Star Group, L.P. Q3 FY2021 Earnings Call

Good morning, and welcome to the Star Group Third Quarter 2021 Results Conference Call. Please note that 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 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, the company's annual report on Form 10-K for the fiscal year ended September 30, 2020, 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 in the cautionary statements. Unless otherwise required by law, the company undertakes no obligations 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, and thank you for joining us to discuss our third quarter and fiscal year-to-date results. While summer is typically a less active time for Star than the heating season, a mix of factors, both positive and negative, impacted results versus the prior year period. The volume of home heating oil and propane fell 26% as a result of significantly warmer temperatures compared to the third quarter of fiscal 2020, which was the second coldest on record over the last 50 years within the New York Metropolitan area. However, as areas previously impacted by the pandemic have begun to normalize, we benefited from increased HVAC equipment installation revenue and related gross profit along with higher sales of other petroleum products. Our service revenues also increased year-over-year, but this positive development was more than offset by the additional expense associated with returning to a more traditional off-season workload as well as a more normal level of heating system maintenance. We also took the opportunity to invest in additional technical training for our field staff, all of which had been somewhat paused in the third quarter of fiscal 2020. Given all of these factors, our performance came in largely as anticipated and more in line with historical levels. Although we did not complete any new acquisitions in the quarter, the businesses we acquired earlier in the year are performing well in aggregate, and we are currently working on several additional attractive tuck-in opportunities. Our acquisition program remains an important part of our growth strategy. Through the first nine months of the fiscal year, adjusted EBITDA decreased by $2.4 million versus the same period in 2020. As fiscal 2021 winds down, we are pleased with our overall performance as a business, particularly in the face of slightly warmer temperatures, certain rising inflationary costs, and a $6.7 million reduction in weather insurance proceeds due to the seasonal timing of degree days. I remain confident that the steps we are taking through the third and fourth quarters will position Star well for next heating season and whatever challenges and opportunities are presented. With that, I'll turn the call over to Rich for additional comments on the quarter. Rich?

Thanks, Jeff, and good morning, everyone. For the fiscal 2021 third quarter, our home heating oil and propane volume decreased by 13 million gallons or 26% to 38 million gallons as the impact of significantly warmer temperatures and net customer attrition more than offset the additional volume provided by acquisitions. Temperatures for the quarter were 24% warmer than last year. As Jeff mentioned, the third quarter of fiscal 2020 was the second coldest on record over the last 50 years. The volume of other petroleum products sold increased by 7 million gallons to 41 million gallons as certain sectors rebounded from COVID-19's impact on economic activity. Our product gross profit decreased as we expected, $13 million or 18% to $72 million due largely to the lower home heating oil and propane volumes sold. Delivery in branches rose by $2 million to $75 million due to the additional costs from acquisitions and a slight increase in expense within the base business. Our net loss increased by $12 million, primarily due to a decrease in adjusted EBITDA. Adjusted EBITDA declined by $15.6 million to a loss of $10 million as lower home heating oil and propane volumes more than offset the impact from improved home heating oil and propane per gallon margins. The adjusted EBITDA loss for the third quarter of 2021 was more in line with historic levels. For the nine months of fiscal 2021, our home heating oil and propane volume decreased by 10 million gallons or 3% to 285 million gallons. Slightly warmer temperatures, net customer attrition, and other factors more than offset the impact from acquisitions. Temperatures for the first nine months of fiscal 2021 were 1% warmer than the prior year comparable period but still 11% warmer than normal. The volume of other petroleum products sold increased by 2 million gallons or 2% to 112 million gallons as the decline in motor fuel sales experienced during the first half of 2021 was more than offset by a rebound experienced in the third quarter. Our product gross profit was $413 million, unchanged from last year as lower home heating oil and propane volume was offset by an increase in home heating oil and propane per gallon margins. Delivery and branch expenses rose just by $1.6 million as additional costs from acquisitions of $2 million and a $6.6 million decline in the benefit recorded under our weather hedge program was partially offset by a $7 million or 3% decline in operating expenses in the base business. Net income rose by $25 million to $111 million due largely to a favorable change in the fair value of derivative instruments. Adjusted EBITDA did decline by $2.4 million to $155 million. Lower total operating expenses in the base business, higher home heating oil and propane margins, and $2.4 million of adjusted EBITDA provided from acquisitions were more than offset by the decline in the weather hedge benefit and the impact from lower home heating oil and propane volume. And with that, I'd like to turn the call back over to Jeff.

