SMF Energy Corporation F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

| About: SMF Energy (FUELQ)

SMF Energy Corporation (NASDAQ:FUEL)

F4Q08 Earnings Call

September 23, 2008 10:00 am ET


Michael S. Shore - Chief Financial Officer

Richard E. Gathright - President and Chief Executive Officer


[John Noble] - Unidentified Firm

[Kevin Ellison] - Unidentified Firm


Welcome to the Q4 2008 SMF Energy Corporation earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's conference, Michael Shore.

Michael S. Shore

Today's conference call is an update on SMF Energy Corporation's results for the fourth quarter ended June 30, 2008.

A press release and 10-K announcing these results were filed on September 18, 2008 and September 19, 2008, respectively. Each of these documents can be found on the company's website at in the Investor Relations section.

My name is Michael Shore, the company's Chief Financial Officer. Also representing management today is Richard Gathright, President and Chief Executive Officer.

Before we get started, I'd like to read the following safe harbor statement:

This conference call will include forward-looking statements within the meaning of the safe harbor provision of the Private Securities 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 Condition and Results of Operation section of the company's Form 10-K for the period ended June 30, 2008, they should not be relied on by shareholders or other persons 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 10-K for the period ended June 30, 2008.

And now I'll turn this call over to Richard Gathright, President and CEO.

Richard E. Gathright

With our financial results just released, I think the releasing of those results is significant in itself because they're 10 days earlier than the due date for the 10-K and 10 days earlier than the company has ever filed its financial results for a fiscal year, significant in that our systems and operations are functioning effectively and as we intended and as we've laid out our business plan, as we've laid out the problems and the issues and the belief in the success that we would have through the accomplishment of the capital investments we've made over the last couple of years. We're seeing the results now.

We have achieved a considerable turnaround in our most recent two quarters and we expect the trend to continue into fiscal 2009. The net loss for the fourth quarter of fiscal 2008 was $366,000, substantially lower than the third quarter loss of $1.4 million, a reduction effectively of $1 million and a $1.2 million reduction from the fourth quarter a year ago.

Our margin is extremely important to us, which is the value that's generated off the service that we deliver after our costs before SG&A and depreciation, was $0.242 compared to $0.168 a year ago and $0.178 from the last quarter. That's a driving force for us that shows that we can create efficiency in the service that we are delivering to our customer.

Our EBITDA in the fourth quarter was $1.2 million. It was a million dollar turnaround in EBITDA over the same quarter a year ago and an $877,000 improvement since the third quarter of this year.

As I said, we expect the positive quarterly performance trend to continue in the fiscal quarter ending September 30, 2009. It should be said that we would expect to report improved results over our expectations as a result of the storm work that we've been undertaking since August, three storms, three hurricanes. However, the underlying business performance is what we are predicating our improvements on.

So while you'll see some fairly material increases in the performance over the guidance we've given, that will be a function of the storm work and our ability to service the public beyond the underlying continued improvement in our business as a function of the completion of our systems and undertakings that have been in process for the last couple of years.

If you look at our 10-K, look at our financial press release, you can see the last six quarters and you can look at the quarterly trend. You can understand that what we've been telling the investment community and others, we are seeing the recognition of that, the validation of that today.

It should be noted that there was nearly a $1 million decrease in our SG&A costs over a year ago, $14.9 versus about $15.8 million. The savings thus far resulted from the efficiencies we've gained from our systems implementation and also being able to wring out integration efficiencies from the two acquisitions we made in 2005. We have created cash availability through these efficiencies and we are re-deploying that cash and have been redeploying that cash in expanding our sales force to capture market opportunities that are in front of us to grow the company's base business.

Now revenues were about $82 million for the fourth quarter. It was up 28% from the third quarter, primarily due to higher prices. And as we saw yesterday, the largest increase in crude oil in history, we are living in very uncertain markets.

