Star Group L.P.

Good morning, and welcome to the STAR Group Fiscal 2021 Fourth Quarter Results Conference Call. All participants will be in listen-only mode. Should 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. To ask a question, you may press STAR then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event has been recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Advisor. Please go ahead.

Thank you and good morning. With me on the call today are Jeff Woosnam, President and 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. 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 The company's annual report on Form 10-K for the fiscal year ended September 30, 2021, 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 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?

Thanks, Chris, and good morning, everyone. Thank you for joining us for our year-end conference call. It's amazing how time has passed so quickly, and here we are concluding our second full fiscal year under the leadership of the new management team. I'm pleased to report that even with slightly lower volumes and the lingering impact of COVID-19 on certain parts of our business, STAR had another strong year in terms of overall performance as we pushed forward with our strategy of continuous improvement and remained keenly focused on the fundamentals of our core business. Despite weather that was 10.7% warmer than normal and 1.1% warmer than the prior year, we reported adjusted EBITDA of $127.5 million, just 2.1% lower than fiscal 2020. It's notable that this was accomplished despite collecting $6.7 million less in proceeds from our weather hedge program due to the seasonal timing of degree days. Given these factors and those related to the pandemic, I think that in many respects fiscal 2021 represents our best operating performance in recent years. None of this would be possible without the dedication of our loyal team of employees who continue to work tirelessly, provide our customers with exceptional service at every point of contact, and do so with a level of enthusiasm that I believe sets us apart from our competitors. Reducing net customer attrition remains an area of great focus for us, and 2021 results were in line with the prior year. We are encouraged to see an improvement in customer losses and overall churn, which would appear to validate and support the investments we've made in improving the overall customer experience. We completed one small tuck-in acquisition in the fourth quarter and closed two additional deals after the end of the fiscal year during November. In total, we completed five separate acquisitions in fiscal 2021 that included approximately 17,500 customers and are expected to add nearly 13 million gallons of annual product sales to the company. We remain very committed to our acquisition program and are currently reviewing several additional opportunities. While none of these are transformational in size, the overall activity level of small to mid-sized prospects has steadily increased over the last several months. As we enter the new heating season and fiscal year, we, like many in our industry, are dealing with the effects of higher product costs some remaining pandemic-related constraints and a tight labor market. However, we continue to proactively adjust our operations to ensure we can effectively deal with these headwinds as well as any other challenges or opportunities that may present themselves in the coming year. 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 2021 fourth quarter, our home heating oil and propane volume increased by 1.8 million gallons or about 10% to approximately 21 million gallons as the additional volume provided by acquisitions was only partially offset by net customer attrition. Our product gross profit did rise by $2 million or 7% to $37 million largely due to the increase in volumes sold and slightly higher home heating oil per gallon margins. Our delivery and branch expense increased by three million dollars of four and a half percent to seventy one point four million reflecting somewhat higher insurance expense and the additional costs associated with the ten percent increase in volume. Our net loss declined by seven million dollars in the quarter to twenty three million dollars due to a favorable change in the fair value of derivative instruments which is non-cash of six point and the absence of another non-cash charge of $5.7 million recorded in the fourth quarter of fiscal 2020 relating to the sale of certain non-strategic assets. The positive impact from these factors was partially offset by a decline in the company's income tax benefit of $4.6 million. Our adjusted EBITDA loss increased slightly by approximately $300,000 to $27.6 million as the increase in operating expenses were reduced for the most part by higher home heating oil and propane volumes and higher home heating oil per gallon margins. In looking at fiscal 2021, our home heating oil and propane volumes sold decreased by 8 million gallons or 2.5% to 306 million gallons at slightly warmer temperatures and that customer attrition more than offset the benefits provided from acquisitions and other factors. Our product gross profit did increase by $2 million to $450 million as the decline in home heating oil and propane volumes was more than offset by an increase in per gallon margins. Delivery and branch expenses increased by $4 million as the additional costs associated from acquisitions of $3.5 million and a $6.7 million decline in the benefit recorded under our weather hedges was more than offset by a $6 million decline in the base business delivery and branch expense. Net income did rise by $32 million to $88 million as a favorable change in the fair value of derivative instruments of $39 million in the absence of the non-cash charge of $5.7 million was reduced by higher income tax expense and a decrease in adjusted EBITDA of $3 million. adjusted EBITDA declined by $3 million to $127.5 million as lower operating expenses in the base business, higher home heating oil and propane per gallon margins, and the adjusted EBITDA from acquisitions were more than offset by a decline in the benefit recorded under our weather hedges. As we look forward into 2022 and beyond, we will continue to repurchase our units at an attractive price and at the same time acquire companies in a disciplined manner that meet our return criteria. We believe that this strategy, along with our distributions, provides the greatest return to our unit holders. And now I'd like to turn the conversation back to Jeff.

