Star Group LP (SGU) 2015 Q4 法說會逐字稿

Good morning, and welcome to the Star Gas Partners LP FY15 fourth-quarter results conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

Please note this event is being recorded I now would like to turn the conference over to Steven Goldman, CEO. Please go ahead, sir.

Good morning, and thank you for joining us today. With me today is Star Gas' Financial Officer, Rich Ambury. After some brief remarks, Rich will review the fourth quarter and fiscal year ended September 30, 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, Steven, 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 Partnerships believe that the expectations 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 annual report in Form 10-K for the fiscal year ended September 30, 2015.

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 Steve Goldman. Steve?

Thanks, Chris. We believe this past year will be a memorable one for Star Gas for several important reasons. While our financial success in terms of EBITDA was certainly noteworthy, we had many other accomplishments, particularly with regard to growing our footprint, expanding our service offerings, and improving Star's overall operating performance.

The work we're doing to strengthen the Company has resulted in a more responsive, customer-focused organization, no matter what challenges each season brings. This past year's falling oil price, combined with the extraordinary weather experienced at the end of January into February, offered great opportunities to showcase our unique abilities and superior customer service. While the Partnership posted record adjusted EBITDA, we did not lose sight of our balanced approach to managing the business, and so we were able to achieve our second-best year for attrition despite the extreme weather challenges this past winter.

We continue our dedication to all previously stated objectives, including leveraging acquisitions to grow in both volume and footprint, expanding services and improving our team by investing in training programs. In addition, this past year we began several new initiatives, including the use of industrial engineering to improve performance, the exploration of boosting customer satisfaction through a more interactive relationship, and new methods to improve our safety culture and reduce accident-related insurance claim expense.

Our acquisition efforts resulted in the addition of three businesses this fiscal year. While two of these were relatively small in size, the third entity, which services residential and commercial oil customers on Long Island, not only added a strong brand for Star but also roughly 18,000 accounts.

One of the other transactions completed in January of this year expanded our footprint into Georgia for the very first time, and subsequently led to the expansion of one of our brands there, as well. With this purchase, Georgia Mountain Gas, we saw the ability to create what we think will be an attractive brand for several areas of the southeast.

We are calling this brand Mountain Gas, and have already expanded into Tennessee this October and into a second location in Georgia. Our multi-directional geographic approach will continue as we seek to increase our services to more and more homeowners across the East Coast.

Several other accomplishments this year were the result of hard work by a number of individuals to reduce long-term administrative costs and risk to the Partnership. Some of the more notable of these achievements include the refinancing of our debt, resulting in significantly lower interest rates; the completion of an updated agreement for New England Teamsters and trucking industry pension fund, and the consolidation of our Woodbury, New York, business center. I'm really proud of such initiatives and what they've done to strengthen Star over the long term.

Our propane operations continue to be where we see the greatest potential for growth going forward, but we have begun to focus on expanding in other areas, as well, particularly in natural gas servicing, plumbing, home generator service, appliance repair and installation, and home security. We believe these complementary services represent opportunities where we can penetrate more homes and strengthen our long-term relationships with existing customers.

In closing, I always like to put credit where credit is due. We have a great Management team, and employees that are just as incredible. We believe so much in the strength of our people that we have decided to expand several programs which we believe will further unlock their potential, and continue to strengthen our Company as a leader in the home service market place. With that, I'll turn the call over to Rich Ambury to provide some comments on the quarter and the year end's results. Rich?

Thanks, Steven. Good morning, everyone. For the fourth quarter of FY15, our home heating oil and propane sales volume decreased by 5% versus the same quarter last year, or $1.1 million gallons to $21 million gallons, and sales of other petroleum products fell by 3% to 25 million gallons.

Our home heating oil and propane margins increased $0.26 year over year during the quarter to approximately $1.20 per gallon. As a reminder, the fourth quarter is a non-heating period with relatively low overall volumes, so margins can be easily impacted quite easily. We also benefited from a continuing decline in wholesale product costs.

Total product gross profit rose by $5.2 million, as the impact of recent acquisitions and higher home heating oil and propane margins more than offset a decline in home heating oil and propane volume. Delivery and branch expenses rose by 7%, or $4 million, largely due to acquisitions, which accounted for $1.6 million of the increase. We also saw higher sales and marketing expenses of $1.7 million in the base business.

