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Star Gas Partners, L.P. (NYSE:SGU)

Q4 2013 Earnings Call

December 12, 2013 11:00 am ET

Executives

Steven J. Goldman - Chief Executive Officer of Kestrel Heat LLC, President of Kestrel Heat LLC and Director of Kestrel Heat LLC

Chris Witty

Richard F. Ambury - Chief Financial Officer of Kestrel Heat LLC, Executive Vice President of Kestrel Heat LLC, Treasurer of Kestrel Heat LLC and Secretary of Kestrel Heat LLC

Analysts

Andrew E. Gadlin - Odeon Capital Group LLC, Research Division

Michael Prouting

Operator

Good day, ladies and gentlemen, and welcome to the Star Gas Fiscal 2013 Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Steve Goldman, Chief Executive Officer. Please go ahead.

Steven J. Goldman

Good morning, and thank you for joining us today. With me today is Star's Chief Financial Officer, Rich Ambury. After some brief remarks, Rich will review the fourth quarter and fiscal year ended September 30, 2013. 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, it 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 and Form 10-K for the fiscal year ended September 30, 2013. 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?

Steven J. Goldman

Thanks, Chris. I am certainly pleased to report during my first conference call as Star's CEO that not only did we post very good results this fiscal year, but we were also successful in expanding our reputation as offering a full suite of home services for our customers, leveraging our well-established fundamental business in heating oil and propane. Well, I'll leave the financial details to Rich's comments. I would like to say that, overall, operating results showed great execution of our business plan under various challenges and the ability to reap the benefits of cold weather wind conditions were what we could be considered more normal. As a reminder, we spent the early part of the past fiscal year responding to our customers' needs, post-super storm Sandy. But as we return to more normal operating conditions, we were the beneficiaries of some very positive actions taken by our customers.

One way that our customers' favorable view of Star manifested itself was in the area of home service products, where we saw a continued diversification and expansion. Our nonfuel offerings such as security, plumbing, air-conditioning, emergency, home generators, duct cleaning and, most importantly, heating services and installation have been welcomed in the marketplace and, in turn, should help propel future growth.

In addition, we've begun to modify our marketing plans where our presence is stronger by better using our home service platform and reputation to our advantage, and our customers are telling us they really like it. While this expansion of services will definitely mean small growing pains here and there along with redoubled efforts in the area of training, we, the team, believe it is critical to the partnership's long-term expansion and improved financial returns. I think it is important to confirm our dedication to the principles that have gotten us this far in our journey to expanding our position as one of the premier home heating, cooling and related service providers in America.

Our team is a very energized and committed one, and we are married to the basic values of accountability, responsibility and active expense management. The businesses which we operate are all continuing to strengthen and adjust to the ever-changing and challenging markets in which we operate. And while we know we are doing many things very well, we also know that there are still strong headwinds facing us. Our greatest concern is the extraordinary challenge of customers converting to natural gas, which continues to be the most pressing issue we see on a regular basis.

We not only have to deal with the significant home heating price differential, but several states in our footprint have begun actively promoting natural gas conversions. However, we know that our product is often the right choice to heat a home, especially with today's more efficient equipment, and we are determined to continue this fight.

While natural gas conversions' credit losses and pressure from low price providers continued to have an impact on our account base in the form of attrition, I am pleased to report that our trend towards lower attrition continues with the lowest reported annual attrition rate in many years of only 3.3%.

We were also able to positively impact our account base with the addition of 2 small acquisitions during the past 12 months. While just 2 transactions is unusual for us, we continued to have very active discussions with many good companies that we believe would be a great fit for us down the road.

Star Gas remains on the right path towards even better operating results, but one thing has not changed and will not change, the strong, dedicated and talented team we have in place. This has been the hallmark of all our success, and we believe they will be the legacy as we continue to develop our people and our business.

With that, I'd like to turn the call over to Rich Ambury, to provide some comments on the quarter's results. Rich?

Richard F. Ambury

Thanks, Steven. Good morning, everyone. Starting with the quarter, our volume rose slightly to 20.6 million gallons, compared to 20.5 million gallons in the prior year's comparable quarter.