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

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Again, if you have a question, please press star then 1. Our first question comes from Tim Mullen with Laurelton Management. You may go ahead.

Thanks very much. On the M&A front, could you just give a little more color in terms of kind of prices being paid, valuations for the businesses that you're acquiring? Has there been any change on that front?

Yeah, I don't necessarily want to get into specifics in terms of multiples of EBITDA. We have seen a bit of an increase in valuations over the last year. But for us, we really look at each opportunity on its own individual merit and the fit that it has for STAR. Okay.

Thank you. Sure.

Again, if you have a question, please press star then 1. Our next question comes from Michael Prouting with 10K Capital. You may go ahead.

Hey, good morning, guys. Great to hear somebody else asking questions on the call. Rich, I had a quick question for you. So adjusted EBITDA was actually up pretty nicely looking at the fiscal year as a whole. On the other hand, free cash flow, or rather cash flow from operations was down a fair bit and it looked like a very small part of that, like maybe 20 million or so was changes in working capital. It's just not completely clear to me. To be honest, I haven't had a time to work through it, but I'm wondering are there other factors that caused a decline in free cash or cash flow from operations for fiscal 21 versus fiscal 20.

I mean, obviously fiscal 20... You're looking at kind of two different product cost environments. Fiscal 20, get my years right, which was two years ago, I guess now. You're looking at a decline in prices. In April of 2020... We were buying heating oil for 65 cents a gallon. So you're collecting receivables at a much higher price, if you will, and your inventory cost goes down so that the free cash flow might look a little bit better in that year. And you get the same play with customer credit balances. And this year, we had probably, to a certain extent, the opposite. where we had a slight increase in cost of product, which is gonna impact your receivables and is gonna impact your inventory valuations and also gonna impact your accounts payable, excuse me, and other accounts like that. Now, if you look at our day sales outstanding on accounts receivable, I think we're actually down this year versus last year by four or five days if you look at the day sales outstanding on accounts receivable. And that's sort of my kind of bellwether is to see how well or how not so good we're doing with our receivables and our cash.

Right. You know, it looks like, I mean, looking across the board, receivables management is very strong. And I'll take some more time to work through it. Just to clarify though, the derivatives themselves have no impact on cash flow from operations, right? They're just a complete wash through.

That's correct. The increase or decrease in the fair value, it's a non-cash item now. certainly the derivatives themselves do work and when we close them out they end up in cost of goods sold.

Yeah, no, exactly. I mean, to be fair, fiscal 20 was sort of a crazy year in terms of how high cash flow from operations was due to the factors you mentioned and it looks like fiscal 21 has just returned to more normalized levels but I just wanted to try to better understand that. A couple of other questions. I'll try to be concise, but on the customer churn, Jeff, just wondering what your outlook might be for customer churn, like what trends you're seeing now, how you feel about fiscal 22 on customer churn going forward. Thanks.