The fourth quarter was the second consecutive quarter in eight quarters that our sold gallons increased over the prior quarter. That's significant in that we have seen a degradation of our base business, not the loss of customers but the reduced consumption by our customers of volume that has offset some fairly substantial gains in new business. This is the first point in time that we are experiencing our new business increasing above the decline in the consumption of petroleum products by our customers.

We cannot control the economy. We cannot control the demand for petroleum products by our customers. What we can control is putting forth the business proposition that we have to new customers and to sell that business to new customers that allows us to exceed the consumption patterns of our base business. It's a market issue. We're very pleased that we're finally seeing some positive traction above that.

And some of the benefit of that is a function of the increased sales force, which we were able to employ as a function of the reductions in costs in other areas of the company and improvements in efficiencies in our peer operating areas. It's also a function of the fact that we are delivering a service that our customers see as valuable - they're willing to pay us for that service - and that we are getting an increasing number of customers from our competitors that are unable to deliver the service.

And if you think about it like this, if I do not show up, if I do not fuel you at night, if I'm unable to obtain the fuel supply, I don't get it in the tanks, if I spill the fuel on the ground, if I create other operating problems for you, then there's no value. So no matter what you offer me as a reduced price for the service that's going to be delivered, there is no service unless you do all the things that are necessary to allow me to improve efficiency in my operation as a customer.

That distinguishes us from the competition. That is a barrier of entry and that is a barrier of performance that we've seen again and again and again in recent months allow us to gain business, most recently with the award of a new contract from the United States Postal Service. I think we've been with the Postal Service for about 15 years. We gained, I think our press release said it was about 30%. The reality, when the smoke cleared, it was about a 40% increase in our basic business with the U.S. Postal Service.

It is a validation of the level of service that we are delivering to a valuable customer, but that's one of 4,600 customers. Our portfolio is across the board and we're not dependent upon any particular customer, but in this case, it's a large body of increase for us and a material impact to our go forward performance not included in our prior guidance as we had not been awarded it at that particular point in time.

Certainly in saying that, the 45% increase in market fuel prices during 2008 has impacted the national economy. No question about that. You're seeing it every day. And certainly, as I said earlier, the resulting demand for limited volumes of our existing customers has been impaired. But the value proposition that we offer in our primary business area allows our customers to save money as prices increase. And as a result of that, the service that we are offering is in increased demand.

We have to be able to actually deliver what we say we're going to deliver to our customer because if we don't, as I said a minute ago, there is no value in the proposition. But we have been able to do that and we are seeing increases in our business. And from that standpoint we would expect to continue to see increases in our business operations grassroots.

Saying that, the business plan of this company and the business proposition that we're offering is one that is intended to create consolidation in the only industry segment in energy that has not seen dramatic consolidation. We're a company that's not been created or not pursuing its business opportunities as a function of creating the need for the service. We are looking at the opportunity that exists in a highly fragmented segment of the energy industry - has not been consolidated, has not seen efficiency. And if you continue to operate as you have historically, you will not be in business.

The capital requirements out there today - the economy is in disarray; we're looking at material bailout of major corporations. We don't have that opportunity here at SMF Energy. It's probably good news for us. Nobody's going to bail us out except ourselves. And notwithstanding the market conditions, there is capital available as there is always capital available for opportunities and yield.

More than ever, we're operating in a time where ingenuity and efficiency dictate the failure or success of businesses. There's no question about that. And our opportunity is to grow our business operations on top of a very automated, effective platform administratively [inaudible] business, operationally of understanding and managing our business, and driving efficiency in an industry sector that does not have efficiency.

The major oil corporations long ago determined that they were going to get out of the end user distribution of petroleum products. They are not efficient in their operations and the intricacies and the difficulties associated with this distribution has put a greater and greater emphasis by the manufacturers of petroleum products on someone else to handle it. And costs are passed along and inefficiencies are passed along.

