SMF Energy Corporations F1Q09 (Qtr End 10/31/08) Earnings Call Transcript

Nov.18.08 | About: SMF Energy (FUELQ)

SMF Energy Corporations (NASDAQ:FUEL)

F1Q09 Earnings Call

November 18, 2008 10:00 am ET

Executives

Richard E. Gathright – Chairman, Chief Executive Officer, President

Michael S. Shore – Chief Financial Officer, Senior Vice President, Treasurer

Analysts

Bill Scott – [Unidentified Firm]

Howard Halpern – Taglich Brothers

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2009 SMF Energy Corporations’ earnings conference call. My name is Carissa and I’ll be your coordinator for today.

At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this call. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call, Mr. Michael Shore, Chief Financial Officer. Please proceed.

Michael S. Shore

Good morning, everyone, and welcome to the call. Today’s conference call is an update on SMF Energy Corporations’ results for the first quarter ended September 30, 2008. A press release and Form 10Q announcing these results were filed on November 14, 2008. Each of these documents can be found on the company’s website at www.mobilefueling.com in the investor relations section.

My name is Michael Shore, the company’s CFO. Also representing management today is Richard Gathright, President and CEO.

Before we get started I’d like to read the following safe harbour statement. This conference call will include forward-looking statements within the meaning of the safe harbour provision for the Private Securities Litigation Reform Act of 1995. For example, predictions or statements of belief or expectation concerning the future performance of the company, the future expansion plans of the company, and the potential for further growth of the company are all forward-looking statements which should not be relied upon.

Such forward-looking statements are based on the current beliefs of the company and its management based on information known to them at this time. Because these statements depend on various assumptions as to future events, including but not limited to those assumptions noted in the management’s discussion and analysis of financial conditions and results of operations section of the company’s Form 10K for the period ending June 30, 2008, they should not be relied on by shareholders or other person in evaluating the company. Although management believes that the assumptions reflected in such forward-looking statements are reasonable, actual results could differ materially from those projected.

In addition, there are numerous risks and uncertainties which could cause actual results to differ from those anticipated by the company, including but not limited to those cited in the risk factors section of the company’s Form 10K for the period ended June 30, 2008.

Now I’d like to turn this call over to Richard Gathright, President and CEO.

Richard E. Gathright

Good morning and thank you for joining us. A very smart man told me some time back that 90% of the people don’t care about your problems and the other 10% are glad you have them. Saying that, we all share the concern about the economy, the financial markets, the impact that will have on all business operations and all companies, the impact it is having.

Our business is a little bit different in that it meets minimum primary economic demands that service the populace of our country. That number is not going down. That number is going up. When you look at our operations and our primary business it relates to the cost of labour far more than it has anything to do with petroleum prices or what you can buy and sell fuel for.

We’ve got over 4,000 customers and we do deliver to some of the most fundamental necessities of our economy. We saw, beginning a couple of years ago, probably a little bit more than that, a decline in what we call our base business. The base business for us are those customers that we service on a regular, ongoing, stable basis. We did see decline. We saw that decline in our business up until the fourth quarter of last year beginning at the end of March ending on June 30.

During that quarter we saw a stabilization of the demand from our base customers. That allowed us to show an increase in the volume of the gallons that we sell which, notwithstanding the fairly substantial increases that we had in new business, had been masked up to that point in time by decline in this base business. That’s very significant for us because if you think in terms of internal growth of our operations we think about the people that we service daily or weekly, whatever the time frame is, and the demand that they have. We also think about the new business that we add. So if your existing base customer business is declining it has the tendency of masking the increased demand for your basic services. And that’s what we saw up until the fourth quarter of 2008 fiscal year. We saw an increase in that quarter for the first time in, I don’t know, a couple years, I think.

