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Star Gas Partners L.P.  (NYSE:SGU)
Q1 2019 Earnings Conference Call
Feb. 06, 2019, 11:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, and welcome to the Star Group Fiscal 2019 First Quarter Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Chris Witty, Investor Relations Monitor. Mr. Witty, please go ahead.

Chris Witty -- Investor Relations

Thank you, and good morning. With me on the call today are Dan Donovan, Acting 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't 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 and Form 10-K for the fiscal year ended September 30, 2018. 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 statement, 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 Dan Donovan. Dan?

Daniel Donovan -- President and Interim Chief Executive Officer

Thanks, Chris, and good morning to everyone. It's with deep sadness that I sit here today due to the loss on December 22, 2018, of our President and CEO, Steve Goldman. I had known Steve since 2003. We, along with our entire management team, worked as partners establishing SGU as a premier provider of heating oil, propane and HVA services. He was a great person to work with and his expertise in operating functions were outstanding. He knew the job, he knew his employees and he knew all customers. All of us at Star Group grieve his loss and I will personally miss a great friend and colleague. Now, it's time to move on and we have, helped by the fact that Steve built an effective network of strong leaders throughout the company. While I'm only back on an interim basis, I'm pleased to say that the management talent at Star Group is formidable and up to the many challenges we face. I am confident in the future of Star.

First, let me start with a few general comments about the weather. In our first quarter, temperatures were colder than last year by 5.3%, although still slightly warmer than normal. Adjusted EBITDA increased by $17.4 million in the quarter or 64% to $44.8 million. Weather conditions were much more in line with our expectation versus some extremes we experienced last year. Oil prices continue to be volatile, as I'm sure most of our listeners are aware. The NYMEX price for heating oil in the quarter ending December 31, 2018, range from $2.44 to $1.66 a gallon versus a range of $2.08 to $1.74 a gallon for the same quarter a year ago. Volatile prices make margin management and customer satisfaction much more challenging.

While we gained 800 more accounts than we lost in the first quarter, it was far less than our net gain of 4,800 accounts in last year's comparable period. New accounts were up by 1,500 accounts over fiscal 2018 but losses were worse by 5,500 year-over-year. The high-end number of lost accounts was primarily due to the price of oil, customers failure to meet our credit terms and by the company's decision to exit accounts with low profit margins. The increase in accounts gained could be attributable to mainly customer referrals and local marketing efforts.

While we did not close on any acquisitions during the quarter, other than a small propane tuck-in, we continue to discuss model and analyze several potential purchases that will hopefully result in greater transaction activity in the coming months. As you know, our distribution for the quarter was $0.1175 per unit, and we also continue to repurchase units. Both actions are intended to enhance unitholder value. As we have said in the past, we believe it make sense to look at distribution increases after the end of the heating season.

With that, I'll turn the call over to Rich Ambury to provide additional color on the quarter's results. Rich?

Richard Ambury -- Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Thanks, Dan; and welcome back, Dan.

Daniel Donovan -- President and Interim Chief Executive Officer

Thank you.

Richard Ambury -- Executive Vice President, Chief Financial Officer, Treasurer and Secretary

For the quarter, our home heating oil and propane volume increased by 10 million gallons of 10% to 113 million gallons as the impact of colder temperatures, acquisitions and a delivery scheduling variance versus the prior year was partially offset by net customer attrition and other factors. Temperatures for the fiscal 2019 first quarter were 5.3% colder than the prior year, but slightly warmer than normal.

Our product gross profit increased by $29 million or 23% to $152.5 billion, due to higher home heating oil and propane volume and an increase in home heating oil and propane per gallon margin. Gross profit from other petroleum products also rose, largely due to the impact of acquisitions.

Delivery and branch expenses increased $11.5 million or about 13% to a $103 million. Operating expenses in the base business rose by $8 million or 8% with acquisitions accounting for the remaining 4% of the increase, the higher volumes sold led to greater credit card utilization and higher reserves for doubtful accounts. Vehicle fuel operating costs were higher due to the colder weather and an increase in fuel costs. Inflationary pressures accounted for roughly 3% of the increase in the base business, our concierge program plus $2 million in the quarter year-over-year, but our weather hedge liability was lower by $1.1 million.

During the quarter, we also recorded a $31 million non-cash charge relating to the change in the fair value of our derivative instruments. This was due to a decline in the underlying price of our commodity hedges from $2.35 per gallon at the beginning of the quarter to $1.68 at the end of the quarter. By comparison, in the first quarter of last year, we've recorded an $11 million non-cash credit related to the fair value of our derivative instruments. The overall year-over-year non-cash impact was $42 million.

Net income decreased by $28 million or 92% to $2.3 million as the increase in adjusted EBITDA of $17.4 million was more than offset by the non-cash $42 million unfavorable change in the fair value of derivative instruments.

In addition, the company reported an $11.5 million tax benefit during the three months ending December 31, 2017, to reflect the impact of the tax law change.

Adjusted EBITDA increased by $17.4 million or 64% to $45 million. The combination of higher volumes and greater per gallon margins led to an increase in product gross profit that more than offset higher operating expenses.

