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Edited Transcript of SGU earnings conference call or presentation 6-Dec-18 4:00pm GMT

Q4 2018 Star Group LP Earnings Call

STAMFORD Dec 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Star Group LP earnings conference call or presentation Thursday, December 6, 2018 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Richard F. Ambury

Star Group, L.P. - Executive VP, Treasurer, Secretary & CFO of Kestrel Heat, LLC

* Steven J. Goldman

Star Group, L.P. - President, CEO & Director of Kestrel Heat, LLC

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Conference Call Participants

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* Andrew Elie Gadlin

Odeon Capital Group LLC, Research Division - Research Analyst

* Michael Prouting

* Chris Witty

Star Group, L.P. - IR Contact

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Presentation

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Operator [1]

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Good day, and welcome to the Star Group Fiscal 2018 Fourth Quarter Results Conference Call and Webcast. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Mr. Steven J. Goldman, Chief Executive Officer. Please go ahead, sir.

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat, LLC [2]

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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 our fourth quarter financial results. We will then take your questions.

Before we begin, Chris Witty, of our investor relations firm, Darrow Associates, will read the safe harbor statement. Please go ahead, Chris.

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Chris Witty, Star Group, L.P. - IR Contact [3]

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Thanks, Steven. Good morning. This conference call may include forward-looking statements that represent the company's expectations and beliefs concerning future events that involve risks and uncertainties and may cause the company's actual performance to be materially different from the performance indicated or implied by such statements. All statements other than the statements of historical facts included in this conference call are forward-looking statements. Although the company 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 company's expectations are disclosed in this conference call and in the company's annual report in Form 10-K for the fiscal year ended September 30, 2018. All subsequent written and oral forward-looking statements attributable to the company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements. Unless otherwise required by law, the company undertakes no obligation to publicly update or revise any forward-looking statement, 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?

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat, LLC [4]

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Thanks, Chris. Good morning, everyone, and thanks for joining our year-end conference call. It's amazing how time has -- flies by, and here we are back at the start of another winter season.

During the fourth quarter, our bottom line performance was negatively impacted by lower volumes of home heating oil and propane, by acquisitions completed after the heating season and investment in our service initiatives and certain onetime expenses, such as severance, as Rich will review in a moment. But we took some strategic actions to better positon the company for future growth during this time. Most notably, we sold our small security business for net proceeds of $7 million. We came to the conclusion that this was not a prudent area for us to be concentrating our efforts on or spending capital, and thus, made the decision to sell this operation.

At the same time, we eliminated 18 small brand names of the company to improve overall marketing efficiency. We believe taking such steps leaves us more focused and streamlined as an enterprise dedicated to our core heating, cooling and other HVACs-related markets.

As always, we continue to look at transactions that can strengthen or grow our customer base. For fiscal 2018 as a whole, we completed 6 acquisitions that brought in aggregate of approximately 17,000 new accounts to Star across several product categories, and we're actively looking at additional opportunities as we speak. It's exciting to watch the expansion of our geographic footprint as well as the increasing array of products and services we're now able to provide our customers.

For the year, our net attrition was 3.2%. While up from last year, attrition for the prior 5 years averaged around 2.5%. We believe this past year largely reflected customers' frustration with the extreme weather conditions we suffered in early January. But in (inaudible), we dedicated to reducing net attrition in the quarter.

As we start the winter season, I'd like to again thank our employees for their tremendous effort this past fiscal year. We faced numerous challenges related to extreme weather, and we believe we're better prepared today if similar conditions were to arise. Even though we're a very large enterprise, we need to remain nimble and very customer-service-oriented. I believe the measures undertaken this fiscal year will help us do just that, leaving us well positioned for a solid financial performance in the quarters to come.

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

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Richard F. Ambury, Star Group, L.P. - Executive VP, Treasurer, Secretary & CFO of Kestrel Heat, LLC [5]

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Thanks, Steven, and good morning, everyone. For the quarter, our home heating oil and propane volumes sold decreased by 3 million gallons or 15% to 19 million gallons as the additional volume provided from acquisitions of around 0.75 million gallons was more than offset by the impact of a delivery variance in net customer attrition.

Sales volume of other petroleum products, however, did rise by about 13 million gallons or 45% to 42 million gallons, largely due to acquisitions.

Our product gross profit increased by $0.5 million or 1.5% as higher per gallon margin and an acquisition-related increase in gross profit from other petroleum products mitigated the impact of a decline in home heating oil volume in the base business.

