Scalper1 News
Star Gas Partners LP (NYSE: SGU ) Q2 2015 Earnings Conference Call August 04, 2015 11:00 AM ET Executives Steven Goldman – CEO Chris Witty – IR, Darrow Associates Richard Ambury – CFO Analysts Andrew Gadlin – Odeon Capital David Spier – Nitor Capital Michael Prouting – 10K Capital Operator Hello and welcome to the Star Gas Partners, Fiscal 2015 Third Quarter Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being record. I would now like to turn the conference over to Steve Goldman Star Gas Partners’ Chief Executive Officer. Please go ahead, sir. Steven Goldman Thank you, Chad. Good morning and thank you for joining us today. With me today is Star Gas Chief Financial Officer, Richard Ambury. After I provide some brief remarks about the quarter and first nine months of fiscal 2015 Rich will review the fiscal third quarter-ended June 30th, 2015 and year-to-date 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. 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 quarterly reports and its annual report and Form 10-K for the fiscal year ended September 30, 2014. 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 Goldman Thanks, Chris. We notice this has been an extraordinary fiscal year thus far as we’ve benefited greatly from falling oil prices and an incredibly cold period this winter unlike anything we have seen in recent memory and we are pleased that we’ve been able to retain much of the benefit of these factors despite an uneven year for weather. Our first quarter and third quarters were certainly an outlook we had planned for what we were counting on in terms of temperatures. Our first quarter you may recall was warmer than normal which challenged us in several ways. It caused equipment sales to be slower than expected and tempered our ramp up of staffing prior to the coldest part of the winter season due to the uncertainty as to how the rest of the winter will proceed. We also faced competitors who are much more aggressive on price to we believe to the lack of weather and related volume. The second quarter was starkly different whether it’s severe temperatures and numerous snowstorms such that we still increased expense related to service and maintenance for both of these during the second quarter and third quarter. I mention this because our third quarter results was somewhat mixed but given the temperatures and other factors impacting it from the quarter before we believe the partnership operated to the best of its ability. In terms of weather the third quarter was cooler during the beginning but that included higher temperatures during May and June. Warm day specifically over 90 degrees helped to drive air conditioning, equipment sales and service so despite the somewhat unusual weather patterns we believe we’ve still been able to deliver our solid results. Our EBITDA and attrition continue to support our belief in that by focusing on the customer and on efficient operations we’re making Star Gas a stronger business every day. One of the areas of improvement that I have spoken about in the past is training and I think it’s important to mention that we are now in the process of creating an internal culture of continuous improvement. We have put in place several new processes to improve the way our employees perform to both better please our customers as well strengthen the bottom line. While we are in the beginning phases of these initiatives our employees have reacted positively to everything we’ve implemented thus far. I mentioned earlier that we’re pleased with our attrition numbers this year but the third quarter’s net attrition was slightly worse than the same period last year and so our sales group has redoubled its efforts to replace these accounts by reaching farther out of our existing footprint for new customers. That said one area of our customer segment that does continue to grow very well has been and is propane and these operations certainly have room to expand even further. In that [way] I’d like to mention we just began operating in Eastern Tennessee this month. We continue to try new things to constantly improve our operating results, notably from a marketing perspective we expanded the use of social media and billboards as two examples to better spread the message about our ability to do more than just service heating equipment. As we all know acquisitions are always an important part of our measure of success, in this regard I’d like to mention that we are in the final negotiations and hopefully we will close soon on another great addition to Star Gas family of businesses and the deal where it’s approximately $20 million. If so when completed we will announce this acquisition. Beside from this acquisition we are also continuing to speak to several other large and small potential owners as usual. Before turning the call over to Rich who will be discussing our financial results I’d like to thank Kim and his team for the tremendous effort that we went through in closing our new credit agreement which allows us to redeem our high interest notes outstanding just to the great deal of time and we’ll strengthen our company financially. With that I’d like to turn the call over to Rich. Richard Ambury Thanks Steven. Good morning everyone. For the third quarter of fiscal 2015 our home heating oil and propane volume decreased by 6% versus last year of 2.6 million gallons to 45 million gallons. Heating degree days were 15% warmer than during the prior year as comparable to fiscal third quarter and 22% warmer than normal. Notes; that temperatures during this non-heating period are not as impactful to annual volume sales as during the heating season. Our heating oil and propane margins increased by over $0.07 year-over-year to approximately $1 per gallon. As a reminder, since the third quarter is a non-heating period with relatively low overall volumes, margins can be impacted quite easily. Total product gross profit was $52 million slightly lower than last year as home heating oil and propane margins were offset by the impact of lower volumes. Star’s net loss declined by $1 million to $8.4 million, largely due to a favorable non-cash change in the fair value of derivative instruments. The adjusted EBITDA loss for the quarter increased by $900,000 to $9.3 