We posted a net loss for the quarter of $45 million, or $19.5 million higher than the prior-year period, reflecting the previously announced non-cash charge of $17.8 million related to the multi-employer pension plan, and a charge of $7.3 million related to redeeming and refinancing the Partnership's $125-million senior notes, also previously announced.

Refinancing of the Partnership's debt will result in lower interest expense going forward, and the new multi-employer pension plan is expected to reduce risk in terms of future obligations. The adjusted EBITDA loss for the quarter increased by $700,000 to a loss of $23.1 million.

Now let's review the full-year results. Home heating oil and propane volume rose by 6% this fiscal year, as acquisitions, primarily Griffith, more than offset the impact of net customer attrition, conservation, and other factors. In analyzing the results, please keep in mind that the first and third quarters of FY15 were warmer than the first and third quarters of FY14, while the second quarter of FY15 was much colder than the second quarter of FY14. On balance, aggregate temperatures for the 12-month period were approximately equal to the average temperatures in FY14, and 5% colder than normal.

Volume of other petroleum products rose 18% to 101 million gallons in FY15, again reflecting the significant motor fuel volume provided by Griffith. Total sales declined by 15% to $1.7 million, versus $2 million in the prior-year period, as the additional volume provided by acquisitions was more than offset by lower selling prices in response to a decline in wholesale product costs of 33% per gallon.

Product gross profit rose by 18%, or $69 million, to $454 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 we have mentioned on earlier calls, the extreme cold temperatures experienced during the second fiscal quarter of 2015 created additional service requirements. Service and installation gross profit declined by $4.6 million, largely due to the impact of the cold weather and storms experienced during this period.

Delivery and branch expenses rose by $26 million, or 9%, reflecting the increase in total volume of 8%. These costs increased in the base business on a cents per gallon basis by approximately 4.5%. As previously mentioned, this increase, as well as the higher service expense, necessitated an increase in per-gallon gross profit margins.

Depreciation and amortization expense rose by $3.3 million, again largely due to the Griffith acquisition, and interest expense was lower by 17%, reflecting lower bank borrowings.

Net income increased by $1.5 million to $37.6 million, as the impact of higher home heating oil and propane margins and acquisitions was largely offset by the non-cash charge of $17.8 million relating to the multi-employer pension plan, and a charge of $7.3 million relating to redeeming and refinancing the Partnership's $125-million senior notes.

Adjusted EBITDA increased by $32.5 million, or 30%, to $140.5 million, again 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 the colder temperatures, and the numerous snowstorms experienced during the second quarter of FY15.

Now looking at the balance sheet, as of September 30, 2015, we had $100 million in cash on hand, and long-term debt of $100 million. In FY15 we were able to pay distributions of $21 million, fund acquisitions and capital expenditures of $30 million, reduce long-term debt by $25 million, and our cash balance increased by $52 million year over year. With that, I'd 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.

Yes, thank you. We will now begin the question-and-answer session.

(Operator Instructions)

At this time we will pause momentarily to assemble the roster. Andrew Gadlin, Odeon Capital Group.

Hi, guys, good morning.

Good morning, Andrew.

I wanted to just ask about priorities for cash flow. Your net cash position right now, obviously capital -- the business is capital intensive, and we're entering that period of the year. How do you think about priorities for cash flow? Is there still robust M&A pipeline? Do you think about share buybacks, special dividend, any of those factors?

We still look at acquisitions each and every day that come along, and we do our analysis. We're also looking at buying some unit buybacks at attractive prices. We look at our distribution. We look at our distribution each and every year in the second fiscal quarter. We usually announce that in April. At that time, we'll see whether we're going to go up on the distribution. There has not been much talk about any kind of special distribution.

Got it, thanks. From a competitive landscape view, how do you see it now? Is it more intense with lower oil prices or not?

I think the current level of oil prices as low as they are today, combined with this mild fall that we have had, have made the best competitors in the marketplace very aggressive. It's about as aggressive and competitive a market as we've seen in the last few years.

Got it. All right, thank you very much for your time.

Thanks.

Thank you. Michael Prouting, 10K Capital.

Yes, morning, guys.

Good morning, Michael.

I apologize both for any background noise as well as any hacking coughs you may hear during my questions. I had a few questions actually, but I will try to move through them quickly. Firstly, you mentioned customer retention. It looked like during the fourth fiscal quarter the major difference year over year was on customer gains versus customer losses. Just curious why gains in the fourth quarter were so much lower than the prior year?