And, with that, I'd like to turn the call back over to Dan.

Daniel Donovan -- President and Interim Chief Executive Officer

Okay. Thanks, Rich. At this time, we'll be pleased to address any questions anyone might have. Anita, could you please open the phone lines for questions?

Questions and Answers:

Operator

Yes, I can. Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question today comes from Stephen Errico with Locust Wood Capital. Please go ahead.

Stephen John Errico -- Locust Wood Capital Advisers -- Analyst

Guys, again, I just want to express my condolences for your loss, but congratulations on managing the business in a great way. My question has to do with your concierge program, it was another $2 million in concierge this quarter, just thinking how you see the growth of that program? Are you getting the return on that program? And what's your overall outlook for it? Thank you.

Daniel Donovan -- President and Interim Chief Executive Officer

Yes. I look back at the comments that Steve made in December, he talked about reining in some of the expense on the concierge program going forward and he also talked about the growth being a little bit slower than we desired in New York, Connecticut, New Jersey, Rhode Island, and basically we put it on a pause and we put it on pause to basically rein in some of the expenses and not to expand it into areas where it's going to cost us a lot more.

We haven't abandoned it, but it's something that we are putting off for now. We're maintaining the customers that we have, we are taking care of them, we have -- still have people in place that can service those customers, but basically we put the program on a pause so that we could evaluate where we want to go in the future with this -- not only myself, but of course, our new management team is going to have the opportunity to take a look at that and see how they want to grow that if they want to grow it at all or do they want to maybe try to localize it and try to make the concept a little bit more successful in a local area, that will be up to them. But, right now, we have a paused program.

Stephen John Errico -- Locust Wood Capital Advisers -- Analyst

Thank you.

Operator

(Operator Instructions) The next question comes from Michael Prouting with 10K Capital. Please go ahead.

Michael Frederick Prouting -- 10K Capital -- Analyst

Yes. Good morning, guys. Thanks for taking my question.

Daniel Donovan -- President and Interim Chief Executive Officer

Good morning.

Michael Frederick Prouting -- 10K Capital -- Analyst

One -- so I just have one question this morning, it's the standard question on capital allocation. So I was encouraging the company to buy some units back in the quarter and also especially the units that you've purchased in January, but I just wanted to make the observation that, at the current stock price, the stock is yielding almost a 12% yield on dividend distributions and repurchases and almost 19% free cash flow yield, once you adjust for changes in working capital. And I'm not aware of too many places right now where you can find 19% cash-on-cash return. So, on the one hand, I'm pleased to see the unit repurchases, but on the other hand it seems to me that the company should be repurchasing units much more aggressively at this level, particularly given the free cash flow yields. And the other observation there is that, as you guys, I'm sure, are well aware, every unit you purchase today is a unit that you don't have to pay a distribution on either this year or in perpetuity. So this also benefits from that standpoint. So, I just wanted to get your latest thinking on unit repurchases with the hope that we can step up the pace here.

Richard Ambury -- Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Michael, it's Rich. This is a -- it's a plan that's kind of on automatic pilot with the -- under the SEC provisions. The guys who handle this force, the broker that handles this force buys back as many units during the day that, I'd say, legally or per the formula on how many you can buy back per day based on various trading, number of units that are traded in a period on a look-back basis, so we are doing as best we can under the constraints of the program.

Michael Frederick Prouting -- 10K Capital -- Analyst

I guess, in essence, I'm suggesting that you should change some of the parameters though that were...

Richard Ambury -- Executive Vice President, Chief Financial Officer, Treasurer and Secretary

We can't change the parameters of the program, because the rules are written in stone as to what you can buy back. I can't buy back anymore than I'm buying back on a daily basis as I am today, unless we did a tender offer on one of the buy back shares. But under this program, which is all Safe Harbor program, I'm not directing this during the course of the day as to how many units to buy back, are we in the market today, are we in at 11 o'clock, are we in at 12 o'clock, it's kind of on automatic pilot and I can't really change it. Thank you.

Michael Frederick Prouting -- 10K Capital -- Analyst

Yes. Thank you.

Operator

(Operator Instructions) The next question comes from Ed Olson, a Private Investor. Please go ahead.

Ed Olson -- Private Investor -- Analyst

Not a question, but a comment. The tender offer sounds good to me.

Richard Ambury -- Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Okay. We'll take that under advisement, Ed.Thank you.

Ed Olson -- Private Investor -- Analyst

Thank you.

Operator

There appears to be no further questions. I would like to turn the call back over to Mr. Donovan for any closing remarks.

Daniel Donovan -- President and Interim Chief Executive Officer

Okay. Thank you, Anita, and I want to thank everybody for taking the time to join us today and also, of course, the ongoing interest in Star Group. We look forward to sharing our 2019 fiscal second quarter results with you in May. Thank you.

Operator

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

Duration: 15 minutes

Call participants:

Chris Witty -- Investor Relations

Daniel Donovan -- President and Interim Chief Executive Officer

Richard Ambury -- Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Stephen John Errico -- Locust Wood Capital Advisers -- Analyst

Michael Frederick Prouting -- 10K Capital -- Analyst

Ed Olson -- Private Investor -- Analyst

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