Yes. and we've talked on this call in the past about our strategy of really trying to streamline the business but reinvest into areas that improve the customer experience. Those items include enhanced employee training, further development of our CRM platform and really just trying to put ourselves in a position where our customers can determine how they want to do business with us. And we track that very closely. We use net promoter scores to evaluate our progress there. We've continued to see improvement in those scores overall. And as a result of that, we've seen a reduction in churn. We saw a significant reduction in overall customer attrition from 2019 to 2020, 2021. is essentially in line with 2020 when you remove the impact of the sale of our southern propane assets earlier in that year. And that was really a strategic move on our part. But we're optimistic that we can continue to make improvements that will positively impact customer attrition and churn overall. Clearly, the pandemic and and some of the constraints in terms of a fully or hybrid remote working environment have impacted some of that progress. I shouldn't even say impacted, but made it more challenging. We've had to find more creative ways to implement some of the things that we want to do. But I am optimistic and so far it's a limited sample size, but so far in in October and November of fiscal 2022. We're off to an improved start. We've kept customer losses in check and new customer additions have increased. So we'll have to see how the rest of the quarter plays out, but I hope that answers your question.

You know, definitely. I mean, that sounds very encouraging. Again, not to sound like a broken record, but even relatively small and sustained changes in or improvements in customer churn can actually have dramatic impacts on the value of the company over the long term and I know that you very much understand that so that sounds very encouraging and then just to switch gears quickly on capital allocation priorities I mean I think Rich covered this to some extent in the and his remarks, but it looks like you're starting to get pretty low on the share repurchase authorization, so should we look forward to an increase in the unit repurchase authorization and is it reasonable, do you think, given the company's strong cash position, to see the customary dividend increase? in calendar 22, and I guess I'll wrap my questions up there. Thanks.

Sure. At the rate that we're going with repurchasing units, which is, again, we're covered by the SEC plan, that will carry us to the next open window for us, which will be the end of, which will be, I guess, the beginning of February once we file the next 10Q. We'll evaluate it then as we normally do. Historically, we've had a unit repurchase plan for almost 10 years or so. We'll have to evaluate the distribution increase as well. I believe that's after the April board meeting. We'll have to see how the results for the year go. We have another four and a half, five months of winter yet.

Right, okay, fair enough. Actually, I'll cheat and ask just one final question. Jeff, wondering if there's any updates in terms of your thinking around climate initiatives and how the company's positioned in terms of, say, non-oil-based heating fuels going forward.

You know, Michael, we as an industry feel like we've got a very viable pathway to reducing carbon emissions. And we noted some of that in the 10K through the use of bio heat, which is essentially a blend of ultra low sulfur heating oil and renewable biodiesel. And, you know, as an industry, we've made a united pledge to use bio heat as a means to reduce emissions in kind of a stepped approach in the coming years. And as a company, we've tried to take a leadership role in that. So we have been increasing our delivered rate of B20, which is essentially an 80-20 mix of ultra-low sulfur, hydrogen oil, and renewable biodiesel. And we'll continue to do that. So we feel like that's a very viable and realistic approach and cost-effective approach to addressing climate change as an industry.

Okay, great. I appreciate the update and thanks again for taking my questions. You bet.

Our next question comes from Gene Riley with Retail. You may go ahead.

Thank you very much for taking my question. Looking at the balance sheet, the captive insurance collateral, it looks like it's reached the steady state. Is that a true statement?

Yeah, it does look like it's, to a certain extent, reached a steady state, which sort of means that the claims that we're adding versus what we're paying out in claims on a current basis is pretty much in a steady state as well as the credit that we're given from AIG as well as support the open claims that we have because they do provide reinsurance in our captive. It's pretty much in a steady state. So yeah, we're kind of happy that we haven't had to increase any deposits into that this year. might have gone up in value just due to some investment income, but we haven't had to contribute to the capital in 2020 or for our upcoming insurance year, which is 2022.

Well, thank you very much. And I just want to add, I think you guys did a great job.

Thank you.

This concludes our question and answer session. I'd like to turn the conference back over to Jeff Woosnam for any closing remarks.

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 2022 first quarter results in February. In the meantime, have a wonderful and happy holiday. Thank you.

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