Star Group (SGU) Q4 2020 Earnings Call Transcript

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Star Group (SGU -0.88%)
Q4 2020 Earnings Call
Dec 8, 2020, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Star Group Fiscal 2020 Fourth Quarter Earnings Call. [Operator Instructions] Please note that this event is being recorded. Now, I'd like to turn the conference over to Mr. Chris Witty, 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, including those related to the impact of COVID-19 on the company.

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 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 our year end conference call. It's amazing how time has flown even in the midst of a global pandemic. And here we are concluding our fiscal year and at the start of another heating season. I'm pleased to say that in the face of many economic uncertainties, Star Group finished fiscal 2020 with strong performance and is well-positioned for the future. For the full year, adjusted EBITDA rose 37% to $130.3 million, reflecting $46.3 million in lower operating expenses in our base business, higher heating oil and propane margins, and increased service and equipment installation profitability. We believe these results in the middle of the healthcare crisis, a nationwide recession clearly demonstrate the value of our products and services, as well, of course, as the dedication of our high-caliber team of employees.

I appreciate everything that's gone into Star's performance this year, which includes a significant reduction in net customer attrition as compared to fiscal 2019's higher levels. Although the first two months of fiscal 2021 have proven to be challenging, particularly as it relates to new customer additions, we remain confident in our strategy of reducing overhead costs, focusing on increased operating efficiencies, and reinvesting in areas that directly improve the customer experience and will continue to lead to improved long-term results. We've also taken some strategic actions to better position the company for future growth. Most notably, as part of our ongoing efforts to evaluate our initiatives and direct resources and capital, we have recently sold our propane operations in the Carolinas, Tennessee, and Georgia.

As you may be aware, beginning around 2011, we began expanding our Propane business in the Southeast through several small acquisitions and then attempted to accelerate our growth by opening a number of small start-up locations in adjacent markets. Unfortunately, we were not successful in building the critical customer mass and related volume required in order to get these operations to a desired level of profitability. We felt it was best to divest ourselves of the associated assets and redirect our capital, time and attention to areas that produce greater profitability and better, more consistent returns. Our long-term goal of expanding our heating oil and propane business both organically and through acquisitions remains unchanged. With everything we've done to improve service levels and streamline the business, I feel confident the company is prepared and can react appropriately to any new challenges as we begin fiscal 2021.

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

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

Thanks, Jeff, and good morning everyone. For the fiscal 2020 fourth quarter, our home heating oil and propane volume decreased by 3 million gallons or 13% to 19 million gallons due to summertime staffing levels, the timing of certain non-winter deliveries, net customer attrition and other factors. The volume of our other petroleum products sold decreased by 5 million gallons or 10% to 40 million gallons due to COVID-19's impact on economic activity. Our product gross profit declined by $3 million or 8% to $34 million as the decrease in volumes sold was slightly offset by higher home heating oil and propane per gallon margins. Delivery and branch expenses decreased by $5 million or 6% to $68 million, largely due to lower insurance and bad debt expense.

Our net loss declined by $4 million in the fourth quarter to $30 million due to a decrease in the company's adjusted EBITDA loss of $1.6 million and a $5 million favorable change in the fair value of derivative instruments. The positive impact from these factors was largely offset by a non-cash charge of $6 million relating to the sale of non-core assets. For the quarter, our adjusted EBITDA loss decreased by $1.6 million or 5% to $27 million due to an increase in home heating oil and propane margins, an improvement in net service installation profitability and lower operating expense partially offset by the impact of the lower volumes sold. For the 2020 fiscal year, our home heating oil and propane volume decreased by 32 million gallons or 9% to 314 million gallons as the additional volumes sold from acquisitions was more than offset by warmer temperatures, net customer attrition and other factors.

Temperatures for fiscal 2020 were 6% warmer than last year and 10% warmer than normal. The volume of other petroleum products sold also decreased by 16 million gallons or 9% to 152 million gallons as the additional volume provided by acquisitions of 9 million gallons was more than offset by a decline in motor fuel sales due, again to COVID-19. Our product gross profit decreased by $20 million or 4% to $447 million as the decline in volumes sold more than offset an increase in per gallon margins. Delivery and branch expense declined by $46 million as the additional costs from acquisitions of $10 million were more than offset by a $55 million or 15% decrease in expenses in the base business.