Total gross profit rose by 2% to $33.5 million as the impact of higher home heating oil and propane margins was somewhat offset by lower service and installation gross profit. Total operating expenses increased by $3.3 million due to higher insurance, plant and marketing expenses. Certain expenses were naturally higher since fiscal 2013 was a much more normal year than fiscal 2012 when we experienced unusually warm weather. We posted a net loss for the quarter of $13.9 million or $8.3 million greater than the net loss from the prior year period, largely due to an unfavorable change in the fair value of derivative instruments of $10.2 million. Star's adjusted EBITDA loss increased by $3 million to a loss of $15.2 million as the additional gross profit was offset by the increased operating expenses previously mentioned.

Now turning it over to the fiscal year results. For fiscal 2013, home heating oil and propane volume increased by 17% versus last year or 48 million gallons to 325 million gallons, as 22% colder temperatures and the additional volume provided by acquisitions more than offset net customer losses, conservation and other factors. On a year-to-date basis, our heating oil and propane margins increased to $0.954 per gallon, up $0.02 versus fiscal 2012. The combination of slightly higher margins and the impact of colder weather drove an increase in product gross profit of $53 million.

Our delivery and branch expenses increased by 15% or $33 million, in line with its 17% increase in home heating oil and propane volume. On a cents per gallon basis, excluding the impact of the prior year's weather hedge, delivery and branch expenses declined by 5.5% to $0.67 per gallon. Net income for fiscal year 2013 was $30 million or $4 million higher than fiscal 2012 as the impact of colder temperatures was partially offset by an unfavorable noncash change in the fair value of derivative instruments of $15 million and by the absence of any weather hedge benefit, which contributed $12.5 million in fiscal 2012.

Adjusted EBITDA increased by 37% or $24 million to $90 million, largely due to the increase in volume. Again, adjusted EBITDA for fiscal 2012 included the $12.5 million weather hedge benefit. As of September 30, 2013, we did not have any working capital borrowings outstanding and our cash balance was $85 million.

Now I'd like to turn the call back to Steve.

Steven J. Goldman

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Andrew Gadlin with Odeon Capital Group.

Andrew E. Gadlin - Odeon Capital Group LLC, Research Division

I was wondering if you could talk a little bit about how the first 2 months of this relatively cold season have been playing out so far?

Steven J. Goldman

Well, I would say that they're basically on plan. I mean, we're getting weather that we expect to have and we're able to execute our plan. It's -- basically, it's more normal weather. It's -- it has been a good mix of warmer days and colder days, and both in some ways are benefiting us because they -- well, the cold is certainly giving us product to sell, the warmer days have given us some temporary relief here and there both to rest our men, and also, sell some other services. So it's been a pretty good start to the quarter so far.

Richard F. Ambury

Yes, through the first 2 months of last year, on a degree day basis, we accumulated 902. This year, through the end of November, we had accumulated 880. So we're down slightly, but it's only 22-degree days difference this year versus last year.

Steven J. Goldman

The one thing I would say though, on a comparative basis, we are -- first quarter, is going -- is certainly will look different than last year, because last year was a quarter filled with the impact of Sandy, good and bad. So we're expecting varied results by key different pieces of the business. But in the end, as I've said, when I started the -- our execution of our plan for 2014 looks to be going pretty well.

Andrew E. Gadlin - Odeon Capital Group LLC, Research Division

On a financial basis, obviously, operationally was very difficult, but was Sandy a net positive financially?

Richard F. Ambury

Well, we did well in the service and installation business, but let's not forget, also, that with folks being without power, we lost several million gallons that we didn't deliver in fiscal 2013. Because even though it was cold, people just couldn't turn on their system.

Steven J. Goldman

It was financially beneficial in an uneven manner and also only in pieces of the business for periods that overlap the first and second quarter. But as Rich pointed out, there was some negative impact of the weather itself and the power loss. So in balance, more or less, they canceled each other out, the benefits and their negatives, but not necessarily in the same time period. So it will have the ghost of that a little bit in our comparisons year-to-year for a little while. But we're very confident and the plan we've laid out is a good one. And it represents an image of performance financially very similar to last year, is our plan.