The opportunity for us is to create consolidation by applying efficiency. We believe that we have a platform that does not exist in our industry sector. It just about killed us to put it in place. It now creates the opportunity. We think that our improving financial results do in fact demonstrate the validity of our business plan, and we certainly know it positions us to grow not only through internal growth with efficiency but also through the consolidation.

The capital markets are tough. We've continued to manage our cash resources effectively and we've been able to obtain limited amounts of capital from a close, supportive investor group which has allowed us to continue to bridge our operations in order to achieve our goals.

As we're doing this, we're continuing to drive efficiencies out of our organization and the opportunities for us to combine, to consolidate are great. The ability to put two companies together where you may save $1 million or $10 million in your basic operation. Using the platform and the efficiencies that we created allows us to generate, we believe, a very substantial yield for our investors.

It's taken us a long time to get here. We're not going to continue to talk about the past. We're only going to be talking about the future because we're living the future now, and while there will be obstacles that we have to overcome, we are in a position to capture the value of the proposition that we put forth to you when we came in, that we put forth to you as we struggled through putting the steps in place, and now we're able to show some very positive results in our operations.

Our base business will grow, but our base business cannot grow to the same level that it will grow through the consolidation. We do have initiatives in the marketplace. We mentioned our DrySolv product alternative to perc used in the dry cleaning industry. It's gaining traction as we're rolling it out customer by customer. It's being pushed hard as a function of the regulatory requirements in this country.

And this particular product versus alternatives is one that not only does it meet all the environmentally friendly requirements, but it also is economic. It's economic and a value to our customers, dry cleaners, and to the consuming public versus a number of things that are out there that are promoted as being environmentally friendly but don't create any net economic benefit. This does.

And we are balancing the attention, the time, the management time, the capital and resources that are being applied to things like DrySolv versus the growth in our base business. But that does not take away from the fact that the company's business plan is growth through consolidation in a fragmented industry where we have not seen efficiency, where we have efficiency in our operation and we can drive that efficiency through the consolidation and there are willing partners out there for us to work with to do that.

And we believe firmly that the capital resources that are necessary for us to accomplish this are there, creating value for our stockholders.

We are a company in transition. The transition now is from a positive platform. It hasn't been an easy road. It will not be an easy road. But if you think in terms of all the organizations in the marketplace that have fallen with great capital resources, we believe that they did not in fact have the ingenuity and they did not in fact have the efficiency in order to meet the business challenges that we are able to meet today.

I appreciate your continued interest. We as a company appreciate your continued support. We look forward to a continuation of improved performance. And to you, that have been supporting us for a lengthy period of time, pledge this company as we are getting ready to hit the road. We're ready to put our story out. We're getting ready for people to understand where we are. We couldn't do that before, so somebody that might be critical of why we haven't done it, it's because we didn't have the results to talk about.

We are in a different position today, and we intend to do everything we can possibly do to publicize both the opportunity as well as the validation of our performance in meeting the challenges and in gaining the opportunity to generate the value from our shareholders.

A committed management team - long since many people would have thrown in the towel. We all believe in what we're doing, and we'll continue to move the process forward to our collective benefits, management, company, shareholders.

Thank you very much.

At this point I will entertain any question that anyone would like to ask me.

Question-and-Answer Session


(Operator Instructions) Your first question comes from [John Noble - Unidentified Firm].

John Noble - Unidentified Firm

I'm relatively new to the story. I was hoping that you could speak a little bit about your ERP system, specifically how long has it been in operation and are you currently realizing the full benefit of this system, and if not, how long will it take to realize.

Richard E. Gathright

Well, number one, the system has been in operation effectively since the first of the year, the first of 2008. We are not today generating all the value that we will generate from the system. It is a scalable system. It was put in place specifically to allow us to effectively manage a diverse business operation and effective to allow us to make material acquisitions and, in making those acquisitions, integrate those in a timeframe that we believe would be in the range of six months and would allow us to meet our Sarbanes Oxley compliance obligations.

We will continue and are continuing to see improvements in the system operations and in the yield in efficiency that comes from that.

