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Star Group (NYSE:SGU)
Q4 2019 Earnings Call
Dec 6, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to Star Group's Fiscal 2019 Fourth Quarter Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note, today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Chris Witty, the Investor Relations moderator. Please go ahead.

Chris Witty -- Investor Relations

Thank you and good morning. With me on the call today are Jeff Woosnam, 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 and in the company's Annual Report and Form 10-K for the fiscal year ended September 30th, 2019.

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?

Jeffrey M. Woosnam -- President and Chief Executive Officer

Thanks, Chris, and good morning everyone. Thank you for joining us to discuss our quarterly and year-end financial results. As we turn the corner on fiscal 2019. I am pleased to report the great progress we're making as a new management team. We spent the past several months, evaluating and adjusting our operating platform with the goal of reducing unnecessary overhead expenses while reinvesting in and strengthening areas that will allow us to deliver the best customer experience possible, and ultimately improves Star's value proposition.

I'm optimistic that as we head into the new heating season, we're better prepared and aligned as an organization to meet our goals with a renewed sense of focus on being the premier service provider in the energy industry. As part of our efforts, we've placed a great deal of emphasis on improving our operational execution and efficiency.

I am pleased to report that in the fourth quarter, we began to see indications, albeit over a small sample size that these efforts coupled with some of our streamlined initiatives are producing the desired result of reducing certain expenses. Maximizing operating performance is not only good for our business, but it can also improve customer responsiveness in our overall quality of service.

Reducing net customer attrition remains a top priority for us. Our performance this year was negatively impacted by a decision not to renew certain low margin accounts, by credit issues and general product pricing trends. Nevertheless, we are committed to improving this going forward as we assess our long-term growth strategy. We purposefully and significantly cut back on our concierge business this year, which following on the sale of our security business in 2018, leave Star more streamlined and better focused on its core products and services. At the same time, we continue to look at attractive acquisitions and during fiscal 2019 completed three transactions that strengthen our operating across several geographic areas. In the fourth quarter, we also repurchased 1.7 million units a decision designed to enhance shareholder value.

With that, I'll turn the call over to Rich to provide additional comments on the quarter and full year's results. Rich?

Richard F. Ambury -- Chief Financial Officer

Thanks, Jeff and good morning everyone. For the quarter, the volume of home heating oil and propane volumes sold increased by 3 million gallons or 14%. The 22 million gallons as the additional volume provided from acquisitions and the timing of certain summertime deliveries more than offset the impact of net customer attrition. Sales of other petroleum products rose by 3 million gallons or 6% to 44 million gallons, largely due to acquisitions.

In the quarter our product gross profit did rise by about $5 million or about 15% due to higher per gallon margins and, of course, the increase in volume. Total operating costs decreased by $4 million to $78 million during the quarter as an increase in costs associated with acquisitions of about $3 million was more than offset by a decline in the base business of $7 million or 8%. Reduction in operating costs were noted across all departments.

The Company's net loss did widen and increased by $12.5 million to $34 million as an improvement in the adjusted EBITDA loss of $9 million was more than offset by an unfavorable but non-cash change in the fair value of derivatives of $10 million, and a $7 million gain recorded in the fourth quarter of fiscal 2018 related to the sale of our home security business.

The adjusted EBITDA loss was reduced by almost $9 million to $29 million largely due to an improvement in the base business. Again in the base business gross profit did rise and operating expenses declined by $7 million. The curtailment of the Company's concierge program and other expense control initiatives drove a reduction in operating costs. For the year on the whole, our home heating oil and propane volume declined by 12 million gallons or 3%. The 340 [Phonetic] million gallons as the additional volume provided by acquisitions and slightly colder weather was more than offset by the impact of net customer attrition, and other factors.

Temperatures for fiscal 2019 or eight-tenths of a percent colder than last year but still 4% warmer than normal. Our product gross profit increased by $21 million or 5%. The $468 million as the impact of higher home heating oil and propane margins and an increase in gross profit from motor fuels more than offset the decrease in home heating oil and propane volume. Operating cost rose by 16% or 4%. I'm sorry, rose by $16 million or 4% to $397 million, again largely due to the additional cost from acquisitions.

Net income decreased by $38 million to $18 million as an increase in adjusted EBITDA of $9 million was more than offset again by an unfavorable non-cash change in the fair value of derivatives of $36.5 million and a $7 million gain in 2008 recorded from the sale of our security business. Adjusted EBITDA rose by $9 million or 11% to $95.4 million.

Acquisitions provided $5 million of adjusted EBITDA, while in the base business adjusted EBITDA rose by $4 million. However and looking at the year, adjusted EBITDA was reduced by about $10 million to the following four items; One, $1.6 million due to the implementation of the revenue recognition accounting standard. We had higher legal and professional expenses of about $3 million. We also took a charge of $1.5 billion related to the discontinued use of a tank monitoring system and we did have an adjusted EBITDA loss of $4 million, again, associated with our concierge program that we've greatly curtailed this past January.

