Star Group LP (SGU) 2017 Q1 法說會逐字稿

Good day and welcome to the Star Gas Partners FY17 first-quarter results conference call.

(Operator Instructions)

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

Good morning and thank you for joining us today. With me today is Star Gas Partners' Chief Financial Officer, Rich Ambury. After some brief remarks Rich will review the 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 that may cause the Partnership's actual performance to be materially different from the performance indicated or implied by such statements. All statements other than the 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 referring 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, 2016.

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 are pleased with our start to FY17. Even though weather within our operating footprint was over 10% warmer than normal, we feel we were able to deliver relatively strong results. Particularly versus last year's first quarter. Excluding the weather hedge credit recorded at that time. Temperatures were nearly 34% colder than in FY16 when we experienced extremely warm weather.

This year was noticeably absent of any significant weather anomalies. Although, we did not enjoy the same product declining cost trends as experienced the past two years. In fact, the increase in product cost has made it difficult for us to maintain profit margins equal to last year. However, even with the conditions that combated our efforts to manage margins we believe our managers were able to produce very respectable results.

We're also happy to see a positive quarter in terms of net attrition where results were the best in several years. We added 5,200 net accounts during the quarter, as compared with 1,400 net account losses during the same period last year. We believe that several changes made in our sales management program as well as our strength in strategy for customer retention are beginning to bear fruit. These initiatives also contributed to a 2.6% increase in installation and service sales during the quarter.

In December, we were able to close on a acquisition in Michigan. Our first foray west of Star's current footprint along the East Coast and continuous mid-Atlantic states. Since acquiring this acquisition, interest in Star Gas from other midwest propane dealers has increased. We believe, as with the South, where we've already taking advantage of several expansion opportunities, we will have the chance to selectively grow our footprint out west as attractive candidates present themselves.

We're very excited about the Michigan business acquired and we think this could lead to additional opportunities going forward. We were also able to close on two small Long Island transactions during quarter, including a well-run plumbing service operation.

This year we have began to work on additional tools to assist our general managers better to serve the customer base. One of the areas of focus that I'm most proud of is our work on improving our hiring and training processes. We believe that as our economy continues to grow and competition for the best employees increases, we need to be able to attract and retain the talent necessary to expand and manage the business.

This last point goes to what I'm always most proud of to highlight, the strength of Star's overall team. With each passing year, our organization continues to grow in very positive ways and we know our results are a direct reflection of these efforts. With that I will 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 buying increased by 19 million gallons or 24% to 100 million gallons as the impact of colder temperatures was somewhat offset by net customer attrition and other factors. Temperatures for the FY17 first quarter were 34% colder but 11% warmer than normal. Our product gross profit increased by $14 million, or 14%, to $117 million as the higher home heating oil and propane volume was partially offset by the impact of lower margins of approximately $0.09 per gallon.

In the past few fiscal years, we have benefited from a declining cost environment that led to an expansion of per gallon margins. This pricing environment has changed somewhat. In addition, during the first quarter of FY17, a majority of our price protected customers reached their maximum selling price, which also contributed to a contraction in per gallon margins.

Delivery and branch expenses increased $17 million, or 26%, to $81 million. In the prior year's comparable period, delivery and branch expenses were reduced by a $12.5 million credit recorded under our weather hedge contract. Excluding the impact of this credit, delivery and branch expenses rose $4 million, or just 6%, largely due to the 24% increase in home heating oil and propane volume.

We posted net income for the quarter of $18 million or about $6 million higher than the prior-year period. Adjusted EBITDA though did decrease by $4.7 million, or 13%, to $31 million as the increase in home heating oil volume attributable to 34% colder weather was more than offset by the impact of lower home heating oil and propane per gallon margins and the absence of the $12.5 million credit recorded under our weather hedge contract, which occurred during the three months ending December 31, 2015.