We certainly don't know for sure, but what we believe is the strong reduction in pricing over the last 14, 15 months have left many customers without the catalyst to go shopping for a new company. That, combined with no major weather events that would have caused that during that quarter, and we believe we also enjoyed some extra gains mid-year coming off of our performance of last year's winter.

A lot has to do with where oil prices are right now. A lot of people are just sitting comfortable where they are and having lower renewals, which makes them not such big shoppers.

Okay, understood. I guess that was despite the additional $1.7 million in marketing costs in the quarter, right?

It is, and it's actually in the face of that. A lot of that marketing cost, though, has gone to product expansion. More propane presence, as well as forays into natural gas service in some areas we haven't been, and some additional security marketing, plumbing and appliance repair. Just trying to get recognition that those are part of our mainstay suite of value offerings to our customers, and what it takes to get that in the face of over 0.5 million customers. In some regards, it could be expensive or more expensive for some of these one-off service offerings to get attention, especially when it comes to marketing on the Internet.

Okay, fair enough. As you look at FY16, in light of your comments on people having license enough to switch given where heating oil prices are today, any thoughts on whether you can keep or maintain a low rate of customer loss as we've seen in the last couple years?

It's our focus on a daily basis, not just getting new accounts, but holding on to the ones we have. Obviously those are the most valuable customers, ones that we've had a longer relationship with. It's a challenging market for doing that, certainly the temptation for customers to look around. We're trying to stay in front of that with the best of our abilities. I think we're better at it than we've been before. We have some new internal tools to make us more aware of customers that may be showing less signs of loyalty. We're hopeful that we can stay within a small band of what we've been executing in the past.

Okay, terrific. Moving on, delivery and branch expenses. I actually had that model quite a bit lower. Certainly if you look at calendar Q4 of last year compared to Q3, delivery and branch expenses dropped considerably, whereas this year there was a much smaller decline on a sequential basis quarter over quarter.

You mentioned the $1.6 million in acquisition costs and $1.7 million in marketing. But of course last year you had costs associated with Griffith. I think I'm still struggling to understand a little bit why delivery and branch expenses were up so significantly on a year-over-year basis in the fourth quarter, and in light of that what we can expect for 2016?

Well, I can't make any predictions for 2016, but again, we did make some acquisitions in the quarter. We did have Griffith. We did have Griffith in the prior years, as well. We have normal increases, whether it's for insurance, comp and benefits, as well as some profit sharing expenses, too, could go up.

I'll give a little additional color. I don't think it's -- what I would say is there were small things that added up to some big difference in numbers. Some of those small things -- and I would characterize them as good, small things -- that did cost us some more money in the quarter.

One is additional training that I mentioned in my talk. We began a program where we put over 400 front-line employees through a special program to better relate to customers as they interact with them. Certainly not an inexpensive process. We believe that ultimately we'll get all our employees through that program. It involves the cost of the labor plus the cost of the training. That's delivery people, installers, service people, as well. Plus, we've started expanding some security, as I mentioned. Again there's expense related to that. Not just local marketing, but some direct installation expense.

Thirdly, along a similar line, I talked about the expansion to Tennessee. During the fourth quarter of this year, we began all the actual groundwork for the expansion of Tennessee. In its origins, and this is the first time we're really experiencing it for a standalone propane business, the net expense in the beginning is a net minus. There is very little revenue coming in, and at that period during that fourth quarter there was really no revenue coming in to speak of. There was marketing, local advertising, ground set-up expense, licensing locally in Tennessee, administrative costs, managerial costs, you name it. Basically constructing an acquisition from scratch. Those are all expenses.

Obviously, each one we do will incur expense, and over -- we believe over a relatively short period of time, we'll see return on these investments. These are not things we saw in 2014, so they stand out in my mind as something very different and characterize some expense differences during 2015.

One other thing I will say, we still labored through additional service expense as an overhang from the second quarter of 2015's winter. It took us through September of 2015 to actually catch up with some maintenance work in almost every area of the function in the field, which is service, fleet, which goes right into delivery, and in some cases, installation.

It's plant, as well, recovering from the winter.

Okay, that's actually really, really helpful to get the color on that. I appreciate that. Given those comments, any color on the extent to which those costs were -- issue a one-off cost for the fourth quarter, and mixed into which those costs -- be they training costs or costs associated with new products or geographies, or what have you -- the extent to which those costs are going to be ongoing for 2016?