We saw a continuing improvement in the first quarter of our new fiscal year. If you look at our financial statements, our volumes in terms of gallons sold are slightly down on the September quarter. I think about 18.5 million gallons versus 19 million gallons for the quarter ending June 30. We did have impact. We did have impact at the end of the quarter. We had impact because of the hurricanes and the storms. That impact was, quite frankly, very positive for us because we eliminated what might be, we’ll call, customer [inaudible] delivery business in favour of our emergency storm response work, which is a much higher gross margin and resulting net margin for us. In fact, we came out of last year with a $0.24 net margin per gallon and the net margin per gallon in the first quarter of fiscal 2009 was $0.33. A large part of that increase is a function of the higher margin storm work that we did.

Saying that, the run rate that we came out of last year on of $0.24 is a stabilized run rate for us based upon the efficiencies that we put in place. We did see in these last two quarters, irrespective of the downturn in the transportation sector which started many months before the recent turmoil in the financial markets, we did see a stabilization. We did see then and we do see now great encouragement by the growth and demand for our services from new customers. That is a function of the fact that companies are doing everything they possibly can to improve their efficiency and to reduce costs and the greatest advantage that we offer the companies is the ability to reduce the labour costs. Labour costs are not going down.

Outside of that, if there’s less demand in the economy, those companies that have efficiency are the companies that are going to get the business. We saw a new postal service contract a few months ago that increased the demand for the services that we offer by about 40% over what we had historically with the United States Postal Service and we believe that is a function of the empowerability to deliver value in greater efficiency.

We are able to now operate with a higher yield. If you think in terms of the overall financial performance of the company, we reported a $512,000 net income for the September 30 quarter. If you go back and look at a year ago, a year ago September 30, we had a $3 million loss. We had almost a $2 million loss in the December 31 quarter, a $1.4 million loss in the March 31 quarter, a $370,000 loss in the June 30 quarter, and a $500,000 profit in the first quarter of the current fiscal year.

We have given guidance and we expected to see performance. We expect to see a yield out of the investments that we’ve made previously. We’ve said it for many quarters and in our Qs and in our Ks in terms of what we’re spending our money on, what we’re spending our time on. We’re now seeing the benefit from the efforts that we have made. We’re seeing value for us in the net margin that we’re generating. In the September 30 quarter $6 million of net margin. That’s the cash that’s thrown off by our business after we pay all the costs of delivering the service operationally to our customers. That’s in comparison to $4.6 million in the June 30 quarter and, I don’t know, $3.2 million on the March 31 and $2.9 million on December 31, 2007.

So the indicators for our business continue to show improvement quarter on quarter. There’s no guarantee, obviously, that each quarter is going to be an improvement on the last. I think that’s one of the problems in our financial markets today is the demand for increasing improvement each quarter. But we are in a business sector where we have an opportunity to deliver a higher level of service which is in demand because people are trying to save money and if we can offer them a savings they want our business. So when the music stops there are going to be a number of people standing and we believe what we’ve put in place, we’ve suffered through the investments that we’ve made, and now allow us to reap the benefit from that with regard to our current operations and with regard to our future operations as we move forward.

We are very opportunistic that we are going to be able to create value for the company, for the shareholders, out of the investments that we’ve made. Whether it’s $0.33 or $0.24 of net margin per gallon sold to our customers, that’s a massive improvement even over the $0.17 that we saw June 30, 2007.

Cash is important. The EBIDTA we generated was $2 million for the quarter. It was $1.1 million June 30, 2008, $277,000 March 31, 2008, negative $387,000 December 31, 2007. We delivered $2 million. That’s with EBIDTA. It’s saying that there’s concern about cash. Reasonably so. We generated a cash contribution for the quarter of about $1.2 million. That’s extremely positive for us outside our fixed costs coverage.

So not only are we showing a positive P&L, and again we’ve had a lot of non-cash charges. Michael, if you look at our losses over the last couple of years and you look at our non-cash charges what’s the comparison?

Michael S. Shore

We had $18 million in losses, $15 million non-cash, and about another $4 million of corporate charges and integration costs. So $15 million of the $18 million in losses were non-cash.