Andrew E. Gadlin - Odeon Capital Group LLC, Research Division

Got it. And just to go back to the degree days. I'm actually surprised to hear that the degree days are 880 versus last year's 902. I'm looking at National Weather Service data, and it looked like in the Northeast, degree of days were up pretty significantly. What am I missing?

Steven J. Goldman

I don't know what you're looking at, I'm looking at the New York metropolitan area for -- actually, I'm looking at kind of a blended across our entire footprint.

Andrew E. Gadlin - Odeon Capital Group LLC, Research Division

So you've kind of catered it to exactly your footprint?

Steven J. Goldman

Yes. It's weighted by average for all the significant airports, ranging from New Hampshire down -- basically, to Maryland.

Andrew E. Gadlin - Odeon Capital Group LLC, Research Division

Got it. Okay. And then, I was wondering if you could talk a little bit about the acquisition environment? Obviously, not much happened in FY '13. Is the environment -- I guess, what are some of the factors constraining activity right now?

Steven J. Goldman

We have both -- we've mentioned it before. We have a lot of activity as far as working with prospective sellers. Usually, the constraints are that they're on the fence. We spend a lot of time nurturing the idea to sell. Many of the owners, even though we offer employment to them and their staff, a lot of them aren't fully adjusted to the idea that they'd have a change in their relationship to their business. There were several of those that we've been speaking to for months now. When you get a cold weather snap like this, and it's beneficial to them, they usually like to ride out the winter then. But we have some pretty good discussions going on throughout our footprint to several different potential sellers.

Andrew E. Gadlin - Odeon Capital Group LLC, Research Division

Got it. Any acquisitions closed since the end of the quarter?

Steven J. Goldman

No.

Richard F. Ambury

No.

Operator

[Operator Instructions] Our next question comes from the line of Michael Prouting with 10K Capital.

Michael Prouting

So unlike last quarter where I spared you questions, I actually have a bunch of questions today. But I'll ask a few this round and double back so I don't spend too much time monopolizing the call. And just to go back to acquisitions which the last guy was asking about, is it reasonable to assume that -- I mean, I know typically you make your acquisitions in quarters which are not revenue-generating quarters or your main heating oil quarters, is that likely to be the case in fiscal '14 as well? Or asking that a different way, is it likely that we probably won't see any acquisitions in the first and second fiscal quarters?

Steven J. Goldman

There is really no rhyme or to reason when acquisitions are made. I've been doing this for 30 years now. And sometimes we make them in December, sometimes we make them in July. There really is no rhyme or reason as to the timing of acquisitions. So you can't draw any conclusions.

Michael Prouting

All right, okay. And then on the stock repurchase or unit repurchase, I noticed that you did repurchase some units both in the quarter and then prior to quarter end. One thing, actually, which was intriguing to me is that you are purchasing the units at much higher prices, certainly following the end of the quarter than you have previously. And I know this being part of situations where the stock has run-up. And because of limits you've used, you haven't actually been active on the unit repurchase. So I'm just wondering if there's been any change in philosophy or strategy as far as unit repurchase is concerned?

Steven J. Goldman

There's been no change in philosophy with our unit repurchase plan.

Michael Prouting

Okay. And I guess just slightly related question to that, so obviously you made fewer acquisitions in the fiscal year, used less cash or very little cash making acquisitions. Did that increase your predisposition towards as far as putting cash -- free cash flow towards unit repurchase given the absence of acquisitions?

Steven J. Goldman

We look at -- when we look at acquisitions, then we look at the unit repurchase plan and the availability to do either one of them.

Michael Prouting

Okay. So there's no necessary correlation between having a strong cash flow and increasing the amount of cash you're putting towards unit repurchase as a result of lower acquisition activity?

Steven J. Goldman

No, there is not.