What I can say is this. They are one-off on the basis that they are controlled events that as we manage the business and we see opportunity to balance our expenditures versus our planned profit for periods, we will take advantage of that. If we have forces working against us, whatever they might be, that make them more difficult to execute, then as a Management team we'll use our best judgment to control those.

They weren't accidental. There is -- the ability to control them, to adjust them, to shrink them, to expand them. And you'll be seeing that over the course of the next several years, as we look to improve the business and grow the business. When the opportunities that the business provides us through our successes allow us to, we will do more of it. When we have, as I say, forces working against us, we will have to do a lot less of it. We will try to be as prudent as we can in how we control those expenses.

Okay, terrific. That's really helpful to understand. That's actually a great segue. Then in terms of forces working against you, obviously the weather in the current quarter isn't exactly cooperating. I know in previous years when you've had adverse weather, you've done a terrific job in managing costs. It sounds like from what you're saying you certainly haven't lost cost discipline?

It's a core part of our culture as a business. I'm very proud to be able to head the organization knowing that we have many managers at multiple levels that have weathered both the coldest periods and the warmest periods to date. We know what we need to do responsibly to the changing and challenging weather conditions. We basically react to it, if not on a daily basis, on a weekly basis, adjusting, trying to look forward. We like to be operating the business several months at a time, not just in the day that we're in.

Sure, okay. It's great to hear that, by the way. Moving on to the balance sheet, it looks like everything was pretty much in line, with one exception, and that's the amount of inventory you had on the balance sheet at the end of the quarter. Obviously in terms of day sales that was a pretty big number.

Two questions on that. One is are you comfortable with that level of inventory? Secondly, I assume that inventory was acquired at much higher prices than current pricing, and I'm just wondering what the implications of that might be, either for gross margins going forward, or, I don't know, the risk of some kind of impairment associated with the cost of that inventory or what have you?

Well, we've spoken about the way we buy product many times on these calls. Basically, every gallon of inventory we buy, we short with a futures contract, so we un-price, if you will, the inventory.

Okay.

Now we have a couple of days of priced inventory, absolutely. But not every gallon on our balance sheet is priced. If the market moves up, we're not going to enjoy a benefit if prices go up. If prices go down, we're not going to get dinged, if you will, in a declining market.

Okay, terrific. There's really no contention with that high-level inventory at the end of the fiscal year?

No, not at all.

All right, great, terrific. Then there's already been a question about acquisitions. It looked like you did two acquisitions recently. I don't have the numbers in front of me, but my recollection is you spent roughly $20 million in the fourth quarter and another $7 million in the current quarter. Is that roughly right?

We did -- we spent $20 million in the fourth quarter, I believe.

Yes. Wasn't there disclosure of a subsequent event in the 10-K? You got an acquisition you made in the current quarter, or am I --?

Yes, we did. No, you're absolutely right. (Inaudible)

All right. Obviously, it's good to see you putting that amount of capital to work. Do those pace of acquisitions indicate a higher pace going forward? Then, what are your thoughts in terms of larger deals?

I don't think the rhythm of acquisition pace has really changed. I've mentioned before, as we have for many years, they're pretty opportunistic. We work on some for many years. We work on some that come up that the sellers want to move quickly. There were a couple this past -- in the last 12 months -- there was one or two that sellers wanted to move relatively quickly.

We have looked at several dozen this year. A lot of them, the owners just want to sit and they're waiting for their own time table. They're out there. We don't know how many we'll be able to succeed on coming to terms and acquiring in the next several months, but we're always optimistic. We keep working on them. I mentioned in the past, we have a dedicated executive on the team that just works on that constantly every day. We're constantly farming for new ones. We're not the only player in the marketplace, but I think we're a formidable one. I'm sure there will be others that pop up.

I don't know -- and we never know what a cold weather means, what a warmer weather means. It doesn't mean more or less, so we just keep trying our best to reel them in. I think of it like going fishing. We keep trying, change our bait a little bit, but keep trying. Persistence is what's important. Again, we've got to find the right businesses for us. They're not all the best fit, and that's why we don't do everything that we touch.

Okay, fair enough. Related to that adverse weather, in the past have you seen that reduce acquisitions because people want to wait for a better year? Have you seen that affect exit from the industry as smaller operators come under cash flow pressure?

