last three weeks or so. That aside, have you gotten any indications at this point of what kind of yield you need to offer?

On the debt?

Yes, if you were to issue.

I have not gotten any indications of what the yield would be.

Okay, all right. Thanks for taking my questions.

There appear to be no further questions at this time. I would like to turn the conference back over to Mr. Goldman for any closing remarks.

Thank you operator. We'd like to thank everybody for your interest in Star Gas and for the questions and for joining us today, and we look forward to reporting on our next quarterly call. Thank you.

The conference is now concluded. Thank you for attending today's presentation and you may disconnect.