SGU - NYSE

Good morning, everyone, and welcome to the Star Group Fiscal 2023 Second Quarter Results Conference Call. [Operator Instructions] Please also note today’s event is being recorded. And at this time, I’d like to turn the floor over to Chris Witty, Investor Relations Advisor. Sir, 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, 2022 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 to discuss our second quarter and fiscal year-to-date results. As the largest provider of home heating oil in nation, our business remains highly dependent on weather, and the second quarter was particularly challenging due to the mild temperatures experienced throughout our footprint. . To put this in perspective, not only were temperatures 22% warmer than normal, but the period was also the warmest in New York City in 123 years. Year-to-date, it was the fourth warmest period on record in this key market. While there’s nothing we can do to influence mother nature, we are adept at mitigating, to every extent possible, unusual weather swings like this, managing costs and working capital and adjusting short-term investment decisions. At the same time, our weather hedge program worked as intended and provided an important buffer under such conditions, as did our disciplined approach to controlling operating expenses even in the face of certain inflationary pressures. The warmer temperatures also negatively impacted our net customer attrition during the period. Due to our size and scale, we are often in a position to add new customers as a result of various service-related disruptions brought on peak seasonal demand, usually in January and February. The warmer-than-normal temperatures that we experienced in these months, however, significantly muted this activity, thus reducing the opportunity to win over new accounts. While we did not complete any acquisitions in the quarter, our team has remained very busy evaluating various energy organizations that align with our goal of strengthening and broadening our portfolio of brands. Our acquisition program remains an important part of our growth strategy. Given the various headwinds encountered through the first half of fiscal 2023, I am pleased with our overall performance, including adjusted EBITDA of $151 million, which is generally in line with the same period last year as well as slightly improved net customer attrition. We achieved this despite weather that was 7% warmer than fiscal 2022 and 16% warmer than normal. While April temperatures were also quite warm, I remain confident in our ability to provide the best possible customer experience and continue to proactively adjust our operations to ensure that we effectively deal with any changes or opportunities that may present themselves as we navigate through the summer months. With that, I will turn the call over to Rich to provide additional comments on the quarter.

Thanks, Jeff and good morning everyone. For the second fiscal quarter, our home heating oil and propane volume decreased by 28 million gallons, or 19%, to 121 million gallons as the additional volume provided from acquisitions was more than offset by extremely warm weather, net customer attrition and other factors. Temperatures for the fiscal 2023 second quarter were 19% warmer than last year and 22% warmer than normal. Our product gross profit decreased by $17 million, or 8%, to 203 million gallons as the 19% decline in home heating oil and propane volumes sold was partially offset by an increase in per gallon margins. Delivery, branch and G&A expenses decreased by $11 million year-over-year primarily due to $14 million attributable to our weather hedging program. In the second quarter of fiscal 2023, we recorded a benefit of $13 million under our weather hedge compared to a charge of $1 million recorded in the comparable period last year. This positive variance was offset by the impact of recent acquisitions, which accounted for an increase of $1 million in operating costs, while expenses in the base business rose by just $2 million. We posted net income of $62 million in the second fiscal quarter of fiscal 2023, or $19 million less than the prior year, reflecting the after-tax impact of a non-cash unfavorable change in the fair value of derivative instruments of $21 million and a $5 million decrease in adjusted EBITDA. Adjusted EBITDA declined by $5 million to $102 million as the impact of lower home heating oil and propane volume of 28 million gallons and a modest increase in operating expenses was partially offset by a $14 million weather hedge benefit and an increase in home heating oil and propane per gallon margins. Turning to the results for the first half of fiscal 2023, our home heating oil and propane volume, again declined by 26 million gallons, or 11%, to 210 million gallons as the additional volume provided from acquisitions was reduced by the warmer temperatures, net customer attrition and certain other factors. Temperatures for the first half of fiscal 2023 were 7% warmer than last year, but still 16% warmer than normal. Our product gross profit decreased by $3 million, or 1%, to $354 million as higher home heating oil and propane margins, along with an increase in motor fuel gross profit partially offset the 11% decline in home heating oil and propane volume. Branch, delivery and G&A expenses were lower by $1.5 million year-over-year, which included $11.4 million attributable to our weather hedge program. In fiscal 2023 year-to-date, we recorded a benefit of $12.5 million under the weather hedge compared to a benefit of $1.1 million recorded in the first half of fiscal 2023. Recent acquisitions accounted for an increase of $2 million in operating expenses, while base business expenses rose by $8 million. In addition, as sales were higher year-over-year, reflecting increased product cost, bad debt and credit card fees rose by $4 million and vehicle fuels were also higher due to the higher energy cost by $3 million. The remaining expense in the base business was approximately $1.3 million or less than 1%. We posted net income of $76 million for the first half of fiscal 2023 or $20 million lower than the prior period due to the after-tax impact of a non-cash unfavorable change in the fair value of derivative instruments of $25 million, an increase in net interest expense of $4.5 million and a decrease in adjusted EBITDA of just $900,000. Adjusted EBITDA declined by $900,000 to $151 million as the impact of lower home heating oil and propane volume of 26 million gallons and slightly higher operating expenses were almost totally offset by an increase in heating oil and propane margins and the weather hedge benefit of $11.4 million. 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. Operator, please open the phone lines for questions.