The decline in the base business was attributable to an $11 million or 10% reduction in direct delivery costs due to lower volume, lower insurance expense of approximately $10 million, $6 million of lower bad debt and credit card processing fees, a $4 million decrease in expenses related to the discontinued concierge's program, lower medical costs of $4 million, and other reductions in operating expenses totaling $9 million or 2.5%. Going forward, investors should expect that certain costs will increase if volumes and/or product costs rise. Expenses such as delivery expense, insurance, bad debt expense and credit card processing fees will most likely increase with an increase in volume and/or cost of product. Operating expenses were also reduced by $12 million due to the impact of our weather hedging program.

In fiscal 2019, we recorded a $2 million charge versus a benefit of $10 million in fiscal 2020. Warmer temperatures during the winter hedge period from November to March resulted in a $10 million payment in fiscal 2020. However, we experienced colder temperatures in our third fiscal quarter, which positively impacted volumes. If the additional degree days in the third fiscal quarter had occurred during the winter hedge period, our hedge -- we would have received only 10 -- or excuse me, we received only $2 million under the weather hedge. In addition, our general administrative expenses for fiscal 2020 decreased by $3 million year-over-year primarily to the lower legal and professional expenses.

Our net income increased $38 million to $56 million due primarily to a $35 million increase in adjusted EBITDA and a favorable change in the fair value of derivative instruments of $22 million, partially offset by a $13 million increase in income tax expense. Full-year adjusted EBITDA increased by $35 million to $130 million. Acquisitions provided $9 million of adjusted EBITDA, while adjusted EBITDA in the base business increased by $26 million. In the base business, the negative impact of COVID-19 on motor fuels and lower home heating oil volumes sold due to warmer temperatures were more than offset by higher home heating oil and propane margins, lower operating expenses in the base business of $46 million, a favorable change in the amount collected under the weather hedge program of $12 million, and improvement in net service and installation profitability of $5 million.

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. Operator, please open the phone lines for questions.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Michael Prouting of 10K Capital. Please go ahead.

Michael Prouting -- 10K Capital LLC -- Analyst

Hey. Good morning, guys, and congratulations on some fantastic execution.

Jeffrey M. Woosnam -- President and Chief Executive Officer

Thanks, Michael.

Michael Prouting -- 10K Capital LLC -- Analyst

Hey, I was trying to give other people a chance to ask questions and I'll try not to monopolize the call. A few questions; firstly, on the customer churn. It looks like you're making terrific progress there. Just to what extent do you think that is sustainable?

Jeffrey M. Woosnam -- President and Chief Executive Officer

Yeah. I think, Michael, we've done a number of things in the last 18 months that's really tried to put ourselves in a better competitive position. And then at the same time reinvest in areas that improve the customer experience. And you've heard me talk about that on this call for some time now. And that has certainly resulted in less customer churn. We're hopeful that will continue. We'll have to see. As I mentioned in my opening remarks, we have observed some sluggish new customer gains in the first quarter. The first quarter is typically a quarter in which we expect to -- we target net growth. It's the only quarter in which we do so, or plan for. So our gains have been a bit sluggish as a result of a number of things. And primarily, likely weather was off in October and November combined over 20%. So that will have that -- an impact on that. But I'm also pleased to see in those first two months of the year that our losses are reduced compared to historical levels. So short answer is we're optimistic but we're going to have to see how everything plays out in the future.

Michael Prouting -- 10K Capital LLC -- Analyst

Okay. Fair enough. So then net-net, would you still expect to be in a customer gain situation in the first quarter?

Jeffrey M. Woosnam -- President and Chief Executive Officer

It's difficult to answer because we don't have -- obviously, we still have a month left.

Michael Prouting -- 10K Capital LLC -- Analyst

Right.

Jeffrey M. Woosnam -- President and Chief Executive Officer

So a difficult thing to say right now.

Michael Prouting -- 10K Capital LLC -- Analyst

Okay. Fair enough. But it sounds like it's going to be close enough that at least you're not expecting material losses for the December quarter.

Jeffrey M. Woosnam -- President and Chief Executive Officer

We will have to see.

Michael Prouting -- 10K Capital LLC -- Analyst

Okay. Okay, fair enough. And then so given the warmer weather you're seeing would you expect to be occurring on the weather hitch in the December quarter if things continue as they seem to be?

