Star Group L.P.

Good day and welcome to the STAR Group fiscal 2022 first 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 one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being 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. Despite the company facing temperatures that were 6.3% warmer than last year and 18.6% warmer than normal, negatively impacting demand, I'm pleased with our overall performance for the first quarter of fiscal 2022. We were able to overcome the weather-related volume shortfall with solid margin management and strong expense controls, particularly in the face of certain inflationary pressures, to deliver adjusted EBITDA in line with the prior year. Our customer retention also improved as our net change in accounts was almost equally driven by both an increase in customer additions as well as a decrease in losses versus the prior year, further supporting our focus on the customer experience. In addition, I'm happy to report that our acquisition program remained active during the period as we purchased three heating oil businesses that brought with them approximately 3 million gallons of annual product sales. We continue to evaluate interesting opportunities that support our strategic growth plan. A recap of our results would not be complete without mentioning how grateful I am to our employees who, while despite the unique circumstances over the past year, have remained entirely focused on servicing our customers. Most notably, their willingness to step up and, in many cases, work extended hours to meet the added demand brought on by much colder weather in January is further evidence of our team's dedication to our customers. It's too early to say how fiscal 2022 will play out, but we are encouraged to see cooler temperatures over the past month and believe we are well positioned to address whatever challenges or opportunities might present themselves for the remainder of the heating season. With that, I'll turn the call over to Rich.

Thanks, Jeff, and good morning, everyone. For the quarter, our home heating oil and propane volume decreased by 2.5 million gallons, or approximately 3%, to 87 million gallons, as the additional volume provided from acquisitions and other factors was more than offset by the impact of warmer temperatures and that customer attrition. As Jeff mentioned, temperatures for the fiscal 2022 first quarter were 6% warmer than the prior year period as well as approximately 19% warmer than normal. Our product gross profit increased by $9 million or 7% to $137 million as an increase in home heating oil and propane margins more than offset the impact of the lower volume sold. Our total operating costs did increase by $9 million, or 10%, to $96 million, of which $1.8 million related to the change in our weather hedge position. Acquisitions accounted for $1.6 million of the increase, and in the base business, expenses rose by $5.6 million, reflecting higher wage rates, the impact of increased product cost on certain operating expenses, somewhat higher insurance premiums, and a normalization of our medical expenses. During the first quarter of fiscal 2022, we recorded a $13 million non-cast charge relating to the change in the fair value of our derivatives. By comparison, in the first quarter of fiscal 2021, We recorded a $17 million non-cash credit, or a negative change of about $30 million. Our net income decreased by $23 million to $14.5 million, largely due to the after-tax impact of the unfavorable change in our derivative instruments. Adjusted EBITDA decreased slightly by $800,000 to $44.5 million, as the impact of higher per gallon margins was more than offset by lower volume, somewhat higher operating expenses, an unfavorable change in our weather hedges, and a slight decline in service profitability. And with that, I'll turn the call back over to Jeff.

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

Thank you. We will now begin the question and answer session. To ask a question, you may press star then once on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Tim Mullen with Luralton Management. Please go ahead.

Hey, guys. I was just curious if you could give any color in terms of when we can expect updates with regards to the buyback.

Well, we do have a footnote in the 10Q as to what we purchased, what we purchased the shares for, and what remaining shares are outstanding. What other information can I help you with?

Would there be any update to what's left on the existing program?

Yeah, it's right there in the 10Q. I can look it up and give it to you if you like.

I see that there's about 1.9 million units left. I'm just curious if the program will be updated. Isn't there usually a window following earnings when that can be changed?

We're running around depending on what's available and the calculation. We buy about 200,000 to 250,000 units a month. So that will last us until the next open window. And I can't promise whether we're going to increase the buyback shares, but historically we have.

And sorry, when is that window open again?

That would be May after we report the second quarter.

Great. Thanks very much.

First week in May or so.

Thank you.

You're welcome.

Again, if you'd like to ask a question, please press star then one at this time. Our next question comes from Michael Prouting with 10K Capital. Please go ahead.

Yeah. Hey, guys. Good morning. I know it's kind of a cliche, but I did want to congratulate you on a terrific quarter. Just great execution across the board given the whether headwinds mean both in terms of margins, cash conversion cycle, and also customer retention. Just a couple of questions. Jeff, first on the customer turnover, customer retention, this is the best quarter I can remember in a long time. Do you think we're starting to see an inflection point here or what's your thinking on customer churn and customer retention going forward?

Yeah, Mike, I'm encouraged. We're going to have to see how the rest of the year unfolds, but certainly we're coming off of a very strong quarter. I'm encouraged to see not only a reduction in customer churn, reduction in losses and improvement in retention as we've talked about in prior calls, but we also saw and we just continue to work on improving the customer experience using technology, employee training, analytics as a way to work smarter and really better understand our customers and at this point so far the results seem to be supporting that so we'll have to see how things unfold as we move forward but certainly encouraging progress.

You know, that's really great and I wanted to call that out. As I've mentioned on prior calls, even just small changes in customer retention and customer churn can actually have a dramatic value on the long-term value of the company. So it's really, really encouraging to see that progress and it would be great to see further progress going forward. Just a couple of other quick questions. wondering if you can give an update on the acquisition front and in particular whether you see any larger the potential for any transformative deals at this point and then I know the buyback is has already been raised I'm just curious in terms of capital allocation if you feel satisfied with the number of shares you're repurchasing right now it seems to be a little bit lower than prior quarters. Obviously, that's determined by the formula. But I'm just wondering if you've given any thoughts to adjusting that formula at all given the slightly lower repurchase rate, especially in light of the repurchase you made outside of the repurchase program. And I'll close with those two questions. Thanks.

Do you want me to take the repurchase question first, Jeff? Sure. You bet. We can't really increase the number of shares that we buy back. I mean, it's a calculation. There's nothing we can do. It's an SEC formula with a look back over, I guess, 60 days, and we're limited to how much we can buy back. Jeff, do you want to discuss the acquisition question?

Jeff, just before you go on with the acquisition, just to finish on the buyback, Rich, is it not possible to adjust the formula there so that you could pick up a few more shares?

It's not our formula. It's an SEC-derived formula that you look back. We can't adjust anything.

Okay, and you can't adjust the price anymore? The price that you're using to repurchase or anything?

Yeah, we can always adjust the price if we want to, sure.

Okay.

That would require a board decision.

Yeah, that's what I'm asking.

Well, we have a price out there, and you can look at our numbers and figure out kind of where it was, but we don't want to overpay either, you know?

Understood. Okay, so it sounds like you're not... Desirous of making any changes to try to pick up the repurchase rate at all then?

As far as the price goes, that's correct.

Okay. All right. Thanks.

And, Michael, in terms of acquisition activity, I mean, the activity level overall has been pretty consistent over the past five to six months, and it's continued into the heating season, which is a little bit unusual as we get farther into the season, often sellers are very busy running their own businesses, so there's a little bit of distraction there, but we're encouraged by that. As I mentioned, we completed three small but I feel are high-quality deals in the first quarter and have a number of prospects in various stages of evaluation and discussion. So I'm encouraged. As for transformative deals, difficult one to answer. At this point, I don't see anything in our immediate future, but that could change tomorrow as opportunities present themselves.

Okay, sure, yeah. Thanks for the update, and again, congratulations on just terrific execution across the board.

Thank you.

Again, if you'd like to ask a question, please press star then one at this time. At this time, there appears to be no further questions in queue. I would now like to turn the call back over to Mr. 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 2022 fiscal second quarter results with you in April. Thanks, everybody.

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