Richard E. Gathright

Well, at the end of the day, while people may say they understand non-cash is non-cash, people looking for positive performance. Notwithstanding the fairly heavy load of non-cash charges we have now we are positive.

The financial results that we’re generating come from the use and effectiveness of our new [inaudible] and the other things, systems, people, personnel, management, structure, which are driving the integration of the two acquisitions that we’ve made are improving our efficiency. We’re expecting some additional efficiencies. Eliminating costs and enhancing that margin and allowing us to put into play additional personnel.

We invested, as we said before, a portion of our cost savings from SG&A and other operational efficiencies into expanded marketing and sales force personnel. This is generating business opportunities for us in our primary service lines and a few new products such as Drysol, the environmentally friendly green alternative to Perc used in the dry-cleaning industry today. It is mandated for elimination by the EPA and other regulatory agencies. And we are seeing increased business opportunities resulting from the ability of our inefficient second-rate competitors to provide the level of service demanded by our customers. I’ve said it before and I’ll say it again, price doesn’t matter unless value is generated from the service and the price that you charge. If a guy wants to charge 10%, 20%, 30% less than us that would be great if he was able to live with the service. But consistently, day in and day out, the competitors are not able to deliver the service.

We are expanding our business. We do have a high demand. We are adding new customers. The balanced approach in terms of the markets that we’re in versus our willingness to go into new markets, as we did with the expansion [inaudible] service contract. We are growing our business.

People have asked me a lot about fuel prices. How does it affect your business? Well, truthfully the one impact that fuel prices have on us is in our running fuel. That’s a fairly insignificant part of our direct operating expense, but it does impact just not enough to move our margin one way or another. If prices are high, yes, it drives people to us looking for efficiencies. If prices are lower in $50, $60 oil that’s still a pretty high price. But one thing we can all say is we haven’t seen a reduction in the cost of labour. Labour costs are not going down. Health care costs, benefit costs are not going down. They’re going up and they’re going up dramatically.

We are continuing to deal with the fuel prices relative to our own business and while they did soar at the early part of the first quarter they eased into September and the current quarter has declined substantially. Notwithstanding the higher fuel prices, which in our business do flow through to the customers, I can say that more and more of the new and old customers are recognizing the benefit of the systems and services that we offer as an opportunity for them to control and reduce their costs. They’re looking for ways to stay alive in this economy, in this market. If I, we as a company, can cut their costs of operations that deposit is paying.

Yes, maybe fuel prices do impact those customers and that pushes them to look for other ways, but the personnel costs are equally important. Outside of fuel for those companies that use a lot of fuel, personnel is the highest cost. Those companies that don’t use a lot of fuel, personnel is the highest cost. And we’re offering a service to these customers that allows us to impact their business in a fairly material way.

At the end of the day, from a competitor’s standpoint, if the competitor puts forth a price without service there’s no value. That’s what we’re seeing more and more is the customers that are coming to us are saying, well, we’re willing to pay value to you for actually saving us money as opposed to just giving us a price that’s lower but not saving us money.

That’s what we’re focused on. We recognize that we are in a difficult economy. We have received strong reports from our close investors and from our financial institutions. Yes, the market is fraught with the backlash of the sub-prime debacle and all of the other fallout that is taking place. But we are in the business to deliver primary services in an economy where the demand is a function of the minimal number of people that live and exist in this country.

In order to do that we’ve continued to manage our cash resources effectively and we have, in the past, selectively requested additional capital from a small group of investors, actually from a number of people, as an on-need basis to bridge us to achieve our goals. In many cases this has been to allow us to put forth letters of credit, give us a better buying opportunity, better market coverage for supply, our ability to get that supply is a function of our ability to generate a much higher margin when we see hurricanes and other storm where our competitors are not able to do that.

