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Edited Transcript of SGU earnings conference call or presentation 1-Aug-19 3:00pm GMT

Q3 2019 Star Group LP Earnings Call

STAMFORD Sep 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Star Group LP earnings conference call or presentation Thursday, August 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey M. Woosnam

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

* Richard F. Ambury

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

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Conference Call Participants

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* Michael Prouting;10K Capital;Analyst

* Chris Witty

Darrow Associates Inc. - MD

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Presentation

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Operator [1]

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Good morning, and welcome to the Star Group Fiscal 2019 Third Quarter Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Chris Witty, Investor Relations monitor. Please go ahead.

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Chris Witty, Darrow Associates Inc. - MD [2]

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Thank you and good morning. With me on the call today are Jeff Woosnam, Chief Executive Officer; and Rich Ambury, Chief Financial Officer.

I would now like to provide a brief safe harbor statement. This conference call may include forward-looking statements that represent the company's expectations and beliefs concerning future events that involve risks and uncertainties that may cause the company'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 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 and 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 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 over to Jeff Woosnam. Jeff?

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Jeffrey M. Woosnam, Star Group, L.P. - President, CEO & Director of Kestrel Heat, LLC [3]

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Thanks, Chris, and good morning to everyone. Thank you for joining us to discuss our quarterly results.

Since our last call several months ago, our new management team has been working to refine our execution of the fundamentals of our core business. While I'm very pleased with the progress we've made over this time, there is still much work to be done. We will continue to focus on strengthening our service platform within the field and our back office, reducing net customer attrition and streamlining operations where appropriate.

Let me make a few general comments about the weather and our results. Third quarter temperatures were 22% warmer than last year and 21% warmer than normal. As you might recall, the 3 months ended June 30, 2018, were favorably impacted by the spillover effect of colder temperatures during the last week of March 2018 as well as by temperatures in April 2018 that were 20% colder than normal.

Given this backdrop, home heating oil and propane volume decreased by 32% versus last year, as Rich will review further in a moment.

Net customer attrition for the third quarter was approximately 1.9%, similar to last year's 1.8%. Reducing attrition remains an extremely high priority for us. To that end, an important component of our strategy is to drive unnecessary costs out of the business to make Star even more attractive in the marketplace. As an example of this, we have significantly scaled back our concierge operations, which did not fit well across much of our footprint. Even as we continue to position the company as the top-tier service provider in the industry, we know that being lean and responsive is a key to maintaining our competitive edge.

We will accomplish this by aggressively identifying and reducing critical -- noncritical overhead expense and continuing to become more operationally efficient at the same time reinvesting in and strengthening areas that positively impact the customer experience and add to our value proposition as a premier service energy organization.

Some of this investment was reflected this past quarter as we intentionally retained additional service technicians and customer service staff to improve responsiveness and increase the completion of annual heating system maintenance. It makes sense to shift a greater portion of this maintenance, which is included as part of our service agreements, in the summer months to better position ourselves for the next heating season.

Although the quarter's weather and certain results were not exactly what we had hoped for, I am more optimistic than ever that the adjustments we are currently making to refocus on our core business will have a very positive impact and better position Star for the future.

With regard to acquisitions, we were pleased to close on one rather sizable transaction during the quarter that brought with it approximately 29,000 customers and 20 million gallons annually of combined heating oil, propane and motor fuel volume. This is an extremely high-quality business with a talented team of employees who we're excited to have as part of our Star Group family.

We are currently evaluating a number of additional acquisition opportunities and will continue to be selective in our approach.

With that, I'll to the call over to Rich to provide additional 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 [4]

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Thanks, Jeff. And good morning, everyone.

For the fiscal 2019 third quarter, our home heating oil and propane volume decreased by 18 million gallons or 32% to 37 million gallons due largely to the warmer temperatures, the impact of net customer attrition and other factors. Temperatures for the quarter were 22% warmer than last year and 21% warmer than normal. Notably, April 2019 was almost 40% warmer than April of 2018, which was unusually cold.

Our product gross profit did decrease by $15 million or 21% to $56 million due largely due to the lower home heating oil and propane volume. However, home heating oil and propane margins did increase by approximately $0.10 per gallon.

