Star Group L.P.

Good morning and welcome to Star Group fiscal 2020 fourth quarter earnings call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. Now I'd like to turn the conference over to Mr. Chris Witty, Investor Relations Moderator. Please go ahead.

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 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 statements of historical facts included in this conference call are forward-looking statements. and the company's other filings with the SEC. 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 an 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 now need to turn the call over to Jeff Woosnam. Jeff?

Thanks, Chris, and good morning, everyone. Thank you for joining our year-end conference call. It's amazing how time has flown even in the midst of a global pandemic. And here we are concluding our fiscal year and at the start of another heating season. I'm pleased to say that in the face of many economic uncertainties, Star Group finished fiscal 2020 with strong performance and is well positioned for the future. For the full year, adjusted EBIT arose 37% to $130.3 million, reflecting $46.3 million in lower operating expenses in our base business, and more. We believe these results in the middle of a health care crisis and nationwide recession clearly demonstrate the value of our products and services as well, of course, as the dedication of our high caliber team of employees. I appreciate everything that's going into Star's performance this year, which includes a significant reduction in net customer attrition as compared to fiscal 2019's higher levels. Although the first two months of fiscal 2021 have proven to be challenging, particularly as it relates to new customer additions, we remain confident in our strategy of reducing overhead costs, focusing on increased operating efficiencies, and reinvesting in areas that directly improve the customer experience and will continue to lead to improved long-term results. We've also taken some strategic actions to better position the company for future growth. Most notably, as part of our ongoing efforts to evaluate our initiatives and direct resources and capital, we have recently sold our propane operations in the Carolinas, Tennessee, and Georgia. As you may be aware, beginning around 2011, we began expanding our propane business in the Southeast through several small acquisitions and then attempted to accelerate our growth by opening a number of small startup locations in adjacent markets. Unfortunately, we were not successful in building the critical customer mass and related volume required in order to get these operations to a desired level of profitability. We felt it was best to divest ourselves of the associated assets and redirect our capital, time, and attention to areas that produce greater profitability and better, more consistent returns. Our long-term goal of expanding our heating oil and propane business both organically and through acquisitions remains unchanged. With everything we've done to improve service levels and streamline the business, I feel confident the company is prepared and can react appropriately to any new challenges as we begin fiscal 2021. With that, I'll turn the call over to Rich to provide additional comments on the quarter and year-end results. Rich?

Thanks, Jeff, and good morning, everyone. For the fiscal 2020 fourth quarter, our home heating oil and propane volume decreased by 3 million gallons, or 13%, to 19 million gallons due to summertime staffing levels, the timing of certain non-winter deliveries, net customer attrition, and other factors. The volume of our other petroleum products sold decreased by 5 million gallons or 10% to 40 million gallons due to COVID-19's impact on economic activity. Our product gross profit declined by $3 million or 8% to $34 million as a decrease in volume sold was slightly offset by higher home heating oil and propane per gallon margins. Delivery and branch expenses decreased by $5 million, or 6%, to $68 million, largely due to lower insurance and bad debt expense. Our net loss declined by $4 million in the fourth quarter to $30 million due to a decrease in the company's adjusted EBITDA loss of $1.6 million and a $5 million favorable change in the fair value of derivative instruments. The positive impact from these factors was largely offset by a non-cash charge of $6 million relating to the sale of non-core assets. For the quarter, our adjusted EBITDA loss decreased by $1.6 million or 5% to $27 million due to an increase in home heating oil and propane margins, an improvement in net service installation profitability, and lower operating expense partially offset by the impact of the lower volume sold. For the 2020 fiscal year, our home heating oil and propane volume decreased by 32 million gallons or 9% to 314 million gallons as the additional volume sold from acquisitions was more than offset by warmer temperatures, net customer attrition and other factors. Temperatures for fiscal 2020 were 6% warmer than last year and 10% warmer than normal. The volume of other petroleum products sold also decreased by 16 million gallons or 9% to 152 million gallons as the additional volume provided by acquisitions of 9 million gallons was more than offset by a decline in motor fuel sales due, again, to COVID-19. Our product gross profit decreased by $20 million or 4% to $447 million as the decline in volume sold more than offset an increase in per gallon margins. Delivery and branch expense declined by $46 million as the additional cost from acquisitions of $10 million were more than offset by a $55 million or 15% decrease in expenses in the base business. The decline in the base business was attributable to an $11 million or 10% reduction in direct delivery costs due to lower volumes, lower insurance expense of approximately $10 million, $6 million of lower bad debt and credit card processing fees, a $4 million decrease in expenses related to the discontinued concierge program, lower medical costs of $4 million, and other reductions in operating expenses totaling $9 million or 2.5%. Going forward, investors should expect that certain costs will increase. if volumes and or product costs rise. Expenses such as delivery expense, insurance, bad debt expense, and credit card processing fees will most likely increase with an increase in volume and or cost of product. Operating expenses were also reduced by $12 million due to the impact of our weather hedging program. In fiscal 2019, we recorded a $2 million charge versus a benefit of $10 million in fiscal 2020. Warmer temperatures during the winter hedge period from November through March resulted in a $10 million payment in fiscal 2020. However, we experienced colder temperatures in our third fiscal quarter, which positively impacted volumes. If the additional degree days in the third fiscal quarter had occurred during the winter hedge period, and many more. Our hedge, we would have received only $2 million under the weather hedge. In addition, our general administrative expenses for fiscal 2020 decreased by $3 million year over year, primarily to the lower legal and professional expenses. Our net income increased $38 million 6 million dollars due primarily to a 35 million dollar increase in adjusted EBITDA and a favorable change in the fair value of derivative instruments of 22 million dollars partially offset by a 13 million dollar increase in income tax expense. Full year adjusted EBITDA increased by 35 million to 130 million dollars. Acquisitions provided 9 million of adjusted EBITDA while adjusted EBITDA in the base business increased by 26 million dollars. In the base business, the negative impact of COVID-19 on motor fuels and lower home heating oil volumes sold due to warmer temperatures were more than offset by higher home heating oil and propane margins, lower operating expenses in the base business of $46 million, a favorable change in the amount collected under the weather hedge program of $12 million, and improvement in net service and installation profitability of $5 million. and with that, I'd like to turn Nicole back over to Jeff.