We are continuing to obtain efficiencies in consolidation and integration of our existing operations, including reduction in personnel costs, direct operating expenses, and inventory costs. However, saying that, if we save money we may reinvest that money in a marketing sales force to try to bring in additional business which we have been very successful in doing.

We don’t have a crystal ball. We can’t tell you what the future will hold with regard to overall demand. But we can tell you today that we have seen fairly nominal impact, at least at this point in the quarter, from let’s say a lower demand for existing customer business. We know that we’re aggressively out there gaining new business, some of which we would hope to be able to report to the public in the short term. Because people have recognized us as a company that allows them to improve their efficiency, their performance, and reduce their costs.

I think I said at the end of the last conference call a quote and I think I’ll re-quote it again today. We’re operating at a time when the ingenuity and efficiency of a business will dictate its success or failure. We are offering a service of increasing value in a fragmented industry that is only recognizing that widely accepted historical business operating practices will no longer work. With our improving financial results we are validating our business plan. The naysayers to you, yes, we said what we’re going to do and we are doing that. And we are positioned to lever our new platform for eternal growth and as the market allows us to do for expansion through strategic acquisitions or mergers and consolidations.

Tight credit, supply disruptions, increasing labour costs are catalysts for consolidation in our industry. And as such for strong financial yield we do believe our platform where we expect SG&A integration savings alone to range between 25% and 60% as a tool to lead change in our industry and to secure the resulting rewards for shareholders.

I’ll leave you that with our thought there and we look forward to reporting our next quarter. We hope that more people will watch us and understand that we do have an opportunity here to consolidate an industry sector yet unconsolidated, supply that efficiency and to generate yield, results, and performance for the shareholders in this company.

I do thank you, those of you who are shareholders, for your support and we look forward to the opportunities that we now have in front of us today as a function of the investment, the energy, the effort, the time, the tribulations, and all the other things that have been undertaken here in the last few years.

Thank you very much. With that I’ll turn it over to some questions please.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Bill Scott – [Unidentified Firm].

Bill Scott – [Unidentified Firm]

Richard, what is your current run rate of gross margin per gallon sold? I mean, in the quarter it was $0.33, that’s up from $0.24, but there’s a degree of hurricane servicing there. So what’s the normalized run rate?

Richard E. Gathright

We don’t report gross margin. We do report gross profit. But for us the important thing is not so much what we charge a person gross, but what’s left after we cover the cost of delivering that service. So it’s the net margin I think that –

Bill Scott – [Unidentified Firm]

Yeah. The net margin per gallon was $0.33 versus $0.24 and my question is should that be considered to be a normal run rate.

Richard E. Gathright

I think probably something between the $0.24 and the $0.33 would be considered a normal run rate. We did have some booing over the, for the hurricane services, but I think without the hurricane services we’re probably in the range of about, I don’t know, $0.26 a gallon. So that’s up from the $0.24, but even with the $0.24 there were a lot of questions about whether that was a stabilized net margin for us being generated and we’re saying again, yes it is. Based upon flipping the switch back in January of this year and seeing the value in the yield that $0.24 was a good number for us going forward. To answer your question, it’s about $0.26 for the quarter ended September 30, 2008.

Bill Scott – [Unidentified Firm]

Okay. My next question is, where do you, you know, Wachovia is being bought by Wells Fargo. Where do you stand with your line of credit with regard to that?

Richard E. Gathright

Well, we’ve had a good relationship with Wachovia and obviously there’s a lot of discussions going on in terms of how that’s going to shake out between Wachovia and Wells Fargo. Our current facility goes through July 1, 2009, and we would expect that we will either continue with Wachovia, depending upon what shakes out between Wachovia and Wells Fargo, or we’ll change facilities. I mean, candidly, we’ve had a lot of solicitation of our business right before and through the current turmoil because we deliver a very stabilized yield on ABL type facilities. I mean, we’ve had an extremely good profile with the DSO that’s around 30 days. That’s much better than most people in our industry. So banks that are looking for a rateable, secure yield are interested in our company. So while we would expect to be, as you would expect us to be, concerned about maintaining our principal lending facility the profile that we have is an extremely good profile. We would expect to be able to maintain that relative to our current business and the growth in our business.