The big value in it is the scalability of it and our ability to make these acquisitions or consolidations with other companies and to allow us to apply the benefit of what we have today to them.

We are looking for a 25% to 60% savings in all the conceivable business combinations that we are looking at currently or would expect to look at as a function of both the systems and the management personnel that we put in place. We have a group of people that are diverse in the industry and we believe probably more diverse than any of the competitors or semi-competitors or comparative competitors out there in the marketplace that understand all the segments that we're operating with.

And so it's not just a system. It is a system being managed by people that have a greater understanding, we believe, than most of the folks out there in our industry sector. And that's one of the reasons that we enjoy a higher margin, we believe, than all of our competitors.

John Noble - Unidentified Firm

And just to get back to the first point, you said it was in operation since the first of 2008. Are we talking calendar 2008 or fiscal 2008?

Richard E. Gathright

Calendar 2008.

John Noble - Unidentified Firm

And just one more question in regard to your current guidance, the last guidance that was publicly out there. It was calling for $5 million to $6 million EBITDA in fiscal 2009. What would your revenue and gross margin expectations need to be in order to achieve that range?

Richard E. Gathright

If you think about it like this, our revenue is to a large degree a flow through the company's operations, and the margin that we're generating off of that is not necessarily representative of the revenue being generated.

John Noble - Unidentified Firm

Specifically around 5% range, I believe, is the total gross profit after taxes and everything, from what I've seen, at least the recent results.

Richard E. Gathright

Well, the revenue that we're generating today and the gross margin that we're generating that we put out in our guidance would be reflective of the $5 to $6 million of EBITDA. Certainly the storm work that we have completed probably pushes us more to the $6 million than maybe the $5 million range. So if you would take what we've reported and we've said with regard to the expectations, then that really is a good gauge for the $5 to $6 million EBITDA.

Michael Shore, would you like to comment on that?

Michael S. Shore

Yes. When you're looking overall on a percentage basis, depending upon what happens with product prices, your percentage of gross profit or net margin as you look at our financial numbers, can fluctuate materially up or down depending upon what happens with the commodities price of fuel, as Richard was discussing, as a pass through to our customers.

What's key and fundamental in understanding what makes up the gross profit and what we look at as the net margin, which is gross profit before depreciation costs, is the net margin per gallon and the overall volume that we're delivering at that net margin rate. As Richard discussed, the continued improvement in the net margin as we continue to wring out the efficiencies and the analysis of improving our route structures to deliver our customers is improving that mark.

In the guidance that we put out there, if you take the overall net margin per gallon of roughly $0.24 to $0.25 at the volume levels similar with slight growth over this year, you would yield out approximately $19 million of total net margin dollars, which would be higher than the current year. But if you look at the fourth quarter net margin, it would correlate pretty consistently with a slightly higher result than the fourth quarter of this past year.


Your next question comes from [Kevin Ellison] - Unidentified Firm.

Kevin Ellison - Unidentified Firm

Are you guiding to net profitability for Q1?

Richard E. Gathright

Yes. Obviously, with the storm work we're doing, it would be hard to say we would not be profitable. But, again, we're looking for the underlying business. And we've said, I think, in our guidance that we're kind of at a breakeven point outside of the performance that we may have through the storm work, which we obviously don't budget and don't predict. There's quite a bit of it, with three hurricanes impacting all the way from Florida to Houston, Texas.

Kevin Ellison - Unidentified Firm

And I believe you just reiterated your $5 to $6 million EBITDA number for 2009?

Richard E. Gathright

That is correct. We stand by that, certainly.

Kevin Ellison - Unidentified Firm

And off that number you're expecting a breakeven to a profit for 2009?

Richard E. Gathright

Yes. I mean, in the guidance we put forth we were putting forth something in the neighborhood of, I think we said negative $600,000 to $400,000 positive, and that flows with the EBITDA projection.