[Operator Instructions] And our first question today comes from Steve Errico from Locust Wood Capital. Pleas go ahead with your question.

Good morning, guys. How are you? Congratulations on a good quarter and a tough environment for you, really keeping your costs under control. My question is, can you explain to me what was the announced intra-quarter? I believe that’s some type of rights program or some dividend per share that’s going to go on if some – if ownership breaks a certain threshold. Could you guys explain that to me? And also let me know what your thinking was behind that?

Yes. In response to certain trading activity of our common units that was reported publicly, the Board decided that it was in the best interest of our public unitholders to adopt the rights plan similar to something that we had previously had in place that expired a few years ago. As we did state in the press release, the adoption of the right plan wasn’t a response to any proposal to acquire control of the company nor is it intended to defer any such offers. We adopted the right plan to give the GP sufficient time to negotiate and behalf of the public unitholders, especially if there is an unsolicited takeover proposal. We had that rights plan in place years ago, we saw some activity in the stock, and thought it would be a good idea to put the right plan in place.

Got it. But I think you just mentioned, I just want to confirm I heard it. It wasn’t in reaction to any proposal you’ve received. It was just based on trading patterns that you’ve seen in the stock.

That is absolutely correct.

And what did you guys done – go ahead.

Go ahead. No go ahead.

What did you guys done with your buyback program? I didn’t get a chance to read the Q yet, Rich, I apologize, but were you buying shares in the quarter? And do you still have the buyback program active?

Yes, we still have the buyback plan active. We bought major of the shares in the quarter. We are in the middle of the year, that’s turning out to be the warmest in the past century. And we experienced record product costs. So we thought its best not to change any parameters of the plan until we emerge from the winter. But we can – we think we continue – yes, yes.

So what – and now that your past is part of you, you know what your cash balances are, what – can you remind me how many shares you have left on your authorization?

Yes. I think there is roughly about 830,000 shares or something to that effect, still outstanding on the public plan, so to speak.

Got it. And then my last one, it’s just because I don’t have it in front of me the K, it was kind of hard for me. I haven’t read one in a while, but what is the threshold that the rights kick into? Is it a 10% buyer or a 15% buyer? Could you just remind me of that?

It’s 15%.

So if someone acquires 16% then all of a sudden, it’s just the GP that gets the extra units or gets the extra voting shares, however you call it, and that would force a conversation?

It’s not just the GP. I mean, the comment is involved in this as well. And there is – there is – without going through the details of the rights plan, there is two mechanisms in the right plan – rights plan for giving folks the opportunity to put in additional capital into the company.

Got it. Okay. Well, great guys, again, congratulations on getting through a tough weather season, and thanks for clarifying that for me. I appreciate it.

Great. Good to talk to you, spent a while. Thank you.

Spent a while. We are still here. Thanks. Okay.

Okay.

Our next question comes from Tim Mullen from Laurelton Management. Please go ahead with your question.

Thanks, guys. Thanks for taking the call and questions. One, I just want to follow-up on the buyback question that was just asked. And when, if ever, would we expect to hear any changes to the program? That’s my first question. And then the second question is just in regards to your lending relationships, have you seen any changes? Or do you anticipate any changes on the lending front, just given kind of all the banking turmoil that we’re seeing in the markets right now?

Sure. With regard to the right – not the rights plan, but the unit repurchase plan, we’re coming out of a quiet period in a couple of days. So it’s only during that open window where we can actually make changes. So if there is a change that we put in place, you’ll see an 8-K that we would file. And that’s basically how we’ve done this over the years is when there is an open window we will issue an 8-K, which either changing the threshold or changing the number of units. Yes, we see the potential banking crisis we haven’t seen any significant change or any change, frankly, in our relationships with our member banks. We’ve been funded throughout the quarter, as we increased our working capital borrowings and then decreased our working capital borrowings, but we never had any instance where somebody said that they couldn’t fund or somebody had to put up for another bank had they kind of put up for another bank?

Got it. And then just going back to the buyback question, I was under the impression that there isn’t much discretion on your part that it’s pretty price sensitive. Is that not the case? I ask that in the context of your comment about a bit more, and that’s how you...

Yes, that is the – yes, there is really no – there really is no discretion for us. I suppose we could have increased the number of units in the prior open period, which would have been, I think, February as we came out of the first quarter. We could have probably made a change there. But again, we were in the middle of the warmest quarter and it’s probably turned out to be the warmest year and price of the product was still pretty high.

Got it. Thanks, guys.

You are welcome.

[Operator Instructions] And gentlemen, at this time, I’m showing no additional questions. I’d like to turn the floor back over to Mr. Woosnam for any closing remarks.

Okay. Well, thank you for taking the time to join us today and your ongoing interest in Star Group. We look forward to sharing our 2023 fiscal third quarter results in August. Thanks, everyone.