Star Group, L.P.
Q2 2017 Earnings Call Transcript

Published: 2 Aug 2017

[Operator:]

Good morning, and welcome to the Star Gas Partners' Third 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, Chief Executive Officer. Please go ahead.

[Steve Goldman:]

Good morning, and thank you for joining us today. With me today is Star's Chief Financial Officer, Richard Ambury. After I provide some brief remarks about the quarter and first nine months of fiscal 2017, Rich will review the fiscal third quarter ended June 30, 2017 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.

[Chris Witty:]

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, we 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 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'd now like to turn the call back over to Steve Goldman. Steve?

[Steve Goldman:]

Thanks, Chris. We continue to assess various ways to improve over doing here at Star Gas. So we're challenging our team to look for new opportunities to achieve our operating results. This past quarter certainly reflects such an approach to running our business. For example, we recently began upgrading certain aspects of our technology platform so we can better respond to the changing needs and wants of our customers. These enhancements resulted in some additional IT cost and other, yet temporary expenses in this quarter as our employees were trained and adapted to modifications in our operating environment. We've seen such upgrades as a very positive and necessary plot of growing Star Gas for the long-term, and both our employees and customers are telling us the same. As a result of these changes we now have the ability to understand customer issues further upstream and far greater detail than before. And there are always times that indicate that this is directly impacting our ability to retain customers. This year such actions have helped attrition [ph] in check despite the warm weather and increasing oil prices but we are not resting on our worlds. We're working very hard at challenging every aspect of the [indiscernible] retainer all segments of our customers. We're also more aggressively pushing boundaries when it comes to expanding the services we offer and the territories which we operate and serve. On the acquisition front, we concluded just one of the busiest periods in terms of M&A interest that we've seen and during the quarter we were able to close on one acquisition in Europe for approximately $7.5 million. But we have many more attractive opportunities in our pipeline, some of which we are expected to be able to close in the very near future. One another notable than this past quarter was the opening of our new customer service center in New Town, Pennsylvania. This represents an adjustment to our middle [ph] operating operations and it's designed to better serve our customers and improve our ability to attract the best employees for this purpose. We still believe that one of our greatest areas of opportunities to continue strengthening our team. The work we've been doing in both recruitment and developmental training is crucial to ensuring we deliver strong results into the future. We have been reviewing our processes to improve training of the next generation of managers necessary to drive our continued growth into the future as well. We're now investing in the business while managing cost is [indiscernible] particularly in the warm year. While we are doing what we can to hold the line on expenses we believe they are investing is necessary for future growth. And I think some expense rise this quarter from the implementation of changes we've made as I discussed, as well as pharma growth and other service are expected. Our team is energized about all that we are doing to keep Star Gas the strong competitive company we are today. And with that I will now turn the call over to Rich.

[Richard Ambury:]

Thanks Steven and good morning everyone. For the third quarter of fiscal 2017, on heating oil and propane volume declined by 4 million gallons or about 9% to 41 million gallons, as the additional volume provided from acquisitions was more than offset by net customer attrition in the base business and the impact of warmer weather. Temperatures in our geographic areas, operations for the fiscal 2017 third quarter; we're roughly about 20% warmer than the fiscal 2016 third quarter and about 18% warmer than normal. However, the warm weather this year did not lead to 20% increase in home heating oil and propane sold since only portion of Star's customer base. Normally, we see delivered during the spring time period. To state it in another way, temps during this non-heating period are not, as impact will go to annual sales as during the heating season. We realize heating oil and propane margins of $1.15 per gallon, approximately $0.14 higher than last year, $54 million, up $1.6 million as the impact of higher home heating oil and propane margins with somewhat offset by the decline in home heating oil and propane volume sold. Our net loss increased by $10 million to $13 million versus last year, largely due to the after-tax impact of an unfavorable change in the non-cash change in the fair value of derivative instruments of $14 million. The quarter's adjusted EBITDA loss did increase by $1.5 million to $9.3 million as the decline in heating oil and propane volume and an increase in certain operating expenses more than offset the additional gross profit provided by higher home heating oil and propane margins, and a slight improvement in service and installation profitability. And looking at the nine months results, our home heating oil and propane volume increased by 12 million gallons or 4% to 294 million gallons, again as additional volume provided by acquisitions and some colder temperatures more than offset the impact of net customer attrition and other factors. Temperatures in our geographic areas operations for the first nine months of fiscal 2017 were about 7% colder than last year's comparable period, but 12% warmer than normal still. So as product gross profit increased by 5% or $18 million to $358 million due to slightly higher home heating oil and propane margins and the increase in heating oil and propane volume sold. In delivery and branch expenses we recorded a $12.5 million credit under our weather hedge in the prior year period and we did not record any such hedge in the current year period. Excluding this, delivery and branch expenses rose $10 million year-over-year reflecting higher delivery expense of $2.5 million to impart to the weather related increase in home heating oil and propane volume of 4%, acquisitions and an increase in spending of approximately $5 million largely due to additional staffing in the areas of information technology, customer service, operations management and sales and marketing. We believe that the staffing positively impacted the 11,000 account improvement we saw in the nine months period in net customer attrition. We recorded a non-cash charge of $7 million for our derivatives during the nine months of fiscal 2017 and the prior years comparable period; again we had recorded a non-cash credit of $20 million. We posted net income of $45 million for the first nine months of fiscal 2017 or about $19 million less than the prior year period. Our adjusted EBITDA this year decreased by $7 million to $110 million, as the impact of higher home heating oil and propane volume, and again, slightly higher home heating oil and propane margins were more than offset by the absence of the $12.5 million credit that was recorded in the first quarter of fiscal 2016 under the partnership's weather hedge contract, lower service and installation gross profit, and additional staffing expense in the areas of information technology, customer service, operation, management and sales and marketing. Now moving over to the balance sheet, at the end of June we had cash-on-hand of $95 million, zero borrowings under our revolving credit facility, and $78 million of total debt. And with that, I would like to turn the call back over to Steve.

