Good day, and welcome to the Star Group Fiscal 2018 Second Quarter Conference Call. [Operator Instructions] Please note this event is being recorded. .

I would now like to turn the conference over to Steve Goldman, Chief Executive Officer. Please go ahead. .

Thank you, Andrew, and good morning and thank you for joining us today. With me today is Star's Chief Financial Officer, Rich Ambury. After some brief remarks, Rich will review our second quarter financial results, we will then take your questions. .

Before we begin, Chris Witty of our Investor Relations firm, Darrow Associates, will read the safe harbor statement. Please go ahead, Chris. .

Thanks, Steve, and good morning. 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 and in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2017.

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 back over to Steve Goldman.

Steve?.

Thanks, Chris. Good morning, everyone, and thank you for joining our second quarter call. The 3-month period ending March 31 was, like last quarter, a challenging and unusual time for us. To give additional context to the heating season, I want to provide our listeners with some additional detail regarding temperatures during the past 6 months.

We started the fiscal year with a small measure of concern as October ended up being the warmest on record for over the past 118 years. But this was followed by November and December, which were relatively cold and certainly colder than 2016.

But nothing unusual until right around Christmas when we then saw an extreme cold snap that went through January 7, during which we said last quarter temperatures were more than 45% colder than normal..

This really tested the company not only in delivery area, but across most aspects of our business and services and it provided to be very expensive to properly service our customers in all respects.

We needed extra staff on hand to answer calls, deliver product, manage maintenance request and repairs and generally handle all the day-to-day aspects of running our operations. This also entailed a great deal of over time.

These challenges not only impacted overhead expenses, as Rich will detail in a moment, but also took a toll on customer satisfaction ultimately heading to some attrition. It took the full month of January for us to really catch up. Then from January 8 until around the first week of March was actually 20% warmer than normal.

It didn't start getting cool again until in March and given the number of well-publicized Nor'westers, the last 3 weeks of the quarter were 25% colder than normal..

At the end of the day, we had a very volatile heating season and will be required to make a payment under our weather hedge contract although not as much as we previously anticipated.

And while we believe we'll see a benefit to the late March degree days in terms of Q3 volume, it doesn't take away from the fact that so far fiscal 2018 has been a very different year than any other one in our history.

I am proud to say though our company really pulled together and put in the hours necessary to handle all the challenges to the best of our ability. But as a leader in the industry, we need to be more nimble and more responsive in the future and hopefully we learn from the last several months.

And if extreme weather conditions become the new normal within our geographic operations, we need to -- going to need to be ready for that..

As I noticed, our net attrition was impacted by the demands placed on our operations this year and we assume other energy providers saw similar turnover in their customer base during the middle of the second quarter when it was warm.

People when shopping around to see if another provider might actually be better and we lost 18,900 accounts during the period while only picking up 14,100 accounts equating to 1% net attrition.

While this is not our most terrible performance and we added net accounts in the first quarter, we are nonetheless not happy given our drive to provide the best service possible particularly during severe weather conditions.

Customers should know that given our size and experience, we are the go-to company to rely on during trying times and will be obviously redoubling our efforts, as I said previously, to perform better during the next crisis whenever it occurs..

I think one thing that definitely added to some of this additional churn in customers was the additional high pricing market that we've been experiencing for the last several months as well. While we don't have as much time for acquisitions during the quarter, we were able to close on 1 in April for $13.5 million.

A heating oil company in Pennsylvania that should help to strengthen our position in this large market. We also see many opportunities for additional transactions heading into the summer.

We also announced during the quarter that Star's Board of Directors authorized an increase in a number of common units available for repurchase and the company subsequently bought approximately 1.2 million units for just under $11 million. We raised our distribution once again as well with both actions designed to further increase shareholder value..

In closing, I'd like to thank our dedicated employees for the many, many hours of hard work they put in this past quarter and the entire fiscal year thus far. It's been a real learning experience for us as a company moving from period to period from rather warm periods to extreme cold periods combined with winter storms in between.

But we already have a team of professional service oriented individuals in place who know that everything we do depends on our customers being happy no matter what the weather brings. I'm proud to have the people in place who enabled us to get through such a tumultuous time..

With that, I'll turn the call over to Rich Ambury to provide some comments on the quarter's results.

Rich?.

Thanks, Steven, and good morning, everyone. For the quarter, our home heating oil and propane volume increased by 26 million gallons or 17% to 180 million gallons as colder temperatures and acquisitions more than offset the impact of net customer attrition and other factors.

As expected, the extremely cold temperatures experienced during the last week of December 2017 favorably impacted the volumes sold during the quarter. Temperatures for the fiscal 2018 second quarter were 8% colder than last year, but still 5.5% warmer than last year.

Our product gross profit increased by $33 million or 18% to $220 million due to the higher home heating oil and propane volumes as well as a 1.3% increase in home heating oil and propane per gallon margins. In the base business, home heating oil and propane margins rose by about $0.027 or 2.3%..