Before I turn the call back over to Jeff. I am pleased to announce that we amended and extended our bank facility this past Wednesday and as of a result, we increased our term loan from $90 million to $130 million. All terms rates and covenants stay the same.

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

Jeffrey M. Woosnam -- President and Chief Executive Officer

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

Questions and Answers:

Operator

[Operator Instructions] And our first question today comes from Matthew Spiegelman from Locust Wood Capital. Please go ahead with your question.

Steve Errico -- Locust Wood Capital -- Analyst

Hi, Rich, and Jeff, actually Steve Errico, Matt is on the line. I just wanted to say congratulations guys. It's really impressive the way you got these expenses under control, it's very nice to see. As far as the, my question on your attrition, Jeff, you bucketed it that there were three headwinds. So I think -- we believe there was low-margin customers, credit and also prices; was it a third, a third, a third or was it more -- could you give us a little more color on that? And if so, do the first two, which are the lower margin and the credit, have we kind of pruned those out, so they shouldn't be as much of a headwind next year?

Jeffrey M. Woosnam -- President and Chief Executive Officer

Yeah, I would say, it is roughly a third, a third and a third, probably a little bit more weighted toward the uneconomic accounts in fiscal year '19. We have worked our way through a number of those accounts the majority of them and I think as we move forward. That's going to be a less of an issue for us. So we obviously made a business decision that we needed to part ways with some of those economic accounts, but that would make sense for the business in a lot of ways, but that's essentially the way it broke down.

Steve Errico -- Locust Wood Capital -- Analyst

And then also the closing down of the concierge business, does that allow you to reallocate those people to other parts of the business. And will that help our customer maintenance and perhaps help our attrition?

Jeffrey M. Woosnam -- President and Chief Executive Officer

I think that we have out -- we have reallocated some of the concierge's staff to other parts of the business. And have the opportunity to do that and that worked well, because part of -- the timing of doing that is as we're heading back into a new heating season. So the timing worked well and we are going to have a period of higher activity and, so I think, but to some degree, there also -- there were also reductions associated with that.

Steve Errico -- Locust Wood Capital -- Analyst

Okay. Well, again, guys, like we're very enthused about the direction, about the cost cutting. So, congratulations, and look forward to a good year this year.

Richard F. Ambury -- Chief Financial Officer

Thank you, Steve.

Operator

[Operator Instructions] And we do have a follow-up question from Matthew Spiegelman from Locust Wood Capital.

Matthew Spiegelman -- Locust with Capital -- Analyst

Hey guys, this is actually Matt. I just had one follow-up to Steve's questions. In the beginning of the call, you mentioned that some of the operational effectiveness initiatives, we're sort of undertaken on a small -- I think what you said was a small sample size of the business. Just wanted to understand what that meant, what parts of the business you were doing these in and what that might mean for the larger opportunity in terms of cost savings.

Jeffrey M. Woosnam -- President and Chief Executive Officer

Yeah. So it really is -- its a two-tiered approach. We spoke in our call on -- in the spring about the idea of really reevaluating our overhead structure as a business. And just taking a very hard and objective look at what we're spending in those areas, and what was really adding value and what wasn't as many much value. And so that's been an exercise that we've continued throughout the spring and the summer we've been fortunate enough to identify certain expenses that we thought that we could reduce and capture and we've been able to do that.

And then the second component of that is really more focused on operational efficiency and that, that includes all departments. Staff departments, field and operations groups, our back office, our dispatch and a lot of it is really been centered around just trying to remove distractions and get everyone focused on executing more effectively in our core business. And it's, I mentioned, it is a small sample size because we start to see that, we started to see that in the fourth quarter and that was reflected in the results, but it's one thing to do that in August and another thing to do that in January. So we are cautiously optimistic and feeling like we're making progress, but we've got to execute on that progress.

Matthew Spiegelman -- Locust with Capital -- Analyst

Thank you. Sounds like a great program.

Operator

And ladies and gentlemen, at this point I am showing no additional questions in the queue. I'd like to turn the floor back over to Mr. Woosnam for any closing remarks.

Jeffrey M. Woosnam -- President and Chief Executive Officer

Well, thank you for taking the time to join us today and your own ongoing interest in Star Group. We look forward to sharing our 2020 fiscal first quarter results with you in February. Thanks everyone.

Operator

[Operator Closing Remarks]

Duration: 15 minutes

Call participants:

Chris Witty -- Investor Relations

Jeffrey M. Woosnam -- President and Chief Executive Officer

Richard F. Ambury -- Chief Financial Officer

Steve Errico -- Locust Wood Capital -- Analyst

Matthew Spiegelman -- Locust with Capital -- Analyst

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