Star Group LP (SGU) 2015 Q3 法說會逐字稿

Hello and welcome to the Star Gas Partners' fiscal 2015 third quarter results conference call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Steve Goldman, Star Gas Partners' Chief Executive Officer. Please go ahead, sir.

Thank you, Chad. Good morning and thank you for joining us today. With me today is Star Gas Chief Financial Officer Richard Ambury. After I provide some brief remarks about the quarter and first nine months of fiscal 2015, Rich will review the fiscal third quarter ended June 30, 2015 and year-to-date 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 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 reflected in such forward-looking statements are reasonable, they 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 report and its 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 takes no obligation to publicly update are 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 back over to Steve Goldman. Steve?

Thanks, Chris. We know that this has been extraordinary fiscal year thus far as we have been benefiting greatly from falling oil prices and an incredibly cold period this winter, unlike anything we have seen in recent memory. And we are pleased that we have been able to retain much of the benefit of these factors despite an uneven year for weather. Our first and third quarters were certainly not what we had planned for or what we were counting on in terms of temperatures.

Our first quarter you may recall was warmer than normal which challenged us in several ways. It caused equipment sales to be slower than expected and tempered our ramp up of staffing prior to the coldest part of the winter season due the uncertainty as to how the rest of the winter would proceed. We also faced competitors who were much more aggressive on price, we believe, due to the lack of weather and related volume. The second quarter was starkly different with its severe temperatures and numerous snow storms such that we saw increased expense related to service and maintenance for both of these during that -- the second quarter and third quarter. I mention this because our third quarter results were somewhat mixed but given the temperatures and other factors impacting it from the quarter before we believe the partnership operated to the best of its ability.

In terms of whether the third quarter was cooler during the beginning but that exclude higher temperatures during May and June, warm days specifically over 90 degrees, helped to drive air conditioning equipment sales and service. So despite the somewhat unusual weather patterns we believe we have still been able to deliver what are solid results. Our EBIT and attrition continue to support our belief in that by focusing on the customer and on the efficient operations we're making Star Gas a stronger business every day.

One of the areas of improvement that I have spoken about in the past is training and I think it's important to mention that we are now in the process of creating and internal culture of continuous improvement. We have put in place several new processes to improve the way our employees perform to both better please our customers as well as strengthen the bottom line. While we are in a beginning phase of these initiatives, our employees have reacted positively to everything we have implemented thus far.

I mentioned earlier that we're pleased with our attrition numbers this year, but the third quarter's net attrition was slightly worse than the same period last year. And so our sales group has redoubled its efforts to replace these accounts by reaching farther out of our existing footprint for new customers. That said, one area of our customer segment that does continue to grow very well has been and is propane, and these operations certainly have room to expand even further. In that vein, I would like to mention we just began operating in eastern Tennessee this month.

We continue to try new things to constantly improve our operating results. Notably, from a marketing perspective, we expanded the use of social media and billboards as two examples to better separate the message about our ability to do more than just service heating equipment.

As we all know, acquisitions are always an important part of our measure of success, and in this regard I would like to mention that we are in the final negotiations and hopefully we will close soon on another great addition to the Star Gas family of businesses in a deal worth approximately $20 million. If so when completed we will announce this acquisition. Aside from there acquisition we are also continuing to speak to several other large and small potential owners as usual.

Before turning the call over to Rich, who will be discussing our financial results, I would like to thank him and his team for the tremendous effort that we went through in closing on a new credit agreement which allows us to redeem our high interest notes outstanding. This took a great deal of time and will strengthen our company financially.

With that I would like to you were it the call over to Rich.

Thanks Steve and good morning everyone. For the third quarter of fiscal 2015 our home heating oil and propane volumes decreased by 6% versus last year, or 2.6 million gallons, to 45 million gallons. Heating degree days were 15% warmer than during the prior year's comparable fiscal third quarter and 22% warmer than normal. Note that temperatures during this non-heating period are not as impactful to annual volume sales as during the heating season. Our heating and oil propane margins increased by over $0.07 year-over-year to approximately $1 per gallon. As a reminder, since the third quarter, the non-heating period with relatively low overall volumes margins can be impacted quite easily.

Total gross profit was $52 million, slightly lower than last year, as home heating oil and propane margins were offset by the impact of lower volumes. Star's net loss declined by $1 million to $8.4 million largely due to a favorable noncash change in the fair value of derivative instruments. The adjusted EBITDA loss for the quarter increased by $900,000 to $9.3 million as the impact of higher home heating oil and propane per gallon margin was more than offset by the decline in volume attributable to the warmer weather and a decrease in service and installation profitability.