Our net service loss widened by $2 million partly due to acquisitions, but primarily reflecting the extreme weather conditions that we experienced during the early part of January 2018 when temperatures were more than 45% colder than normal.

This unusual weather pattern resulted in a significant increase in the demand for service resulting in a higher number of service calls and more hours worked at premium rates.

Delivery and branch expense increased by $14.4 million or around 16% to $107 million during the quarter partly due to the impact of acquisitions, which accounted for $4.7 million of the increase. In the base business, expenses rose by $11 million before a $1.2 million credit recorded under our weather hedge.

The extremely cold weather in January resulted in $2.8 million increase in expenses while overall prices and volume resulted in an increase of bad debt accruals and credit card fees of $2.2 million..

The year-over-year comparison was also impacted by higher insurance expense due in part to the extreme weather, an increase in our fixed costs and normal salary benefit and wage increases. Regarding our weather hedge, you may recall that we recorded a charge of $3.1 million during the first fiscal quarter.

Given overall weather conditions in the second quarter, we reduced that amount expected to be paid by $1.2 million to $1.9 million. As a reminder, our weather hedge covers the period November 1 through March 31 taken as a whole.

We posted net income for the quarter of $55 million or $15 million higher than the prior year period due to an increase in adjusted EBITDA and a reduction in the effective tax rate. Adjusted EBITDA increased by $17 million or 19% to $105 million in the second quarter of fiscal 2018..

The higher adjusted EBITDA was primarily a result of the additional volume sold due to colder temperatures, higher home heating oil and propane margins, the additional adjusted EBITDA provided by acquisitions and a $1.2 million credit under the weather hedge contract.

All of these more than offset the increase in operating expenses in the base business. For the first half of fiscal 2018, our home heating oil and propane volume increased by 30 million gallons or 12% to 284 million gallons as colder temperatures and acquisitions more than offset the impact of net customer attrition and other factors.

Temperatures for the first half of fiscal 2018 were 7% colder than last year, but still 5.6% warmer than normal. Our product gross profit increased by $40 million or 13% to $344 million due to higher home heating oil and propane volume and a $0.02 increase in home heating oil and propane per gallon margins..

Again in the base business, home heating oil and propane margins increased by $0.036 or 3.2%. Our net service loss again widened by $2 million year-over-year partly due to acquisitions, but again primarily reflecting the extreme weather conditions previously discussed.

Delivery and branch expenses increased by $24.5 million or 14% to $198 million during the period due again partly to due to acquisitions, which accounted for $9 million of the increase and we also recorded a charge of $1.9 million related to our weather hedge as I previously mentioned. In the base business, operating expenses rose by $14 million.

Again the extreme cold weather resulted in an estimated $2.8 million increase in spend -- expenses while higher prices and volume resulted in an increase in bad debt accruals and credit card fees of $2.6 million..

The year-over-year comparison was also higher by higher insurance expense due in part of the extreme weather, an increase in our fixed cost and normal salary, wages and benefit increases.

We posted net income for the first 6 months of fiscal 2018 of $85 million or $27 million higher than the prior year period due to an increase in adjusted EBITDA and again a reduction in the effective income tax rate. Adjusted EBITDA increased by $12.7 million or 10.7% to $132.2 million for the 6 months ended March 31, 2018.

The increase in adjusted EBITDA primarily resulted from the additional volumes sold in the base business largely due to the impact of colder temperatures, higher home heating oil and propane per gallon margins and the additional EBITDA provided by acquisitions which was partially offset by higher operating costs in the base business and a $1.2 -- excuse me, $1.9 million charge related to the company's weather hedge contract..

And with that, I would like to turn the conversation back over to Steve. .

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

[Operator Instructions] We have a question from Andrew Gadlin of Odeon Capital Group. .

I was wondering if you could talk a little bit about the churn in the quarter. Steve, I know you highlighted that you were disappointed with it. But relative to some of your comments previously, it was relatively minor increase versus last year in churn.

Are you still concerned about churn showing up later in the year? What has you still focused on this right now?.

What has me focused on it is we've been on a pretty good run to the last over a year. We were showing a much better trend in my mind for same periods because of a lot of the internal mechanisms we put in place, enhancing the customer experience, opening new channels of communication for customers and getting upstream on complaints.

The issue for the period I'm highlighting because it really was temporarily a setback for us in that the demand on resources not just for our company, but all resources within the heating space during in the last week of December and the first couple weeks of January and even a couple of weeks that ensued because response was really pent-up compared to the demand that was in the marketplace at that time.

There was disappointment all around because of just the gigantic surge and there is a limit to how much expansion any particular company in our space can have.

And even though we were able to rearrange our resources and I think we created an immense response to the demand of our customers, there still on the edges were customers because of real physical limitations were not happy in the end no matter what we did during the period or post the period and we're just critical of that and not happy about it.

But do I think it's going to have further impact for the rest of the year, it's hard to tell. I'm hoping that we have our arms around a lot of the people that were woken by the event and we responded to them.

We spent a lot of money and a lot of time reaching out to anybody that we understood was very sensitive to us after the period and we think we -- our penetration to that group was very good.