[Steve Goldman:]

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

[Operator:]

[Operator Instructions] And our first question comes from Michael Prouding [ph] with 10K Capital. Please go ahead.

[Unidentified Analyst:]

Good morning. I hesitate to say it but this really was a terrific quarter when you look at the bunch of the metrics here, particularly encouraging to see the continuing improvement in customer attrition, both in terms of customer gains and customer losses. Steve, do you want to put some more color on that? I think one thing in particular, obviously is that success in this area really adds the value of the business overtime and I'm curious to the extent to which you've already have us the benefits since your technology investments or based into which we're -- there is still more to come.

[Steve Goldman:]

That's a good question. Thank you first of all, but I think we'd appreciate you looking at the quarter the way you are. The material difference in retention of customers that we've seen for the past six months is the beginning of leveraging about half of the technological improvements we've put in place. What we're seeing in the front-end of this difference is a set of tools which allows us to drilldown on all customer interactions and evaluate them and evaluate us on what the customers like and didn't like, and try to assess what that means for risk of the customer being dissatisfied and/or ultimately leaving us. And then what we're working on now and I would say, like I said, about halfway through the mechanisms to -- in a speedy fashion get after those customers and more than just resolve whatever they might be concerned about but pay attention to where we missed the mark on, what we think the customers expect us to be doing and change that. So what we're finding is, it's not just a sensitivity issue; there were some operational execution issues from the perspective of the customer. So they kind of challenged our traditional thoughts of how well were executing for the customer, and we're getting to see our performance through customers eyes and quite frankly, it's very different by location and really eye-opening and I think the positive and exciting part of that is it's very actionable. So I don't think we've seen all the benefit. To your second question; I think there is more opportunity to come. It may not always be even, I would not say that we may not see a small blip [ph], often losses at some point, there are other factors; price is always a significant one. But again, as I mentioned in my comments, all this comes in the shadow of two warm winters and a little help from Mother Nature and little bit of cold weather; all this could be exaggerated in our benefit hopefully that we are really getting more crystal clear vision of what our customers want. Now I will tell you that there are some other things in our technology pipeline that we're working on, that we're not fully done getting into place and some of those things will help on the sales side, I'm attracting the different amounts of customers that we're targeting based on they value to us as an organization. And I think the results of that study you will see in the next 12 months or so.

[Unidentified Analyst:]

Well, great, thanks for that. I mean this is really exciting news and obviously I'd like to see nothing better than your catch become Amazon as heating oil and propane deliveries. So as far as I'm concerned, this is really exciting news. Just a couple of other quick questions; so on the acquisition front is there anything more you can say about that, in particular, are you seeing any larger deals out there? And then just one final question for Rich; I noticed that the service crapped [ph] up a little bit in the quarter and I just wanted to understand what might be behind that?

[Steve Goldman:]

We'll let Rich answer that first.

[Richard Ambury:]

Yes, the DSOs -- while they might be up versus last year, don't -- let's not forget that last year was a much, much, much warmer year; then last year and frankly the weather that we did get kind of the only two real good weeks we had was in the month of March. So that kind of pushed out, if you will, the over 90s in summer time but I'm not concerned about our receivable level.

[Steve Goldman:]

And then on the acquisition front Michael, we've -- as I said I can't really exaggerate. How many people would have spoken to him in the last six months, it's a lot and again, speaking to customers does not [indiscernible], purchase the acquisitions, as in Thomas Gale's point of view there; so anyways from a million gallons; two, over 20 million gallons. And they are geographically diverse as well. So part partially offset the issue is always qualitative. What's going to happen when we try to negotiate, a price that works for us that would be accretive and beneficial to the company and then we else is trying to buy then and then what happens in due diligence. Quite frankly, we -- I thought we'll having a couple of more that's also about during this call and they just didn't materialize because they weren't really acquired by the purchase that the price then we thought the value of the business was when we first saw looking at them. So I don't want to waste money to sort of take the same, add it to the business and bought accounts. And you know, like I always say, we're working on a lot of fronts with China, it's kind of my own extents where we can, we're trying to do the best we can with margins on the overall circumstances, we're trying to grow the geography, we're trying to grow the services, we're offering customers; so it's just all over, we're trying to make the business a more healthy business with those people who have invested in the company as well as the employees that work for the business.

[Unidentified Analyst:]

Okay, that's terrific news, keep up the good work.

[Steve Goldman:]

Thanks.

[Operator:]

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

[Steve Goldman:]

Okay, and thank you for taking the time today to join us and for your ongoing interest at Star Gas. And we look forward to sharing our fiscal fourth quarter results with you in December.

[Operator:]

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