Michael Prouting

Okay, all right. And just a couple of other ones, and then I'll pass to somebody else. One thing which actually seems to be really favorable for the company is I've noticed that basically over some time now, you seem to be steadily increasing your product gross margin and obviously giving the leverage in the business in the amount of volume you put through. That's an extremely positive favorable economic drive there. I'm wondering -- or I just want to get your thoughts on the extent to which you think that might be sustainable. And if there's any underlying market forces that may be supportive of that in terms of either a more rational competitive environment or just whatever?

Richard F. Ambury

Steve can probably elaborate. We're trying to sell some additional products and put them through our system through our customers.

Michael Prouting

Okay.

Steven J. Goldman

Yes. I mean, to your point about margin increases or retention, we -- it's a fine balance. We think of it as walking a tightrope, because we want to retain and grow our customer base. At the same time, we need to make sure we have the right margin that reflects our costs, and we manage it actively. The forces in the marketplace that put pressure on the margins are uneven. It depends on the marketplace. Some places, we have extraordinary pressure; some, it's a little less force. We are fortunate that we have diverse marketplaces. So if one is under assault where we have a pretty decent balance of consistency, as you noted. And I think it's one of our 5 key focuses that we make sure we're protecting the margins we need to be a profitable business.

Michael Prouting

Okay. So -- and that's more a function. It's not like more a function of internal decisions you are making as opposed to any positive change in the competitive environment.

Steven J. Goldman

Yes.

Michael Prouting

Okay. And then your final question related to that, and I'll jump off. So obviously there's also positive trends on the attrition side, which again is a hugely positive driver for the fundamentals of the company. Then it looks as though that's being driven more by increases in customer gains as opposed to decreases in customer losses. And it's sort of interesting that you're achieving that at the same time as you're -- as you've been able to increase product gross margin. So I just wanted to get your thoughts on what might be driving the increase in customer gains? And if you think that's sustainable?

Steven J. Goldman

Well, what's -- I'll start with the latter and say, yes, it's probably sustainable. No one has a crystal ball, so we can't predict what we'll do tomorrow, but we do have some very solid sales and marketing plans that are fully integrated right down into the communities we serve. Those are showing very good rewards. We keep working on strengthening that part of our business, both our sales management. So execution is better, the tools they're using. We've been working on upgrades, as well as our more customized approach to each individual market. We have some very strong brands, as I mentioned in my statement earlier. We get -- we got a very good uplift from Sandy from being a company that could react to our customers' needs, not just for delivering product, but for things that maybe they didn't realize that we actually do. And that helped us in a way, that maybe all the marketing spend that we could ever spend will never penetrate the market. So word of mouth is very strong in our business. We're seeing that as a big benefit. And to your point, that combination is what gives us the opportunity to have good strong margins and customer growth at the same time.

Michael Prouting

All right, terrific. And one related question to that and maybe I will stop for now. So I'm just curious, obviously, you've got a great database in terms of prior customers, customers that may have churned off, either because of termination charges that they were hit with after breaking contracts when oil prices -- heating oil prices declined previously or are the customers that have just been churned off for whatever reason. Do you feel like the increase in customer acquisition is driven by your gaining back old customers that you may have lost or...

Steven J. Goldman

No, no. The mix really hasn't changed. We've always worked off customers loss lists for potential reacquiring those customers. The problem with lost customers is, a lot of times, lost customers are, again, are comprised highly of conversions to other products, particularly natural gas. And customers who have poor credit situations so that we can't continue our relationship with them. I mean, if they return to us in a year or so and they're in better credit shape, we can obviously restart our relationship. But the ones that leave for competitive marketing where someone has offered a very low price and they go to them, and they find that the services and what we offer, we do pretty well getting them back. That's -- and that's part of our normal mix of gains. But there's a piece of the customer base, when it goes, there's not a lot you could do about getting those back. A lot of our new customers are just that, new customers. We haven't had -- they may have been customers of someone else. There are a lot of other businesses in this space that are struggling, and I think that's some of our opportunity for the future.

Operator

[Operator Instructions] And I'm not showing any further questions at this time. I'd like to turn the call back over to Mr. Goldman for closing remarks.

Steven J. Goldman

Okay, thank you. And we appreciate and we thank everybody for their interest, and we look forward to reporting our first quarter results in February.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a good day.

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