Now let's review the nine month results. Home heating oil and propane volume rose by 7%, as acquisitions, primarily Griffith, more than net customer attrition, conservations, and other factors. In analyzing the results, please keep in mind that the first and third quarters of fiscal 2015 were warmer than the first and third quarters of the fiscal 2014, while the second quarter of fiscal 2015 was much colder than the second quarter of fiscal 2014. On balance the average temperatures over the nine month period were approximately equal to the average temperatures of the prior year's comparable period, and 5% colder than normal.

Volume of other petroleum products rose 27% to 76 million gallons, again, reflecting the significant motor fuel volume provided by Griffith. Total sales declined by 13% to $1.5 billion versus $1.7 billion in the prior-year period as the additional sales provided by acquisitions were more than offset by lower selling prices in response to a decline in wholesale product costs of 32% per gallon. Year-to-date product gross profit rose by 18% -- rose 18%, or $64 million, to $421 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. However, as we have mentioned on earlier calls, the extreme cold temperatures during the second fiscal quarter of 2015 created additional service requirements. Service and installation gross profit declined by $4 million, largely due to the impact of the colder temperatures and storms experienced in the second quarter of fiscal 2015.

Delivery and branch expenses rose by $23 million or 10% reflecting the increase in total volume of 10%. These costs increased in the base business on a cents per gallon basis by approximately 3%. As previously mentioned, this increase as well as the higher service expense increased our per gallon margin gross profit requirement.

Depreciation and amortization expense rose by $3.5 million largely due to the Griffith acquisition and interest expense was lower by 19% reflecting lower bank borrowings. Net income increased by $21 million to $83 million due to the impact of higher home heating oil and propane margins, acquisitions, and a favorable noncash change in the fair value of derivative instrument. Adjusted EBITDA increased by $33 million, or 26%, to $164 million as the impact of higher home heating oil and propane per gallon margins and acquisitions more than offset higher operating and service costs largely attributable to colder temperatures and the numerous snow storms experienced during the second quarter of fiscal 2015.

Now let's move over to the balance sheet for a second. We recently announced that we entered into a new five year asset based revolving credit facility that provides the ability to borrow up to $300 million, $450 million during the heating season, for working capital purposes. The credit facility also provides for a $100 million five year senior secured term loan. Proceeds from the term loan along with character on the balance sheet will be used to redeem our 8.875 senior notes due 2017. The term loan payment schedule is comprised of $10 million per year plus 25% of excess cash flow with a final payment at maturity. We inspect to see lower interest expense going forward through this new debt structure.

And with that I would like to turn the call back to Steve.

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

Thank you. (Operator Instructions). Our first question comes today from Andrew Gadlin with Odeon Capital.

Good morning. Thank you for taking my question.

Good morning, Andrew.

Oh, thank you. You mentioned earlier in the call that there is an acquisition in the works for approximately $20 million in proceeds. Can you talk a little bit about geography or business mix?

It's a New York area company located on Long Island. It's about somewhere around 19,000 customers. It's a business that more or less reflects our average retail heating oil type business in the area. It's a very strong competitor of ours so we think of it a very strong brand. As I mentioned in the past, it's one of these acquisitions that we have been speaking to on and off for years to try to get to this point. We are very excited about the opportunity because we believe it's a very good addition to Star Gas.

And if the acquisition closes mid-quarter would you guys put out a press release just to let us know that it's been done?

We will file a press release or an 8-K.

Got it. Thanks. And then in terms of the term loan that you're taking out, could you remind me what the interest rate on that term loan is?

Well, it's variable and there is a grid but the lowest grid is LIBOR plus 3.25%.

Got it. With a hundred basis points floor?

There is no floor. There is no floor.

Oh, okay. And in terms of that facility as you think about it, priorities for cash flow in the near-term -- would you say you would want to pay that debt down as quickly as possible or balancing the opportunities in share buybacks and dividend increases, et cetera?

Sure. We want to balance -- we want to balance everything out. The way the excess cash flow covenant to repay anything back over the $10 million it includes acquisitions. So there's no hurry to pay back that -- that loan so if at the end of the term there's a $60 million bullet which includes the $10 million final maturity, so be it.

We don't believe that doing this alters our strategy from what we have been doing for the last several years, which is looking to make the best use of our earnings to better the business and strengthen the investment of those people that have believed in us up to now.

Got it. Alright, guys. Thanks very much.

Thank you.

The next question comes from James [Vermeulen] with Locust Wood Capital.

Hi. I would just like to congrats you guys on a strong third quarter and at Locust Wood we're just wondering how you guys think about your dividend payout ratios.

Yes. We evaluate our dividend payout each and every year. It's usually sometime in April of the fiscal year. Depending on how -- what kind of year we're having and what our opportunities for acquisitions or paying back this debt although we probably with this lower rate it's not very attractive to keep this outstanding and unit repurchases.