Our operating expenses increased by $9.5 million or 13% to $18 million during the quarter. Acquisitions accounted for $4.4 million of the increase, while in the base business, expenses rose by $5.1 million or 7%. The major drivers of the expense increase include a higher bad debt expense and credit card fees of $1.3 million, an expansion of the company's concierges program for about $1.6 million, there were some rebranding expenses of $6 million as well. We also took a charge of $0.5 million for severance during the fourth quarter of fiscal 2018 as 11 positions were eliminated, which should save the company well over $2 million in fiscal 2019.

Separately, as Steve mentioned, we sold our small security business and recorded a gain of $7 million in the quarter.

The company's net loss increased by $3.8 million or 21% to $21.5 million as the gain on the sales of the security business was more than offset by the net loss attributable to acquisitions completed after the heating season, a widening of the adjusted EBITDA loss in the base business and a $5.1 million noncash change in the fair value of derivative instruments.

The company's adjusted EBITDA loss increased by $8.4 million to $38 million due to an increase in the base business adjusted EBITDA loss of $6.7 million and an adjusted EBITDA loss of $1.7 million related to acquisitions, largely completed after the heating season.

In the base business, total gross profit declined by $1.9 million as the reduction in home heating oil and propane volume was partially offset by higher home heating oil and propane margins. Expansion of the company's concierge service program, higher bad debt and credit card fees, the build-out of certain departments, severance payments, training and inflation pressures accounted for the balance of the increase in the adjusted EBITDA loss.

Moving over to fiscal 2018. As a whole, home heating oil and propane volume rose by 40 million gallons or 13% to 357 million gallons as the additional volume provided from acquisitions in colder weather more than offset the impact of net customer attrition and other factors.

Temperatures for fiscal 2018 were 9% colder than last year's comparable period, but still about 5% warmer than normal. As mentioned on prior calls, the fiscal year included some extreme weather patterns, including times when temperatures were nearly 50% colder and 50% warmer than normal.

Our product gross profit increased by $57 million or 15% to $447 million due to higher home heating oil and propane volume, a 1.9% increase in home heating oil and propane margins and an increase in gross profit from other petroleum products.

In the base business, though, our home heating oil and propane margins did increase by $0.036. Our net service gross profit decreased by $2 million year-over-year, partly due to acquisitions, but also reflecting the extreme weather conditions experienced this past winter.

Our delivery and branch expenses rose by $51 million or 17% to $357 million during the year. This was partly due to acquisitions, which accounted for $18 million of the increase, and we also recorded a charge of $1.9 million related to our weather hedge contract.

In the base business, expenses rose by $31 million. The extreme cold weather experienced earlier in the year resulted in an estimated $3 million increase in delivery expense, and the additional volume sold accounted for another $3 million. Higher prices and volume also resulted in an increase in bad debt expense and credit card fees of $6 million. To attract and retain customers through our expanded service offerings, costs related to our concierge program rose by $3.4 million. In addition, the year-over-year comparison was impacted by higher insurance expense of $4.5 million, due in part to the extreme weather we experienced earlier in fiscal 2018.

Our onetime rebranding expenses of $1 million, service payments of $0.5 million and customer concessions of $4 million also contributed to the year-over-year comparison. An increase in our fixed cost, the normal salary benefit and other expense items accounted for the balance of the increase.

We posted net income for fiscal 2018 of $56 million or $29 million higher than the prior year due to an increase in the adjusted EBITDA of $5.2 million, a favorable change in the fair value of derivative instruments of $9 million, the $7 million increase related to the sale of the security business and a decline in the company's effective income tax rate.

Adjusted EBITDA rose by $5.2 million to $86 million for fiscal 2018. This reflected the additional EBITDA provided by acquisitions of $4.9 million, including the adjusted EBITDA loss for acquisitions completed after the heating season of $800,000.

In the base business, the impact of the additional volumes sold, largely reflecting colder temperatures and higher home heating oil and propane margins, was relatively offset by higher operating costs and a $1.9 million charge related to the customers' weather hedge contract.

And with that, I'd like to turn the call back over to Steve.

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat, LLC [6]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And today's first question comes from Andrew Gadlin of Odeon Capital Group.

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Andrew Elie Gadlin, Odeon Capital Group LLC, Research Division - Research Analyst [2]

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I was wondering if you could talk about the M&A pipeline a little bit.

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat, LLC [3]

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Yes, sure. It's been relatively consistent the last 6 to 8 months. We've been steadily looking at numerous potential acquisitions, both larger and small, in the range that we tend to look at things across our footprint, not external to our footprint for the most part. We're seriously looking at a couple of potential mix product businesses that we're still in the relatively early stages. So we don't know, as always, if they'll come to fruition. And we've gotten a lot of external interest, and we always have conversations going end to end in our footprint. So potential possible acquisitions that may be presented later during the next 6 to 12 months. So from our perspective, what's in front of us looks pretty normal, and we're optimistic that we'll wind up with probably the similar type behavior as our past that we'll have some opportunities to close on some acquisitions in the next 12 months.