To your point, it represents kind of a small increase, but again an increase and a result that's directionally wrong for what we're pursuing as a result and we don't want to be negligent of pointing that out.

And the other thing I do want to point out is the market increases in cost so in turn our selling price is certainly not friendly to us or anybody from a retention standpoint. As prices get back into these levels where we have not seen for about 3 years, we have to be very careful.

Customers get very sensitive, it becomes a different part of their home budget again and they have their eyes wide open to anything related to the price of heating oil and related services and the conversations become a little bit more difficult to hold on to them and then as we renew their agreements going forward, we have to be mindful of that.

But I don't -- again I can't tell at this point from what we've experienced that it's created a different direction from our relationship with our customers and my belief would be that we will get our arms properly around anything that has altered the course that we were -- we've been on. .

Makes sense.

And then as we think about customer retention next year and repricing, do you see the potential to reduce your gross profit per gallon?.

Honestly, our objective is always kind of the same thoughts directionally, which is try to offset increased expenses and inflation as much as we can so that the adjustments in price are neutral to kind of preserve our profitability and then grow the business so that there can hopefully be more profitability.

And then look at internal operating costs, whether it be variable or fixed, and look for ways to improve those.

We're certainly in a marketplace where there are some inflationary pressures that have been impacting us probably for the better part of 2 years now where internally trying to adjust to that the best we can and look at how we can do things so that they impact us less going forward.

But we are very aware of that and cognizant of that and how that relates to pricing. You can't just charge people whatever you'd like. If we can double the price and no customer ever leave, obviously that would make things simpler, but that don't work that way.

So we very carefully adjust pricing to our cost increases and what our projected internal costs are as we see even under our management control that they're going to end up being.

We don't have a crystal ball so it's not perfect, but we have a lot of experience that tells us how we should adjust things and how we should look at it and I think our track record shows that more or less we are pretty close to right.

And I still feel very confident and comfortable because if anything, we get better and better over time with better mechanisms, better tools, better reports and better ways to look at things on an inter-period basis so we can make adjustments that we need to make.

So I don't -- again I don't think the rise in price predicts anything about next year's margins or profitability at this point, we don't know. .

The next question comes from Michael Prouting of 10K Capital. .

Steve, I had some related question to what Andrew just asked specifically.

So if you see a recurrence of what happened over the past heating season, what would you do differently? And then related to the customer retention, do you see opportunities to go out there and win customers away from competitors that may have suffered similar customer service issues?.

2 really good questions. One, the biggest takeaway from this period's experiences, we realized some limitations of our internal phone system and we are addressing that.

We had a day where because of some external forces primarily media, television and radio telling people to call their service provider to make sure that they get a delivery regardless of whether they needed one or not, they basically overwhelmed our phone network. So our phone network on one particular Sunday took over a million calls.

Our past history was somewhere around a couple of hundred thousand calls. It was of course the people calling over and over again as they were encouraged to call and they felt like they may not get through.

Ultimately that kind of worked itself out, but we would like a better response and better mechanism to give better real-time feedback to our customers so they don't feel that sense of insecurity. That would be one thing.

The second thing that I think we would do differently and we are doing differently is look at our preventive scheduling -- our preventive maintenance scheduling a little bit differently and we are starting to peel out groups and we did a little bit of a test concurrent to this winter season looking at how we can do more proactive work on behalf of the customers so we basically could predict their need before they have the demand.

And for that that particular group, which represented a few thousand customers, what we saw in this kind of experiment was a large reduction in reactive service calls. So I think we can get upstream and we did cut the edge off of some of these type of extraordinary weather conditions.

I think that's something we are taking into practice and going to expand upon. As far as our competitors, I'm actually kind of surprised knowing what has happened with some of our competitors during the same period and what the reaction was that we haven't seen a larger influx of new customers already.

In some markets we've seen a little bit of a blip up, in some cases lot of it has to do with contracts and agreements, we are optimistic that we can leverage it. I think we did a very good job in the marketplace and it's pretty well known what our responsibility was.

I think that we are hopeful that just what you asked is going to be a big opportunity for us between now and the fall.

That's part of the issue that it's a little unpredictable when that chance will become because customers that do have agreements with competitors are locked in for varied periods of time and we're out there in the hunt right now trying to pull those people loose.

And there is one thing that we're kind of theorizing that people recognize how extreme the period was and they probably are thinking, everybody experienced the exact same thing they did.

We know that differentially we were able to still provide very, very good service and the majority of our customers not only got through, but they got the service when they needed it and expected to get it. So I'm hopeful that that will be the case and we'll see some more positive gain results from that. .

Was there a follow-up, sir?.

No, that's it. .

[Operator Instructions] There appear to be no further questions. So at this time, I would like to turn the conference back over to Steven Goldman, Chief Executive Officer, for any closing remarks. .

Thank you, Andrew, and thank you everybody for taking the time today to join us and for your ongoing interest in Star Group. And we look forward to sharing our 2018 third quarter results with you in August. .

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