Our delivery and branch expenses decreased by $600,000 to $83 million as the additional cost from acquisitions of $3 million was more than offset by a decline in the base business of $3.5 million. The lower volumes led to a reduction in direct delivery expense of $2 million, and concierge-related expenses declined by $1.5 million. As Jeff noted, we have substantially scaled back concierge.

Our net loss for the period rose by $15 million to $23 million in the quarter due to a noncash unfavorable change in the fair value of derivative instruments of $9 million and an increase in the company's adjusted EBITDA loss of $11.7 million during the quarter.

During fiscal 2019 third quarter, a $1.6 million noncash charge was reported related to the change in fair value of derivatives versus a $7.5 million credit recorded in the third quarter of fiscal 2018.

The adjusted EBITDA loss widened by $11.7 million to $20 million as the additional EBITDA provided by acquisitions of approximately $1 million was more than offset by a $12.6 million increase in the adjusted EBITDA loss within the base business. The impact from lower volumes sold in the base business due largely due to warmer temperatures more than offset the impact of higher home heating oil and propane margins in lower total operating expenses of $4 million. Again, contributing to the favorable change in operating cost was a reduction in concierge expenses of $1.5 million.

Moving over to the 9 months. For the first 9 months of fiscal 2019, our home heating oil and propane volume decreased by 14 million gallons or 4% to 324 million as slightly colder temperatures and acquisitions were more than offset by the impact of net customer attrition and other factors. Temperatures for the first 9 months of fiscal 2019 were roughly 1% colder than last year but still 4% warmer than normal.

Our product gross profit increased by $16 million or 4% to $430 million as the decline in home heating oil and propane volume was more than offset by an $0.08 per gallon increase in margins and higher gross profit from other petroleum products.

Delivery and branch expenses rose by $15 million or 5% to $296 million during the period primarily due to acquisitions, which accounted for $12 million of the increase. Spending on the concierge program year-over-year though was up by $1.7 million.

Net income decreased by $25 million to $51 million as the impact of a noncash unfavorable change in the fair value of derivative instruments of $26 million, an increase in net interest expense of $2 million and a higher effective income tax rate more than offset a slight increase in adjusted EBITDA.

Adjusted EBITDA increased by $400,000 to $124.2 million. While acquisitions provided $5.4 million of adjusted EBITDA, in the base business adjusted EBITDA did decrease by $5 million. However, the impact of higher home heating oil and propane margins in the base business more than offset a decline in home heating oil and propane volume and an increase in total operating expenses, improving year-over-year adjusted EBITDA by about $4.5 million in the base business prior to the following few items: one, $3.3 million due to the implementation of the new revenue recognition accounting standard, which should reverse itself primarily by the end of the year; $3 million of higher legal and professional expenses; a charge of $1.5 million related to the discontinued tank monitoring system; and $1.5 million increase in the adjusted EBITDA loss associated with the company's concierge program.

And with that, I'll turn the call back over to Jeff.

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Jeffrey M. Woosnam, Star Group, L.P. - President, CEO & Director of Kestrel Heat, LLC [5]

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Thanks, Rich. At this time, we will be pleased to answer any -- address any questions that you have. Debbie, 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 the first question comes from Michael Prouting with 10K Capital.

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Michael Prouting;10K Capital;Analyst, [2]

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I'll try to restrict myself to 3 questions this morning. Rich, firstly, a question on receivables. I noticed DSOs were up and also the allowances as a percentage of gross receivables was up quite a bit. Is there something going on there?

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Richard F. Ambury, Star Group, L.P. - Executive VP, Treasurer, Secretary & CFO of Kestrel Heat, LLC [3]

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Not the -- I mean I think the DSOs this year versus last year if you're doing it on a 90-day sales I think we're up 2 or 3 days and nothing great. I think my numbers suggested going from 54 days to maybe 56 or 57 days sales outstanding if you do it on the quarter, so I didn't see anything strange there. And the allowances -- with the allowances, we have our reserve requirements that we go through. I think we did book an extra $1 million or so this year versus last year in the quarter, but right now, the receivables are well reserved.

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Michael Prouting;10K Capital;Analyst, [4]

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Okay. Yes, it was some -- just to be more explicit, what I'm looking at is allowances as a percent of gross receivables. So in the June quarter last year, they were roughly 5%. And this quarter, they're roughly 6.3%. So that's a pretty significant increase. So I just want to make sure why...