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

Our first question comes from Mark Savino, a private investor.

Yes. Guys, I was wondering about your receivables. Any problems there? It seems that they're creeping some.

Absolutely not. Our days sales outstanding for receivables were 48 days as of June last year, and this year they are 41 days. There is, however, a significant increase in the cost of home heating oil, so you will notice an increase when comparing this year to last year.

No. That's great. One other thing...

We're actually in better shape this year than we were last year.

No. That's great. One other question and that is labor. I sense there is some pressure regarding your ability to find and train quality employees. How is that going?

There's no question that the labor market has certainly tightened up. We've put a number of programs in place, both to improve retention of our existing workforce and really to make the positions that we're recruiting for more attractive. So like many businesses, we continue to try to find creative ways to reduce employee turnover and to keep the valuable employees and associates that we have and also to attract new ones. So I think we're not the only business that is challenged in that regard right now. But I think it is a work in progress.

It’s definitely concerning. I worked as a manager at UPS for 20 years and spent a total of 30 years with the company. I notice many issues emerging with the new workforce. I see younger employees who struggle with training. For instance, I've observed them driving large trucks and backing up into streets after pulling into driveways, which goes against the principle we always followed of moving forward and never reversing. This raises my worries about potential accidents and other problems arising with inexperienced drivers.

Well, frankly, I would say that our field training and retention has been fairly constant. It's really more contained at this point to customer contact employees, a lot of our inside contact center employees and those things where we've gone partially like really in a hybrid remote environment as a result of the pandemic. And so ongoing training — I wouldn't say it's become more difficult, but we've had to pivot a little bit to continue to keep our training programs in place for those folks.

Okay. I've been an investor since 2006, since the reorganization. And you guys have hit a home run, for sure. I made a lot of money. So I appreciate it. Keep up the good work, and maybe we'll talk next quarter.

Thank you very much.

Our next speaker is Michael Prouting from 10K Capital.

Just a couple of questions this morning. My recollection is that CapEx ticked up in the quarter. And I was just curious to what might be driving that. And then on the capital allocation side, two questions. First, I'm wondering, Jeff, what you're seeing as far as the acquisition pipeline is concerned? And whether you see the potential for any really large needle-moving acquisitions? And then on the stock repurchase side, as I kind of previewed last quarter, I was expecting that without changes in the formula just given the higher stock price you would probably buy back a lot fewer shares, and that seems to have occurred in the second quarter. So Rich, Jeff, I'm just wondering what your thoughts are in terms of adjusting that formula.

Yes. Regarding acquisitions, I'd say that the current activity level is quite typical for this time of year. We have successfully completed five acquisitions so far in fiscal '21, which brings our total to seven over the past twelve months. The activity is there, and we are actively exploring several appealing tuck-in opportunities. As for larger acquisitions, their timing is unpredictable; we may not have identified any today, but a more significant opportunity could emerge at any moment. Overall, our acquisition pipeline right now aligns with our typical expectations for mid-summer.

Yes. Regarding the capital expenditures, we made some additional investments in our fleet and other areas of our plant. It's nothing out of the ordinary, but we increased our investment in the fleet by about $2 million to $3 million. As for capital allocation, we may need to reconsider our strategy, or we could continue with our current approach to unit repurchases.

This concludes our question-and-answer session. I would now like to turn the conference back over to Jeff Woosnam for closing remarks. 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 2021 fiscal fourth quarter results with you in December. Thanks, everybody.

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