We've seen both. We've seen both. Sometimes we're surprised both ways. Sometimes we don't really understand how people get through the highest prices or the warmest winters. But they seem to find the way and endure and don't sell. A lot of people make the mistake of waiting for a better price.

I will say this, that for the most part a better price will not come. As these businesses go on, they typically put themselves in a position where their business is, for one reason or another, the value is going down almost certainly -- not in every single case, but in a lot of cases, because of other conditions that they're facing. They're making it a more competitive situation.

I assume -- this seems kind of obvious -- but I assume that when you're looking at valuing businesses today, you're going to look at it in terms of some kind of longer-term EBITDA generation, as opposed to EBITDA generated off very favorable weather conditions in the last fiscal year?

We always weather adjust them. We try to make our best assumptions for the five- and ten-year periods going forward of what the businesses will produce.

Okay, terrific. Then getting to the end here, buybacks. You mentioned buybacks as one use of capital. Obviously, it's been a while since you bought back units. On the one hand, the price at which you bought back historically is still lower, quite a bit lower than where the price is today. On the other hand, the unit price has gotten hammered, along with the [rest] of MLPs for, as we know, a bunch of various reasons. What are your current thoughts as far as willingness and priority of allocating capital towards unit buybacks?

Well, we have a disciplined program where -- and we have a hurdle out there, and I'm not going to give you our hurdle as to where we're buying units. To a certain extent, there's six months out of the year due to quiet periods in the way this program works that we can't even change the price. There's very few opportunities for us to move that price up or down during the course of the year.

Have you bought back any units this quarter?

I really don't want to give you any color as to what's happening in the first quarter of FY16.

All right, fair enough. My last question, and I'm sure you're going to hate me for asking this question. I saw that you renewed Dan Donovan's consulting contract. A couple questions around that. Firstly, can you remind me -- I know it's in the 8-K, but I just have forgotten -- can you remind me how much is that consulting contract for?

$250,000.

$250,000, okay. Don's on the Board, right?

Yes, he is.

Okay. I know he was absolutely a terrific CEO. I think I'm struggling to understand why you're paying a guy who's serving on the Board $250,000 in consulting fees? Related to that, I'm wondering how much time is Don allocating to consulting for Star Gas on a daily basis, weekly basis, what have you?

The decision to renew Dan's role going forward was actually mine. This is Steve Goldman. There are several reasons for it, and it doesn't have anything to do with the Board, quite frankly. A lot has to do with his role on several committees where he represents our Company in a way that, quite frankly, there's no one that has the depth of relationships and experience involved with the other people that are on these industry-related Boards in multiple regions that Dan does.

In addition to that, to transition other executives currently who are engaged in what I consider an optimum load of responsibilities trying to drive the business forward and expand it would basically take away from those initiatives at the current time. Dan has made himself available to us, and quite frankly, the cost of replacing Dan by using those other executives would actually exceed that, since Dan doesn't get benefits, he doesn't enjoy part of our bonus profit sharing pool, and many other attributes of a senior-level executive.

What I would also say about your question is Dan is actively working. It's not just consulting, meaning he doesn't just give advice. He has a scheduled calendar of events. It's the same calendar of activity that we agreed to for the first two years, which equates to about almost 30% of an active working year. That does not really include all the conference calls he's involved in.

I think it's a very valuable tool to have him doing what he does. It's valuable not just for Star Gas, it's actually a benefit to the heating oil industry as a whole, quite frankly. Maybe the heating oil industry should help pay for part of what Dan Donovan is doing. But we have taken it as the leader in the industry to pay that.

That payment also is in lieu of any other Board compensation.

Okay. I have a comment on that. As far as his participation in various industry committees and so forth, a couple of comments on that. Firstly, with other companies, people who are on the Board do that without expecting or receiving compensation from that. Secondly, I don't understand why, if Dan is doing stuff for the industry, you guys feel that he should be paid by Star Gas for that.

I think my third comment would be I don't know how much the average employee earns at Star Gas, but to me, I believe it's a three-year, $750,000 consulting contract seems pretty rich, especially given the fact that you have a very competent Management team, and you've also hired a guy to work full time on acquisitions. To me, it doesn't seem like good corporate governance. I think the risk is you're going to attract activist investors. I think that would be a shame, given how you guys have managed the Business up until this point. Those are my thoughts on the consulting contract.

Okay, thank you.

Dave Kanen, Aegis Capital.