Jeffrey M. Woosnam -- President and Chief Executive Officer

Well, with regard to the weather hedge it does cover the period of November through March. So there's a lot of the heating season, a lot of the heating season yet to go. As of today, we're probably in the money a little bit on one of the weather hedges; we do have two. But we'll have to see really to where we settle up at the end of March to see whether we'll actually collect.

Michael Prouting -- 10K Capital LLC -- Analyst

Okay. Fair enough. And then the last question I had was in terms of priorities as far as cash flow is concerned. So obviously fiscal '20 was just a fantastic year for cash flow and to some extent obviously, you benefited from low working capital requirements. So it's interesting Jeff, by the way to see the divestiture early this quarter. And I think that's very, very impressive to see the focus on profitability and return on capital invested. So kind of putting all that together, I'm noticing that the pace of acquisitions has slowed down quite a bit.

So in terms of capital priorities and just from a sort of big picture perspective, I'm wondering how you're looking at that? Like, are you expecting an increase in pace of acquisitions in the current fiscal year? And then on this share buyback obviously, you were successful in picking up some shares from one of your institutions in the current quarter. But I'm just wondering given the amount of shares you've bought back we seem to be seeing a decline in share volume. And so, I'm wondering to what extent it might be necessary to go back to your broker and adjust the formula as far as the stock buyback is concerned. And I'll wrap it up with those questions.

Jeffrey M. Woosnam -- President and Chief Executive Officer

Well, with regard to the share buyback and I said this a few times, it's a program and we don't call a broker and say, hey, you got to do this. You have to do that. We're limited to the number of shares that we can buy based on the average, I guess, I think it's the last 60 trading days. And we've put in certain hurdles during the course of the year as to where we will buy shares back. And we're in this six-month quiet period that we can only adjust this when we're in an open window and we're in a six-month quiet period. So I can't change very much on this program that we're buying units back from.

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

And Michael, in terms of acquisitions, clearly, we saw a reduction in activity particularly in the second and third quarter of this year and I think that's to some degree understandable given the circumstances with the pandemic. We are and continue to evaluate opportunities that are in front of us and we're hopeful that we can move those things along, but time will tell.

Michael Prouting -- 10K Capital LLC -- Analyst

Okay, great. And just a quick follow-up question on the formula for the buyback; what is it that creates the six-month quiet period around the buyback? I wasn't aware of that.

Jeffrey M. Woosnam -- President and Chief Executive Officer

Sure. We can really only change the number of shares that we can buy back and the price that we can buy back during a quiet period and which is usually -- it's basically the three days after we file till the beginning of the next month in the next fiscal quarter with the way that we filed our 10-K. Our 10-K we're filing in December and we're already in the next fiscal quarter if you will, the first quarter of fiscal 2020. So we can't make any changes for six months.

Michael Prouting -- 10K Capital LLC -- Analyst

Okay.

Jeffrey M. Woosnam -- President and Chief Executive Officer

Now, when we file the next 10-Q, which would probably be somewhere in the first week of December, I'm sorry first week of February 2021, let me get my dates straight then we can make changes.

Michael Prouting -- 10K Capital LLC -- Analyst

Okay. Fair enough. That makes sense. Thanks for addressing my questions.

Jeffrey M. Woosnam -- President and Chief Executive Officer

Yeah.

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

You bet.

Operator

[Operator Instructions] Next question comes from Tim Mullen, Laurelton Management. Please go ahead.

Timothy Mullen -- Laurelton Management -- Analyst

Thanks. My question is actually addressed by Michael. So thanks guys and good luck.

Jeffrey M. Woosnam -- President and Chief Executive Officer

Thank you.

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

Thanks.

Operator

This concludes our question-and answer-session and I'd like to turn the conference back over to Mr. Jeff Woosnam, President and CEO. Please go ahead.

Jeffrey M. Woosnam -- President and Chief Executive Officer

Well, thank you for taking the time to join us today and your ongoing interest in Star Group. We look forward to sharing our fiscal 2021 first quarter results with you in February. Have a great holiday season everybody.

Operator

[Operator Closing Remarks]

Duration: 20 minutes

Call participants:

Chris Witty -- Investor Relations

Jeffrey M. Woosnam -- President and Chief Executive Officer

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

Michael Prouting -- 10K Capital LLC -- Analyst

Timothy Mullen -- Laurelton Management -- Analyst

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