million as the impact of higher home heating oil and propane per gallon margins was more than offset by the decline in volume attributable to the warmer weather in a decrease in service and installation profitability. Now let’s review the nine months results. Home heating oil and propane volume rose by 7% as acquisitions primarily [directed] more than offset the impact of net customer attrition, conservations and other factors. In analyzing the results please keep in mind that the first and third quarters of fiscal 2015 were warmer than the first and third quarters of fiscal 2014 while the second quarter of fiscal 2015 was much colder than the second quarter of fiscal 2014. On balance the average temperatures over the nine months period were approximately equal to the average temperatures of the prior year’s comparable period and 5% colder than normal. Volume of other petroleum products rose 27% to 76 million gallons again reflecting significant motor fuel volume provided by Griffith. Total sales declined by 13% to $1.5 billion versus $1.7 billion in the prior year period as the additional sales provided by acquisitions were more than offset by lower selling prices in response to a decline in wholesale product cost of 32% per gallon. Year-to-date product gross profit rose 18% or $64 million to $421 million, due to the growth in sales volume as well as higher home heating oil and propane margins. The decline in home heating oil and propane costs contributed to the per-gallon margin expansion. However as we have mentioned on earlier calls the extreme cold temperatures during the second fiscal quarter of 2015 created additional service requirements. Service and installations gross profit declined by $4 million largely due to the impact of the colder temperatures in storms experience to the second quarter of fiscal 2015. Delivery and branch expenses rose by $23 million or 10%, reflecting the increase in total volume of 10%. These costs increased in the base business on a cents per gallon basis by approximately 3%. As previously mentioned this increase, as well as the higher service expense increased our per gallon margin gross profit requirement. Depreciation and amortization expense rose by $3.5 million, largely due to the Griffith acquisition and interest expense was lower by 19% reflecting lower bank borrowings. Net income increased by $21 million to $83 million due to the impact of higher home heating oil and propane margins, acquisitions and a favorable non-cash change in the fair value of derivative instruments. Adjusted EBITDA increased by $33 million or 26% to a $164 million as the impact of higher home heating oil and propane per gallon margins and acquisition more than offset high operating and service cost largely attributable to cold and temperatures and a numerous snow storms experience during the second quarter of fiscal 2015. Now let’s move over to the balance sheet for a second. We have recently announced that we actually it’s renew five year asset base revolving credit facility that provides the ability to borrow up to $300 million. $450 million during heating season for working capital purposes. The credit facility also provides for a 100 million five year senior secured term loan proceeds from a term loan along with cash on the balance sheet will be used to redeem our 785 senior notes due 2017. The term loan payments schedule is comprised of 10 million per year plus 25% of excess cash flow with the final payment and maturity. We expect to see lower interest expense going forward through this new debt structure. And with that I’d like to turn the call back to Steve. Steven Goldman Thanks, Rich. At this time we would be pleased to address any questions you may have. Chad please open the phone lines for questions. Question-and-Answer Session Operator Thank you. We will now begin the question-and-answer Session. [Operator Instructions] Our first question comes for the day from Andrew Gadlin with Odeon Capital. Andrew Gadlin You mentioned earlier in the call that there is an acquisition in the works for approximately 20 million in proceeds. Can you talk a little bit about geography or business mix? Richard Ambury So New York area company located on Long Island, it’s about somewhere around 19,000 customers it’s a business that more or less reflects our average retail heating oil type business in the area so a very strong competitor of ours so we think of it as a very brand, as I’ve mentioned in the past it’s one of these acquisitions that we’ve been speaking to on and off for years to try to get to this point, we are very excited about the opportunity because we believe it’s a very good addition to Start Gas. Andrew Gadlin And if the acquisition closes mid quarter would you guys put out a press release just to let us know that it’s been done? Steven Goldman We’d either file a press release or an 8-K. Andrew Gadlin Got it. Thanks. And then in terms of the term loan that you are taking out can you remind me what the interest rate on that term loan? Steven Goldman While it’s variable and there is a grid but the lowest grid is LIBOR plus 3 in a quarter. Andrew Gadlin Got it. Well 100 basis points floor? Steven Goldman There is no floor. Andrew Gadlin Okay. And in terms of that facility as you think about it priorities for cash-flow in the near-term would you say you want to pay that tax down as quickly as possible or balancing the opportunities and share buybacks and dividend increases etc. Steven Goldman Sure. We want to balance everything out. The way the excess cash flow covenants to repay anything back over the $10 million, it includes acquisition. So there is no hurry to pay back that loan. So it’s at the end of the term, there is a $60 million bullet which includes the $10 million final maturity, so be it. Richard Ambury We don’t believe that doing this offers our strategy from what we’ve been doing for the last several years, which is looking to make the best use of our earnings to better the business and strengthen the investment of those people that have believed in us up to now. Operator Next question comes from James [indiscernible] with Locust Wood Capital. Unidentified Analyst Hi. Just like to congratulate you guys on a strong third quarter and at Locust Wood we’re just