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

When I begin the question and answer session, to ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To draw your question, please press star then two. This time, we'll pause momentarily to assemble the roster. Again, if you have a question, please press star, then 1. First question comes from Michael Prouting of the 10K Capital. Please go ahead.

Hey, good morning, guys, and congratulations on some fantastic execution. Thanks, Michael. Hey, I was trying to give other people a chance to ask questions, and I'll try not to monopolize the call. A few questions. Firstly, on the customer churn, it looks like you're making terrific progress there. To what extent do you think that is sustainable?

Yeah, I think, you know, Michael, we've done a number of things in the last 18 months that really try to put ourselves in a better competitive position and then at the same time reinvest in areas that improve the customer experience. And you've heard me talk about that on this call, you know, for some time now. And that has certainly resulted in less customer churn. You know, we're hopeful that will continue. We'll have to see. As I mentioned in my opening remarks, we have observed some sluggish new customer gains in the first quarter. The first quarter is typically a quarter in which we expect to, we target net growth. It's the only quarter in which we do so, or plan for. So our gains have been a bit sluggish as a result of a number of things, and primarily likely weather was off in October and November, combined over 20%. So that will have an impact on that. But I'm also pleased to see in those first two months of the year that our losses are reduced compared to historical levels. So, you know, short answer is, you know, we're optimistic, but we're going to have to see how everything, you know, plays out in the future.

Okay, fair enough. So then net-net, would you still expect to be in a customer gain situation in the first quarter?

It's difficult to answer because we don't have, you know, obviously we still have a month left. So it's a difficult thing to say right now.

Okay, fair enough. But it sounds like it's going to be close enough that at least you're not expecting material losses for the December quarter. We will have to see. Okay. Okay, fair enough. And then, so given the warmer weather you're seeing, would you expect to be occurring on the weather hedge in the December quarter if things continue as they seem to be?

Well, you know, with regard to the weather hedge, it does cover, you know, the period of November through March. So there's a lot of the heating season yet to go. You know, as of today, we're probably in the money a little bit on one of the weather hedges. We do have two. But, you know, we'll have to see really to, you know, where we settle up at the end of March to see whether we'll actually collect.

Okay, fair enough. And then the last question I had was in terms of priorities as far as cash flow is concerned. So, obviously, fiscal 20 was just a fantastic year for cash flow and to some extent, obviously, you benefited from low working capital requirements. So it's interesting, Jeff, by the way, to see the divestiture early this quarter. And I think that's very, very impressive to see the focus on profitability and return on capital invested. So kind of putting all that together, I'm noticing that the pace of acquisitions has slowed down quite a bit. So in terms of capital priorities, just from a sort of big picture perspective, I'm wondering how you're looking at that. Are you expecting an increase in pace of acquisitions in the current fiscal year? And then on the share buyback, obviously you were successful in picking up some shares from one of your institutions in the current quarter. But I'm just wondering, given the amount of shares you've brought back, we seem to be seeing a decline in share volume. And so I'm wondering to what extent it might be necessary to go back to your broker and adjust the formula as far as the stock buyback is concerned. And I'll wrap it up with those questions.

Well, with regard to the share buyback, and I said this a few times, you know it's a program and you know we don't we don't call the broker and say hey you got to do this you have to do that and we're we're limited to the number of shares that we can buy based on you know the average I guess I think it's the last 60 you know trading days and we put in you know certain hurdles during the during the course of the year as to where you know where we will buy you know shares back and you know we're in this six month quiet period that we can only adjust this when we're in an open window, and we're in a six-month quiet period, so I can't change very much on this program that we're buying units back from.

And, Michael, in terms of acquisitions, you know, clearly we saw a reduction in activity, particularly in the second and third quarter of this year, and I think that's to some degree understandable given the circumstances with the pandemic. We are and continue to evaluate opportunities that are in front of us, and we're hopeful that we can move those things along, but time will tell.

Okay, great. And, Rich, just a quick follow-up question on the formula for the buyback. What is it that creates the six-month quiet period around the buyback? I wasn't aware of that. Sure.

We can really only change the number of shares that we can buy back and the price that we can buy back during a quiet period, which is usually it's basically the three days after we file till the beginning of the next month in the next fiscal quarter. But the way that we filed our 10K, our 10K we're filing in December, and we're already in the next fiscal quarter, if you will, the first quarter of fiscal 2020. So, you know, we can't make any changes for six months. Now, when we file the next 10Q, which would probably be somewhere in the first week of December, I'm sorry, first week of February 2021, get my dates straight, you know, then we can make changes.

Okay, fair enough. That makes sense. Thanks for addressing my questions.

Yeah.

You bet.

Again, if you have a question, please press star then one. Next question comes from Tim Mullen, Laurelton Management. Please go ahead.

Thanks. My question is actually addressed by Michael, so thanks, guys, and good luck. Thank you. Thanks.

This concludes our question and answer session. I'd like to turn the conference back over to Mr. Jeff Watt. Woosnam, President and CEO. Please go ahead.

Well, thank you for taking the time to join us today and your ongoing interest in Star Group. We look forward to sharing our fiscal 2021 first quarter results with you in February. Have a great holiday season, everybody.

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.