Rich, this is Steve also from Locust Wood. Great job. You guys have done very well for us over the year. Would you guys think about in the future reporting your results more in a distributable cash flow basis? I mean obviously we can figure it out but the type of people who are following your company it might be helpful to them. Have you guys given any thought to that?

No, we really haven't given any thought to that. It's just another non-GAAP SEC type term and I am not so sure we want to really go down that road right now.

Okay. Great. Well, again, great job and thanks -- thanks for everything you have done for us.

Thanks, Steve.

The next question comes from David Spier with Nitor Capital.

Hey, guys. How are you?

Good, David.

I just wanted to -- most of the questions have already been asked. I just wanted to clarify on the term loan, you mentioned about $10 million in annual payments. That's -- you're referring to principal payments?

That is correct. That is correct.

So -- okay. So essentially it's $10 million principal payments thus and then the interest on that is LIBOR plus you said 375 basis points?

Well, there is a grid depending on our availability, yes.

Okay got it. Okay. Alright. Makes a lot of sense. So essentially available to take down that debt which you were previously paying about I would say $11 million in interest payments so you are going to be able to take it down slowly over time and you estimate about $60 million in the final balloon payment so that's -- that's correct?

Yes. Although there is a -- we do have to set aside 25% of excess cash flow to pay that final maturity during -- for each fiscal year.

Got it alright. Makes sense. Alright. I appreciate it, guys. Thanks.

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

Morning, guys. Thanks for taking my questions.

Good morning, Michael.

Good morning, Michael.

I apologize in advance for this background noise. I am at an airport this morning. Just by the way, congratulations on the debt refinancing. So it sounds like the strategy really is to not pay that down any quicker than you have to and keep the firepower for any large acquisitions that might come along?

Yes. That's pretty much it, yes.

Okay. That's -- that makes total sense. You talked about an acquisition that you're in the final stages of closing right now. Can you just give us a sense of how the acquisition pipeline looks at this point? And also in particular any larger deals that might be out there on the horizon.

It looks probably like it's been looking for the last several years. We're speaking to four or five different people in different parts of our geography right now. We're always looking to get some others going at the same time. We don't have anything extraordinarily large that's imminent right now -- but, again, we continue to speak to all potential acquisitions for down the road. And as I mentioned before, this took really several years to get this one done. So we really never know when the seller will be ready to go ahead and finalize the transition. So again, it doesn't look any better than it did before, but it certainly isn't any worse and I think our opportunities are out there and we're happy where we are with that.

Okay. I appreciate the color on that and I would assume also that as far as valuation is concerned that you're still within your historical parameters in terms of what -- what you would be willing to pay?

That's correct.

Okay. And then just one -- I guess one somewhat random question. I know there's been discussion previously about collapsing or getting rid of the limited partner structure. I am just wondering if that is something that is on the front burner or something that's still under consideration.

It's -- it's sure not on the front burner, but that doesn't necessarily mean that we won't look at it from time to time.

Okay. Alright. That covers the questions I had. Thanks for -- thanks for taking my questions this morning.

Okay, Michael.

Our next question comes from Gary McHam with McHam Taylor and Company.

Good morning. Can you hear me okay?

Yes, we can.

Okay. Steve, I believe it was you that said just a couple of minutes ago concerning the cash flow, the 25% cash flow to payback on the term loan. You used the phrase set aside. I had read I thought that this had to be paid and not set aside.

You're right. It is to be paid from the 25% of the excess cash flow.

Okay. At the -- at the end of the term or can you do it -- or is it along the each of the five years?

Yes. The way the term loan works is we pay $10 million a year for each -- each fiscal year. At the end of each fiscal year we basically see what the excess cash flow is as defined, which is roughly EBITDA less interest less taxes less fixed assets less pension payments as well as any acquisitions that we might make.

There's a cap on -- there's a cap on it, is there not?

Yes. The cap would be $15 million. That is correct.

Yes. Okay. Alright. So it's not set aside necessarily. It is to be paid. Okay.

That is correct.

Okay.

Sorry for the term.

That's okay. I just wanted to clarify. That's all I have.

Okay.

Our next question comes from Gene Riley, a private investor.

Hello there.

Hi.

I have a question about the stock -- the unit repurchase program. The last two years you have been having record earnings and record cash flow, but you seem to have ground to a halt on the repurchases. When does that turn around?

Again, we look at all our opportunities whether it's acquisitions, having cash on the balance sheet to take debt off the table it's almost at 9%. We look at it all, at various prices and analysis.

Okay. Thank you.

You're welcome.

(Operator Instructions). At this time there are no further questions so I would like to turn the conference back over to Steve Goldman for any closing remarks.

Okay thanks, Chad. Thank you for taking the time today in joining us and for your ongoing interest in Star Gas. We look forwards to sharing our fourth quarter 2015 results with all of you in December.

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