While the weather hedge contract covers the period November 1 through March 31 taken as a whole, the extremely warm temperatures experienced during the three months ending December 31, 2015, resulted in our recording the full benefit of that contract. Given that the full benefit was taken, we did not record any additional weather hedge benefit during the subsequent quarter ending March 31, 2016, despite temperatures being about 12% warmer than normal during that period.

As of December 31, 2016, we had cash of about $37 million and long-term debt of $83 million. With that, I would like to turn the call back over to Steve.

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

(Operator Instructions)

Our first question comes from John Ragazino with Drexel Hamilton. Please go ahead.

Good morning, gentlemen.

Good morning.

You mentioned the attrition rate this year that added 5000 or so accounts less the 1400 that were lost. How does that compare to the five-year average attrition rate?

I can't say I have the five year average in front of us, but in 2015, for example, in the quarter where that would be the quarter ending December 31, 2014 we added about 4300 accounts.

Okay. A fair performance this year end. Moving on to the acquisition front. I know it is probably a difficult comparison to be made in the propane space via the home heating oil but what kind of typical multiples do you see in the regional tri-state area of the Northeast United States for home heating oil providers? Are you still looking at expanding that business?

We don't see a big variance in what we believe the multiples to be. Our range of multiples for our heating oil has been in the 3 to 5 times EBITDA range depending on the strength of the business, the size, the brand durability, the trajectory of that business, and what other opportunity we believe that business offers us either directly or through synergies and other expansion opportunities. That would be the same for the New York, New England or the mid-Atlantic areas.

All right. That's all I got for you this morning. Thanks the lot, guys. I appreciate it.

The next question comes from Mike Prouting with 10K Capital.

Good morning, guys.

Good morning.

Rich, I will settle for just one quick question and maybe double back with some others depending on who else is on the call. You mentioned earlier that margins were affected by fixed price customers hitting their maximum selling price ceiling. Can you remind us the relationship between how that works and your hedges and the extent to which you are protected by your hedges? Thanks.

I didn't say fixed price. I said price protected. What I'm really referring to the majority of our price protected customers are our ceiling customers. Where we say to the customer this is a maximum selling price that you can go up to. If you look at heating oil prices have crept up from let's say $1 where we were this year. So customers who sign up at one dollar a gallon last year with a embedded cost, today it's almost $1.60 a $1.65 a gallon. Our hedges protect those sales agreements with those customers when it reaches the strike price of the underlying hedge. So our hedges basically paid off during the quarter as a good portion of these customers had reached their maximum. Whereas, last year we had a declining cost environment and to a certain extent we were able to lag our selling prices when costs came down.

Okay. So let me paraphrase that to make sure I understand what you're saying. It sounds like at some level -- well, in one sense your hedge is to fully protect you. But on the other hand you had a benefit last year because essentially the prices were so low that the customers essentially -- effectively in economic terms overpaid so the ceiling -- is that the right way to think about that?

We don't say they overpaid. We charged them the call option which we were charged. But those hedges were not in the money.

Okay. So in other words this was essentially just a more normal price or it's a more normal situation verses the benefit that you enjoyed last year. I guess that's reflected because clearly last year in the December quarter you had an extraordinarily high gross margin per gallon. Whereas in the December quarter this year, it's actually pretty, almost exactly the same as the gross margin per gallon in December 2014 and actually well above the price per gallon in years prior to that.

Right. We had $1.18 last year and we're at $1.09 this year in the quarter.

Yes and December 2014 it was $1.10, December 2013 was $0.97, December 2010 was $0.95. You're basically back to quote/unquote normal levels.

Right.

Thanks.

(Operator Instructions)

At this time it appears there are no questions. So this concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Goldman for any closing remarks.

Thank you, Steve. And thank you for taking time today to join us in your ongoing interest in Star Gas. We look forward to sharing our second-quarter 2017 results with you in May.

This concludes the conference. Thank you for attending today's presentation. You may now disconnect.