Good morning. New to this story, so bear with me. Can you take me through cash flow from operations? Was there anything anomalous that boosted it? For example, accelerated depreciation and amortization? Then for the next couple years, can you give me some guidance on what you expect your CapEx to be?

Well, we don't really give much guidance, but if you look at the last couple of years as far as maintenance capital, and add up three or four years and divide by whatever the number of years you have, we're pretty steady in our capital expenditures. There's nothing really -- we did have a good year this year. Our EBITDA was up 30.5%. We generated $140 million of EBITDA. That did help generating additional cash flow from operations this year.

Did you say accelerated G&A helped generate additional cash flow?

I did not say accelerated G&A helped. I did not say that. I said our EBITDA is up this year, which gave us some additional cash flow from operations.

I see. Accelerated depreciation and amortization was not a factor. There was nothing anomalous or asymmetrical versus other years?

No, other than we made the acquisition of Griffith a year ago. We had it in there for six months last year. We have Griffith in here for a full year -- not only the depreciation, but we have its cash flow from its operations, from Griffith's operations.

Okay. You referenced opportunities to cross-sell your customers -- what I'm going to call for, just based on my ignorance to the industry, let's call it non-oil and propane gas revenue. Can you tell me about what percentage of your revenue came from these ancillary services in the quarter?

No, we don't really break that out, so I can't really tell you that.

Is there any disclosure in your filings for us to look at?

No, there is not.

Is this a fairly new initiative, or is this something that you guys have been doing for years?

We've done air conditioning and many of these other things at a smaller scale. It's not really a new initiative, it's more expansive. It changes a little bit in its complexion as we do different acquisitions. It's certainly in very small quantities a growing contribution to our overall revenue.

Okay. Can you help me to understand the landscape in terms of pipeline of acquisitions? Do sellers want more now? Is it more of a buyer's market, more of a seller's market? What is your specific criteria for doing a deal?

I would characterize the market as neither a seller or a buyer's market. There is no buyers. In the minds of the seller, they always want more money than most people probably would think their business is going to be sold for. But there may be a buyer at times that will pay it. That's the gambit they take.

We have a very disciplined practice of analysis, combined with due diligence, that weighs a lot of factors -- not just the strength and size of a business, the brand strength, the trending of stability of their account base, the geography they're in, their current cost structure as compared to ours. Will it fit in ours with their low cost or high cost? Can we sustain that and still drive profitability and make it accretive to what we're doing?

There's always stuff for sale. That doesn't always mean it's stuff you want to buy. We have to be very careful. It's easy to buy stuff that in the current period looks attractive. Someone asked earlier, do we look at what the value would be longer term? That's our most important aspect of how we look at an acquisition. What will it mean to the business in the next five years.

We try to be as scientific about it as we can be. We certainly aren't going to know everything that's going to happen, but we do not work in an isolation vacuum. We do work around these businesses for the most part. Sometimes we don't know the businesses really well, but a lot of times we do know of them. Sometimes we compete directly with them, or we know who the owners are and what they've done.

The pipeline has been the same, I think, for the last five or six years. It has ebbs and flows. We'll get communication or contact from somebody for probably -- three or four come up at a time, and then we won't hear about any for a month or so at a time. There will be another flurry. As I said, we'll be working on literally for years of discussions, trying to get us to understand their business better, and trying to get the seller to understand more realistically what a selling price might look like.

Sometimes these businesses are set up with no intent for an exit strategy. Even their record-keeping needs to be looked at as an aspect of could we actually make a purchase, and rationalize what we might or might not pay. There's a lot that goes into it. These businesses, you remember, they're family-run businesses for the most part. Their thought is to have a succession plan in the family that will continue. When that doesn't work out for some reason, then we get an opportunity, usually.

What are the economics, though, that you're looking for? I'm sure you guys have an internal model. What multiple --?

That's not something we will share. That's not something we will share.

Okay. Is there -- okay. Now typically, what are you looking for? Let's say -- I know you're not going, for competitive reasons you don't want to share that, but let's say you're paying five times EBITDA. Are you looking to these deals that immediately take out cost? Are there certain immediate cost benefits and synergies that you're looking to achieve? Can you help me to understand that a little bit? What kind of benefit that you get?

This is what I can tell you. We have made acquisitions in different product types as low as 2 times EBITDA as a multiple, and as high as 6 in the past. Primarily, we're in like a 3.5, 4.5 range, depending on the value of the business. That doesn't mean that's what we approach a business with.