wondering how you guys think about your dividend payout ratios? Richard Ambury We evaluate our dividend payout each and every year, it’s usually sometime in April the fiscal year, depending on what kind of year we’re having and what our opportunities for acquisitions or paying back this debt which is lower rate if not it’s very attractive to keep this outstanding and unit repurchases. Unidentified Analyst Rich, this is Steve also from Locust Wood. Great job you guys have done very well [for us] over the years, would you guys think about in the future reporting your results distributable cash flow basis I mean obviously we can figure it out but the type of people who are following your company it might be helpful to them, have you guys given any thought to that? Steven Goldman No we really haven’t give any thoughts to that, it’s just another non-GAAP SEC type term and I’m not so sure we want to really go down that road right now. Operator The next question comes from David Spier with Nitor Capital. David Spier I just wanted to — most of my questions have already answered, I want to clarify on the term loan, you mentioned about 10 million in annual payments you’re referring to the principal? Steven Goldman That is correct. David Spier Okay, so essentially its 10 million principal payments, and then the interest on that is LIBOR plus you said 375 basis points. Steven Goldman Well, there is a grid depending on our availability, yes. David Spier Okay. It makes a lot of sense. So essentially you’d be able to take down that debt which you’re previously paying about I’d say 11 million in interest payments so you can be able to take it down slowly overtime and then be up about 60 million in the final balloon payment. So that’s correct? Steven Goldman So we do have to set aside 25% of excess cash flow to pay that final maturity during the fiscal year. Operator [Operator Instructions] The next question comes from Michael Prouting with 10K Capital. Michael Prouting I apologize in advance of this background noise. I am at an airport this morning. Just by the way congratulations on the debt refinancing. So it sounds like the strategy really is to not pay that down any quicker than you have to and keep the firepower for any large acquisitions that might come along. Steven Goldman Yes, that’s pretty much it, yes. Michael Prouting Okay. That makes total sense. You talked about an acquisition that you are in the final stages of closing right now. Can you just give us a sense of how the acquisition pipeline looks at this point and also in particular any larger deals that might be out there in the horizon? Richard Ambury It looks probably like it’s been looking for the last several years, whom we’re speaking to four or five different people in different parts of our geography right now. We are always looking to get some others going at the same time. We don’t have anything extraordinarily large that’s imminent right now but again we continue to speak to all potential acquisitions down the road and as I mentioned before this took really several years to get this one done. So you really never know when the seller will be ready to go ahead and finalize the transition. So again it doesn’t look any better than it did before but it isn’t any worse and I think our opportunities are out there and we’re happy where we are with that. Michael Prouting Okay. I appreciate the color on that and I would assume also that as far as valuation is concerned that you’re still within your historical parameters in terms of what you’d be willing to pay. Steven Goldman That is correct. Michael Prouting Okay. And just one I guess somewhat random question, I know there has been discussion previously about collecting or getting rid of the limited partners structure. I’m just wondering if that’s something that’s on the front burner or something that’s going to consideration. Steven Goldman It’s shown on our front burner that doesn’t necessarily mean we won’t look at it from time to time. Operator Our next question comes from Gary [Indiscernible] Unidentified Analyst Okay Steve I believe it was you that said just a couple minutes ago concerning the cash flow, the 25% cash flow to pay back on the term loan. You used the phrase set aside I had read I thought that this had to be paid and not set aside. Steven Goldman I think you are right it is to be paid from 25% of the excess cash flow. Unidentified Analyst Okay at the end of the term or can you do it or is that a long way each should five years. Steven Goldman Yes. The way the term loan worked is we pay 10 million a year for each fiscal year and at the end of each fiscal year we basically see what the excess cash flow is as defined which is roughly EBITDA, less interest, less taxes, less fixed assets, less some pension payments as well as any acquisitions that we might make. Unidentified Analyst There is a cap on it is there are not? Steven Goldman Yes. The cap would be $15 million. That is correct. Unidentified Analyst Yes. Okay, alright so it’s not set aside necessarily it is to be paid. Okay. Steven Goldman That is correct. Unidentified Analyst Okay. That’s okay I just want to clarify. That’s all I have. Steven Goldman Okay. Operator Our next question comes from Gene Riley a Private Investor. Unidentified Analyst Hello. I just have a question about the unit repurchase program in the last two years you’ve been having record earnings and record cash flow but you seem to have ground to a halt on the repurchases when does that turnaround? Steven Goldman Again we look at all opportunities whether its acquisitions having cash on the balance sheet to take debt off the table that’s almost is 9% and we look at it all at various prices and analysis. Operator [Operator Instructions] At this time there are no further questions. So I’d like to turn the conference back over to Steve Goldman for any closing remarks. End of Q&A Steven Goldman Thank you for taking the time today and joining us and for your ongoing interest in Star Gas. We look forward to sharing our fourth quarter 2015 results with all of you in December. Operator The conference has now concluded. Thank you for attending today’s presentation. You may disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you! Scalper1 News
Scalper1 News