Bill Scott – [Unidentified Firm]

Have you revised your guidance as to EBIDTA for this current fiscal year?

Richard E. Gathright

No, we have not. Obviously we’re performing above the guidance that we gave. I think we will wait until we see what the quarter does, at least as we move a little bit further into the quarter, and we may well give some additional guidance. But certainly we’re performing up to the guidance we have given previously and is certainly in the first quarter in the profit we’ve reported we’re performing at least equal to what we expect to perform for the year. So we’ll look to give some further guidance.

The current period that we’re in is historically our down period. This is nothing new. We’ve said it year after year after year. We have less number of work days. But at the same time the efficiencies that we’ve generated internally and the demand for the business which seems to be continuing to outstrip what might be either a stabilized or a slight decline on base business is very, very positive for us. We’ll look at it a little bit longer before we give some additional guidance. But we’d expect to give some further guidance as we move forward.

Bill Scott – [Unidentified Firm]

What’s your plan? You’ve got one firm, Taglich, who has written a research report on you. What is your plans to get further other companies to write research.

Richard E. Gathright

Well, I’m sure you recognize that we’re a company that doesn’t lend itself necessarily to the research out there today. That is the reason we did agree to and contract with Taglich to provide some research on the company. We are expecting to hit the streets candidly to see as many institutions, companies, and other entities as we can with the filing of our 10Q to try to get a greater understanding of our company, our business, our performance, where we expect to go. Taglich is important. It’s a paid report, but it’s independent research and I’m sure they will be generating and updating a dated report on the company and if we can generate some additional research we’ll do that. But I think importantly for us we have to get the story out. People are focused on a whole bunch of things right now and a lot of it has nothing to do with us. So our goal and our intention is to get out on the streets and see as many people as we possibly can to get the story out. The story is a stabilized business and business that can grow dramatically and has every opportunity to drive consolidation in the market place where the value comes in for an efficient company. That’s what we’ve got. That’s the game plan at this moment.

Bill Scott – [Unidentified Firm]

Thank you very much.

Operator

(Operator Instructions). Your next question comes from John Nobile - Taglich Brothers.

Howard Halpern – Taglich Brothers

Hi. This is actually Howard, one of his associates, pinch hitting for him today. But he did leave some questions for you guys.

How much volume do you believe might have been lost in the quarter due to the emergencies?

Richard E. Gathright

Well, I think you guys in your report said we would probably add maybe a million gallons a quarter. The gallons that we generated was about a little bit less than a half a million gallons less than what we did on June 30. At the same time, when we gave our guidance, and I think reasonably we never predict, we never project the storm work. We never will. We never can. We intentionally gave up gallonage that was generating less than a 10% gross margin for us to pick up 40% business is a positive undertaking. So while we look at our storm business as well as our base business it is comingled whether it be route structures or personnel or equipment costs, whatever the case may be. You say okay, for example, the Houston market where you had certain customers who were shut down for lengthy periods of time where you had to not deliver to them. You play some catch up, but you also deliver to other people who were generating for you a very high margin for that same short period of time. We really didn’t see any reduction, let’s say, in our base volume or growth volume through the quarter.

The reduction that we saw was really a function of eliminating very low margins. People call us up on the phone, will you deliver me today some gallons, and they’re only buying from you based on price. When we pulled that business back we pulled it back because we wanted to make sure we had our equipment available, our personnel available to deliver a 40% gross margin business as opposed to a 10% gross margin business. We’ll do it every single time. While we did predict that we would have a positive quarter, but long before we knew if there was going to be one hurricane, certainly the hurricanes did add a positive net margin for us. So we’ll always sacrifice volume in favour of price. It’s hard, I know, from an industry standpoint when you’re looking at volume as being the leading indicator, but really for us it is not. Our leading indicator is net margin and net margin per gallon. That is our leading indicator. In the case of storm work we’ve dramatically improved our net margin and net margin per gallon in favour of reducing some clients.