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Operator [4]

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And our next question today comes from Michael Prouting of 10K Capital.

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Michael Prouting, [5]

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Steve, I was wondering if you could give us some metrics around the concierge business.

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat, LLC [6]

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I think the most important -- Rich talked a little bit about additional spending. I would characterize additional spending for the most part was in the form of marketing, advertising and promotions to try to establish the branding of the product in a piece of our footprint. We're probably offering -- I say probably because it's hard to specifically tell you the exact percentage of population of customers because they are our first target audience, our internal customers. Although, wherever we're targeting internal customers, we're looking at external customers as well. So we're probably looking at a footprint which is equal to about 8% to 12% of our company footprint from a marketing standpoint. Getting just the base formulation of the product was -- out into to the marketplace was sort of expensive. We're trying to measure some of that. So we're a bit more cautious about how well spent was that product going forward. So I don't think -- I guess my point is, what we've spent on some start-up cost and marketing probably isn't reflective of the same rate going forward. We're going to do it pretty carefully. And part of that is, we're trying to establish a new concept in our marketplace, which is personalized, extended concierge-level service for people who primarily are heating oil or propane customers, but we're going to help them manage all the other services for their home. We have a -- I think it's easiest to characterize it as we have a few thousand paying customers, paying for a membership at this point. And that's our strategy that we're going to have either a monthly or annual membership to help offset some of the staffing costs to have the people that can answer the phones and provide this human touch type service. It's growing. Maybe a bit slower than I'd like it to be, but it's -- we're aiding customers every day. And of course, the selected footprint that we've decided to do that in, which is primarily the New York, Northern New Jersey, Lower Connecticut, Rhode Island geography, which -- Rhode Island spills a bit into Massachusetts, which, again, it's some of our more dense piece of our northern half of our business where we think the demographic best fits the target audience. I think that the pace of adding customers has been there. I was hoping it would be, at this point, a bit faster, but I think part of it is just getting people to understand the product and concept and growing referrals and reputation. We've really only been marketing, as noted in Rich's comments, really, the aggressive launch started in the late September. So really, from a perspective standpoint, we're about a little over 2 months into this. And then, obviously, there's a lag in people kind of being receptive to it. So it's really still fully hard to measure people's appreciation. But the people that are using it, for the most part, have stayed with it. So loss rates are relatively positive. During the churn of people who've tried and are saying, we're getting out, we're retaining better than 70% of the customers that are starting. And I say that because we're just focusing on people who are paying. And in the world of people who do trial things and they tend to try it, they don't stay with it. But we kind of have built some mechanisms to get some recurring contact, which I think will be a key to is this a successful product or not.

One thing that I would mention that kind of filters back to Star internally that doesn't really offset directly, this product cost is the benefit to preexisting Star Group customers, which again, at this point, are still about 95% of these customers. We're seeing additional use of plumbing services, appliance repair, HVAC, heating fuels sold, generators and some other partnered more traditional work like duct cleaning that we've been doing for a while. We're seeing some growth where, in concentration, where this product is being offered. So that is very promising, I think. Again, it's -- the lift is embedded in the service and installation revenue numbers. And again, it is kind of small, so they're hard to notice. But materially, they're probably a few hundred thousand dollars for the period that we started doing this. So again, all in, it's early in its onset. We're making adjustments as we see appropriate. We're certainly not looking to labor the Star Group performance in large part. But what we do with this concierge product, it's supposed to be additive in the long term, both for retention and support of growth of service revenues.

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Michael Prouting, [7]

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Okay, great. And I would also assume too that the churn rate amongst customers who are signing up to the concierge service is likely to be much, much lower than nonconcierge customers, right?

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat, LLC [8]

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We hope that. We don't know that factually, at this point. Right now, there's not enough data or time to -- that has lapsed to give us certainty in that. We'll probably know that in the 9 months. A better measure is a full 12-month period.

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Michael Prouting, [9]

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Yes. No, of course. Yes. And just to delve back on the acquisition side of things, any potential for some much larger, transformative acquisitions in the foreseeable future?