Again, a lot depends on whether we see the continued growth that we have been experiencing in net business and what the economy does to impact the customers that we have and the services that they deliver. But I think that it's a fair statement to say that we do stand by the guidance to have a net neutral P&L for the - or slightly positive possibly - for the fiscal year ending 2009.

I mean, we hope that we'll be able to refinance some if not all of our maybe higher-priced debt. Obviously, that's a fairly material impact on the company's performance and if you weren't carrying that debt, then obviously - or the non-cash charges associated with it - you would be performing amazingly well.

But that is not the situation that we're in today. We believe that our continued improvement in our financial performance will allow us to improve our capitalization and our credit profile, and hopefully that will support a better performance than what we've said. But at this point, we're standing by the guidance that we've given.

Kevin Ellison - Unidentified Firm

On the consolidation front, it's the grow through consolidation, I would imagine with the capital markets being so constrained that there would be tremendous opportunity in this area and maybe you can talk about that. And are there any initiatives, real initiatives that are going on with you and potentially other people in terms of this consolidation?

Richard E. Gathright

Well, number one, yes, there absolutely are the opportunities, as pressures are out there in our industry sector on all companies are greater. People that we've talked to in the past that have been maybe reluctant to want to discuss consolidation are now calling us. We have a number of targets and candidates that we're talking to.

And really part of the exercise for us was to complete the fiscal year, get out our financial performance and use that as a basis to go out to the marketplace and explain what we've done. And that is a segue into moving forward with one or more immediately of these consolidation opportunities. That is our plan and we are in active discussions in that regard.

Kevin Ellison - Unidentified Firm

And one last question, Richard. You alluded to in the beginning of your speech about the investor relations and getting out on the road. Can you be a little more specific about timeline and what the game plan there is?

Richard E. Gathright

Well, the game plan is - and again, as I'm sure you recognize, we've been reluctant to go out and say things until we could support those things. You can tell people what the plan is and they say well, that's great, but let me look at your financial performance. Until we were able to show financial performance, a material turnaround in our financial performance, and validate what we'd been saying, we have not felt comfortable in going out to the marketplace.

We do intend a blitz on institutions and certain high-worth individuals and primary institutions, a road show, public pronouncements and other data and information that is going to both crystallize what we believe the opportunity is as well as what we know here is our ability to execute on that opportunity. And that's going to be getting in front of as many people as we possibly can. We'll start that process probably in about 10 days from now, and we'll continue it as long as we have an audience to talk to.

Kevin Ellison - Unidentified Firm

And I do have one last question. When do you anticipate getting your first quarter numbers filed and out?

Richard E. Gathright

Well, November 15th, I think, is the due date. We would hope to get them out earlier than that. We'll get them out as quickly as we possibly can because obviously it's going to be positive for us to do that.

At the same time, the positive and negative is that we're struggling through a massive amount of storm work right now and so the process is maybe a little bit slower than it would be if it was a normal quarter. That's good for us as a company. It's obviously good for our investors. But it may slow down putting out our numbers prior to the November 15 date.

But I assure you that we'll have them out there in front of everybody at the earliest moment possible.


You have no questions at this time, sir. I would now like to turn the call over Richard Gathright for closing remarks.

Richard E. Gathright

All right. Thank you. Again, we do appreciate the continued support of our investors that have allowed us to validate our business operation and give us the opportunity to generate the yield for them and for everybody else. Our commitment is to, as I said earlier, get the story out, continue to drive the process.

Think about it like this: You have an entire industry sector that is inefficient by definition. It has not seen consolidation; it has not seen efficiency. We're not creating that opportunity. The opportunity is being created by the actual demand as a function of the company surviving and surviving in an industry sector that is absolutely dictated and required to get petroleum products to the consumer.

And yet even in the constrained capital markets the company that is able to create efficiency, not only does it survive but it allows its investors to pull that efficiency into their pockets. That's what it's all about. That's the reason we're here, and that's the commitment that we have on a go forward basis.

We look forward to our next call. Thank you very much. Have a good day.

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