Howard Halpern – Taglich Brothers

Okay. He also wanted to know in terms of new customers that you got, how many gallons did you sell to them during the quarter?

Richard E. Gathright

I think it’s back to the idea that we increase new customers by a million gallons. Certainly the post office service business alone did in fact meet that requirement in terms of a go-forward basis. During the actual quarter I don’t have that figure to be able to tell you was it a million gallons or was it more or less than a million gallons. We certainly added some significant business during that period. If nothing else we added a postal service contract during that period that will increase our volume by about 40%.

Howard Halpern – Taglich Brothers

Okay. I guess that might put a little twist on this question, but during this current economic environment what is the sense that you’re getting or percentage increase that you’re seeing in actual quotes for potential new customers?

Richard E. Gathright

I’m sorry. I’m not quite sure of your question.

Howard Halpern – Taglich Brothers

You know, because you talked about the proposition that you offer customers, so how many new customers are you seeing coming? I guess, what type of pipeline do you see possibly?

Richard E. Gathright

We see a pipeline that causes us to have to make sure that we have the supply available to meet the demand. We are seeing an increasing number of people that are interested in our services and you would expect that as a function of the economy that we’re in. To stay in business people have to reduce their cost of operations and improve efficiencies. The reality is that we are seeing both new customers that have not been in fleet fuelling and mobile fuelling, but we’re also seeing a lot of customers that believe in the proposition but also have not been able to get value because the service provider that maybe charges them less than we will. Look, we’re going to charge you a certain price based upon what it costs us to live in that service and we’re not going to do anything less than that. So we’re seeing a lot of people who are coming in and saying we understand you can deliver the service and we’re willing to pay the price, but we are also seeing a large number of customers, or at least potential customers, that have not been in mobile fuelling before and that is allowing us to offer them something that they haven’t seen that will allow them to minimally control their costs and, from a more positive standpoint, reduce the cost of operations. So I think we’re going to see, I would expect to see the kind of growth we saw in the last quarter of 2008 moving forward. I think it’s reasonable to say we’ll add a million a quarter, but if we have a storm situation and hurricane situation we’re absolutely going to give up every single gallon we can to get the higher margin because in the case of the storm work it’s a limited number of gallons and a high dollar per service hour generated for the customer.

Howard Halpern – Taglich Brothers

And finally, is there any progress report talked with consolidation candidates?

Richard E. Gathright

Well, yeah, look, we’ve got, it’s the Dead Sea Scrolls of consolidation candidates. But the reality is we’re in a marketplace where we need to see improvement in our stock price. There are candidates where there may be an opportunity to consolidate without having to raise a lot of capital. Those are the things that we’re most interested in now. But we also recognize that for the benefit of our shareholders you can’t raise a lot of capital at $0.30. So we’re having to be patient with regard to what are an extensive number of opportunities available to us today in the marketplace of people that we could acquire, that are good solid businesses but they are struggling with the same kind of financial banking issues that so many are. That so many of us are not in a position to be bailed out by somebody. We have to bail ourselves out. So there’s no limitation on the opportunity except what the marketplace allows us to do as a function of our stock price and the ability to generate the capital resources. That’s why I said earlier that we are intending to go out, hit the streets, get our story out. In any market, what the market is there’s opportunity for gain. We believe we have a very low cost operating business that can add dramatically to its business without increasing the cost and generate a very substantial yield for our shareholders. We just need to get that point out. We just need to get it out in front of people to understand what our opportunity is if we can get the support. And that is what we’re intending to do.

Howard Halpern – Taglich Brothers

Thanks very much.

Operator

At this time there are no further questions in cue. Therefore, I would like to thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. You have a great day.

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