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat, LLC [10]

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Anything we're looking at right now is pretty much within the difficult bandwidth of the size of acquisitions that we've been looking at before, a couple million up to few tens of millions, in that range. There's nothing transformative, as I say. I'd say a couple of them, if they were to take place, could be very healthy and a benefit to us because of the overlap and what the long-term synergies would be. So there's a couple or really a few that we're looking at that if we can get them to work for us and the sellers that we'd be pretty happy to have as additions. But we never know if that really works out for us in the long term. So I think the -- again, the key part is moving healthily in the same steady path we've been moving, but nothing that's going to make Star Group look very different in the next couple of years that we see right now on the horizon.

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Michael Prouting, [11]

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Okay, thanks for the update there. And then finally, in terms of the usual question on capital allocation, any update to what's unit repurchases versus dividend, et cetera?

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Richard F. Ambury, Star Group, L.P. - Executive VP, Treasurer, Secretary & CFO of Kestrel Heat, LLC [12]

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We're in the market every day, buying units back to the extent that we can buy them back. And we'll still keep on -- probably, the distributions will probably go along as they have been in the past.

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Operator [13]

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And ladies and gentlemen, our next question comes from [Ed Olson], a private investor.

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Unidentified Participant, [14]

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A little more specificity on the buyback. You announced $5.5 million, I think, on August 28. What have you bought against that?

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Richard F. Ambury, Star Group, L.P. - Executive VP, Treasurer, Secretary & CFO of Kestrel Heat, LLC [15]

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Yes, that's a -- yes, just let me look that up. Hold on a second.

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Unidentified Participant, [16]

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Okay. And while you're doing that, I just -- a elaboration on the propane business?

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat, LLC [17]

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Propane is growing at a healthy pace, kind of the similar pace to what we've seen for the last 4 years. The account growth has been steadily over 10% that we're happy about, and that's pretty much the blend over all the geographies. There's some smaller groups that are growing better than that. There are some larger, more mature groups of propane that are growing just about at 10%. What we haven't been able to enjoy consistently is all the volume we've been hoping for. We've gotten growth in volume and it's been in line with prior years. But because we've spread out the geographical reach of the propane business, we've seen some very unevenness of how customers are using propane, and some of it has been kind of disappointing. Especially as you get down south, the weather effect on propane consumption to the weather-sensitive piece of the propane business has been kind of more on and off as opposed to gradient as with the heating oil components in the north.

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Unidentified Participant, [18]

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Well, if it'll help you, in even South Carolina, we have a frost this morning.

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat, LLC [19]

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Well, that does help. And honestly, what -- if it's going to be prolonged, we'll probably see better volumes this year down there. And what's happened in the last couple of years, we've had relatively late onset of colder periods, and then it's evacuated relatively rapidly above 50 degrees. And all of a sudden, we lose the draw in volume. So if we do have the benefit of cold, and it stays a while, I think we'll be pretty pleased with those volume numbers because I think our propane businesses have been not only growing reliably, but it's been pretty healthy. So we're pretty happy about that.

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Richard F. Ambury, Star Group, L.P. - Executive VP, Treasurer, Secretary & CFO of Kestrel Heat, LLC [20]

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To answer your question on the unit buyback, in the fourth quarter, the quarter ending September 30, we bought back 430,000 units. And in October, we bought back 151,000 units. In November, we bought back 182,000 units. So ballpark, it looks like, on average, we're buying back between 130,000 and 150,000 units a month.

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Unidentified Analyst, [21]

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And then what is the total against the $5.5 million? What's left?

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Richard F. Ambury, Star Group, L.P. - Executive VP, Treasurer, Secretary & CFO of Kestrel Heat, LLC [22]

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Well, as the end of November, it's a -- the total units that we can buy back is 5.026 million.

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Unidentified Analyst, [23]

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I'm not sure if I understand that, though. The $5.5 million was announced in August, and you still got 5.026 million open?

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Richard F. Ambury, Star Group, L.P. - Executive VP, Treasurer, Secretary & CFO of Kestrel Heat, LLC [24]

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Well, there is a public part of the plan, which is 2.5 million units, and then there's -- around 2.5 million is still left for the public plan.

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Unidentified Participant, [25]

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Okay. So has anything been done on the private side?

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Richard F. Ambury, Star Group, L.P. - Executive VP, Treasurer, Secretary & CFO of Kestrel Heat, LLC [26]

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Nothing was done on the private side, right.

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Operator [27]

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(Operator Instructions) There appear to be no further questions, so I'd like to turn the conference back over to Mr. Goldman for any closing remarks.

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Steven J. Goldman, Star Group, L.P. - President, CEO & Director of Kestrel Heat, LLC [28]

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Thank you, Rocco. And thank you, everybody, for taking the time for joining us today and for your ongoing interest in Star Group. We look forward to sharing our 2019 fiscal first quarter results with you in February.

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Operator [29]

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Thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.