As I said, there's a lot of dynamics that go into our decision of what we think we'd scale a business. If we're going to put them in categories like an A, B, and C, D, what would determine that for us as a team? Internally, there's five key people that look at this stuff together on part of it. Our CFO which -- who is on the call is part of it.

We do not, for the most part when we look at these things, look to dismantle them, or unfold the economic setup they have. Our first look is -- in the ideal business for us is something that we buy that the business runs as it is, and produces profit that we can latch on to our business. And then over time, in a softer way, as opportunity presents itself, shrink expenses jointly between our parent group Company Star Gas and these acquisitions that we buy.

There's a lot of reasons for that: employee loyalty, customer loyalty. We don't like to disrupt functionality. There are instances, some distressed businesses that we've bought or very small ones where we see quicker opportunities, or one of the reasons the business is selling is that a key player is retiring and doesn't want anything to do with the business, and there's an opportunity to replace that person and absorb some costs. We certainly take advantage of those things. Those things go into how we calculate what we believe the value could be for us. In turn, it may have some impact on what we -- and it doesn't always have some impact on what we would pay a seller.

Okay. I'm going to jump back into queue, but the final question more of a curiosity thing, because I'm from Long Island. Who did you buy on Long Island?

That we're not going to disclose.

Okay. Good luck. We'll talk soon. Thank you.

Okay, thank you.

David Spier, Nitor Capital.

Hi, guys. I'm going to try to keep it as brief as possible here. You're doing a very good job on the long-term debt from $125 million to about $90 million. Going forward, should we expect that number -- the long-term debt number, to continue trending down around $10 million annually?

Well, we do have $10 million in current, so there's a total of $10 million in current and $90 million in long term.

The $10 million I assume you're going to pay off this year?

Yes, that's why it's in current.

That's why I'm talking about long term.

We'll be paying basically $5 million -- excuse me, $5 million -- $10 million off over the next five years. Then we have 25% of defined excess cash flow, as defined in the credit agreement, which will also, if you will, go to paying the end bullet of $50 million.

Yes, I understand. That bullet comes up in five years, I believe? The $50 million?

Right. We could --

You have the option to pay down more currently if you decide, if you choose to?

We have the option and we have an obligation to put away 25% of excess cash flow as defined in the credit agreement to reduce the bullet.

Does that go to escrow, or is that just paid off annually?

It pays off annually. It doesn't go to escrow.

Understood. Okay, that sounds good. Also, as you continue to pay down principal, obviously the interest costs should go down as well annually, as well, right?

Yes, that's how it would work.

Got it. Okay, just wanted to make sure. Then just the last question, you mentioned the opportunity in the Southeast. Could you just explain how significant of an opportunity you see that being and why that opportunity exists, more or less?

Okay, well it's hard to measure or describe what we believe right now the size of the opportunity is. What I would say is, obviously we don't have a large presence in the Southeast. We operate a slight operation in the most southern piece of North Carolina. We have some presence in South Carolina. We now have some presence only in northern Georgia and a small site in Tennessee.

That being said, propane use is broad throughout the Southeast. We as a practicing business are much more than a fuel supplier. We are a service-oriented business. That's basically our thoroughbred as managers, to provide service. It's certainly a distinction.

We believe going against some of the competitors in the marketplace in this territory that is contiguous to how we operate now is going to be very friendly towards us, if we do it properly. It's -- as I described much earlier on today, it's not without expense to do this. The opportunity somewhat is dampened by how much ability we'll have to spend on this in balance, versus producing the right profit level for the business.

It will be a long-term, slow, opportunistic growth into the area. Our initial experience has been good, very well received, and it looks promising. I don't know how to put that in -- there's no way numerically to describe that, but I think the other benefit of that, which is unfulfilled at this point, is I believe we'll have other opportunities for acquisitions in that neighborhood as we become more of a presence.

All right, great. I appreciate it, guys. All the best.

Thank you.

Gene Riley, a private investor.

Thank you. The August acquisition, $6.6 million revenues referred to in the 10-K, is that for eight weeks? Hello?

Yes, it is, sir.

Eight weeks. Okay, thank you very much. That's all I had.

You're welcome.

Thank you. As there are no more questions at the present time, I would like to turn the conference back over to Steven Goldman for any closing comments. Mr. Goldman?

Thank you for taking the time to join us today and for your ongoing interest in Star Gas. We look forward to sharing our first quarter 2016 results with you in February.

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