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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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It’s really the over 90 that we reserve for. So not getting into the details of each specific aging, and that's really what would drive the increase in the allowance as a percent of the total receivables.

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Michael Prouting;10K Capital;Analyst, [6]

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Okay. But you're not seeing anything there that you're particularly concerned about as far as collectibility is concerned? And...

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Richard F. Ambury, Star Group, L.P. - Executive VP, Treasurer, Secretary & CFO of Kestrel Heat, LLC [7]

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No. I'm not -- don't forget, last year, we had more -- April was so robust, we had probably on a comparative basis more sales, if you will. If you look at the quarter financials, sales last year were $327 million. This year they're $284 million -- $283.4 million. So we had more current sales, if you will, in last year's quarter, which drove up the receivables on an absolute basis, and the reserve as a percent probably is down as a percentage basis when you compare that to this year.

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Michael Prouting;10K Capital;Analyst, [8]

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Okay. So why don't we move on. So second question is on capital allocation. By the way, congratulations on completing the acquisition during the quarter. It sounds like there are more potential acquisitions in the pipeline. I'm curious how you'd characterize the pipeline and if you see any larger-sized deals out there?

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Jeffrey M. Woosnam, Star Group, L.P. - President, CEO & Director of Kestrel Heat, LLC [9]

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I would say that our level of activity is pretty typical for what we've experienced this time of year. We've got several opportunities in the pipeline that we're optimistic about, but we'll have to see how those things transpire and come to fruition.

I've been very involved in our acquisition program in prior positions, very comfortable with it, and so I don't see our strategy is changing all that much. But the level of activity right now I think is pretty consistent with what we would typically see this time of the year.

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Michael Prouting;10K Capital;Analyst, [10]

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Okay. Great. And related to the capital allocation question, you've been repurchasing units at a pretty consistent rate. Obviously, the unit price I mean really hasn't moved for several years now. Is there any reason to think that you won't continue unit repurchases at a similar rate going forward?

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Richard F. Ambury, Star Group, L.P. - Executive VP, Treasurer, Secretary & CFO of Kestrel Heat, LLC [11]

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Well, if the units are available and within our price constraints, we do have to take a look at. We have about $1.6 million left on the public plan. And when you're buying 100,000 to 200,000 a month, that gives you 5 or 6 months' worth of firepower, so to speak.

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Michael Prouting;10K Capital;Analyst, [12]

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Okay. Right. And then final question for Jeff. I was really encouraged to hear your focus on customer churn, and it also sounds hopeful in terms of how you spoke about improvements that you're making there. But without giving anything away to competitors, I'm wondering if there's anything more you can say about that?

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Jeffrey M. Woosnam, Star Group, L.P. - President, CEO & Director of Kestrel Heat, LLC [13]

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I would just say that, as I mentioned in my opening comments, that our overarching strategy is to be looking very aggressively at what we would consider to be any nonessential overhead expense to try to become more lean and reinvest some of that expense into areas that we know have a positive impact on the customer experience, and I think that's the direction. And then obviously, anytime we can reduce expense from the business, it puts us in a better competitive position.

And that's really the overarching strategy. And we're working on that. We continue to work on it. I wouldn't consider it an initiative. I would consider it something we're trying to make a culture as part of the business, that we're going to continue to look at things that we believe are nonessential to areas. As I tell my team, if we have an overhead expense that's not helping us attract a new customer, retain a customer, improve the customer experience, maintain our level of compliance, then those are things we have to look at.

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Michael Prouting;10K Capital;Analyst, [14]

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Okay. Great. Yes. Because I mean obviously reducing the level of churn dramatically increases the value of the company over time because obviously a customer you don't lose is a customer that you don't have to reacquire, right? So I really appreciate the focus on that.

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Jeffrey M. Woosnam, Star Group, L.P. - President, CEO & Director of Kestrel Heat, LLC [15]

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You bet.

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Operator [16]

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(Operator Instructions) At this time, there are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Woosnam for any closing remarks.

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Jeffrey M. Woosnam, Star Group, L.P. - President, CEO & Director of Kestrel Heat, LLC [17]

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Well, thank you for taking the time to join us today and your ongoing interest in Star Group. We look forward to sharing our 2019 fiscal fourth quarter results with you in December. Thanks, everyone.

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Operator [18]

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