Chris Witty - Darrow Associates, IR Steven J. Goldman - President and CEO Richard F. Ambury - CFO, EVP, Treasurer

Andrew Elie Gadlin - Odeon Capital Group George Schultze - Schultze Asset Management

Hello, and welcome to the Star Gas Partners Fiscal Second Quarter Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Steven J. Goldman, Star Gas Partners Chief Executive Officer. Please go ahead. Steven J. Goldman: Thank you. Good morning, and thank you for joining us today. With me today is Star Gas' Chief Financial Officer, Rich Ambury. After some brief remarks Rich will review the fiscal second quarter ended March 31, 2016. And we will then take your questions. But before we begin, Chris Witty of our Investor Relations firm, Darrow Associates, will read out the Safe Harbor Statement. Please go ahead, Chris.

Thanks, Steve, and good morning. This conference call may include forward-looking statements that represent the Partnership's expectations and beliefs concerning future events that involve risks and uncertainties that may cause the Partnership'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 Partnership 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 Partnership's expectations are disclosed in this conference call and in the Partnership's quarterly reports and annual report on Form 10-K for the fiscal year ended September 30, 2015. All subsequent written and oral forward-looking statements attributable to the Partnership, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements. Unless otherwise required by law, the Partnership 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. Steven J. Goldman: Thanks, Chris. First and foremost, I'd like to begin by mentioning how challenging this quarter was due to the extraordinarily warm weather. Last year we had the opportunity to show how well we can perform during very cold weather. Our organization then shined, and we posted record results. But every year, as you know, stands on its own. It should come as no surprise that at the start of each year, our greatest concern is that winter will not provide us the normal cold temperatures we expect and need to perform well. This year, given the circumstances, we needed to demonstrate strong control and the ability to perpetually adjust our plans, as each period of expected cold weather failed to materialize. Because there is always the possibility that temperatures can be rather abnormal, either way, we always plan to service our customer in the coldest as well as the warmest of environments. This past quarter was a period of intense focus and careful decision making designed to achieve the best customer satisfaction and operating results possible. And we really could not be prouder of how well our entire team managed through such challenging conditions. Star Gas continues to push forward to better itself as an organization. We used the past six months to sharpen elements of our strategy to attract and retain a broader customer base through our expanded footprint. We believe that the unusual weather and low oil price also indirectly impacted other aspects of our business. So lack of severely cold weather gave customers less of a reason to leave their current provider and seek higher levels of service we're known for. And the lower cost of oil gave rise to many extra low price teaser offers in the marketplace, as many competitors became extremely aggressive to try to lure new customers. Under these circumstances, we retained our margin discipline, but attrition did suffer. That said, we continued to work on creating stronger, longer lasting relationships with our customers to help minimize results like this in the future. We are also redoubling our territory expansion efforts, both by organically growing our base, as well as pursuing attractive acquisitions. In addition, we continue to emphasize efforts to broaden the service related area of our business. We see the growth of such services as key to our future success in areas like plumbing, natural gas service, air conditioning, and home security. In the past, these were primarily relationship enhancements to our current fuel customers, but we now see them as revenue opportunities external to our existing account base. We are examining and testing various ways in which to ensure a more durable long-term relationship with homeowners; one that covers a broad spectrum of offerings from propane and home heating oil to these ancillary services, which at times are counter-seasonal to our main business. So while these past six months certainly caused us to adjust some plans for the remainder of this fiscal year, we will not abandon our efforts to enhance our customers' experience and strengthen Star Gas' overall performance. The warm weather, which had a negative impact on volume and revenue, drove home the importance of our plans to expand Star's geographic footprint and the range of service offerings. We are more determined than ever to position our organization for better results going forward by focusing on ways to grow the customers we serve and the ways we serve them. Lastly, Star Gas recently announced that it raised the quarterly distribution to $0.1025 per unit. Based on our never-ending effort to strengthen the business and shareholder value, we believe this increase is part of a rational approach consistent with current and future cash flow expectations. With that, I'll turn the call over to Rich Ambury to provide some comments on the second quarter results. Rich. Richard F. Ambury: Thanks, Steve, and good morning, everyone. For the quarter, our home heating oil and propane volume decreased by 53 million gallons, or 25%, to 157 million gallons as the additional volume provided by acquisitions was more than offset by the impact of warmer weather, net customer attrition, and other factors. Temperatures in Star's geographic areas of operations for the second quarter were 26% warmer than during the prior year and 12% warmer than normal. The warmer temperatures were a continuation of the weather patterns experienced during the first quarter of fiscal 2016. Also, as a reminder, the second quarter of fiscal 2015 was 19% colder than normal. Our product gross profit declined by $59 million, or 24%, due primarily to the decline in home heating oil and propane volume. Delivery and branch expenses decreased by $16 million, or 15%, as an acquisition-related increase of $3 million was more than offset by a reduction in the base business of nearly $19 million. In the second quarter of fiscal 2016, we recorded a non-cash credit of $14 million for our derivatives. In the prior-year's comparable quarter, we recorded a similar credit of $13 million. Interest expense decreased $2 million, the result of refinancing $120 million of 8.875% debt with $100 million term loan that was at lower variable rates last year. We posted net income for the quarter of $55 million, or $21 million less than the prior-year period. Adjusted EBITDA decreased to $89 million, down $39.0 million, or 31%, as lower operating expenses were more than offset by the decline in volume driven by 26% warmer weather. For the first half of fiscal 2016, our home heating oil and propane volume decreased by 80 million gallons, or 25%, to 237 million gallons, again, as the additional volume provided by some acquisitions was more than offset by the impact of warmer weather, net customer attrition and other factors. Temperatures in our geographic areas of operation for the first half of fiscal 2016 were 27% warmer than last year's comparable period and 20% warmer than normal. Our product gross profit declined by 22%, or $82 million, as higher home heating oil and propane margins were more than offset by the decline in home heating oil and propane volumes sold. The continued decline in home heating oil and propane product costs contributed to the expansion in our per-gallon margins. In delivery and branch expenses, we recorded a $12.5 million credit under our weather hedge contract. Outside of this, delivery and branch expenses rose $6 million due to acquisitions, but was reduced by $24 million in response to the warmer weather. Again, we recorded a non-cash credit of $9 million for derivatives. In the prior-year's comparable period, we recorded a similar credit of $4 million. Interest expense decreased by $3.5 million, again, due to the result of the refinancing that I previously mentioned. We posted net income for the first half of fiscal 2016 of $67 million, or $24.0 million less than in the prior-year period. Adjusted EBITDA decreased to $125 million, down $48 million, or 28%, as the impact of higher home heating oil and propane per gallon margins and lower operating expenses, and the $12.5 million credit recorded under our weather hedge contract was more than offset by the decline in volume driven by 28% warmer weather. Now looking over at our balance sheet, at the end of the quarter, we had cash on hand of $147 million, zero borrowings under our revolving credit facility, and $97.5 million of long-term debt. While we were obviously disappointed with the warm weather, I would like to point out one interesting statistic. For the 12 months ending March 31, 2016, we generated $92.3 million in adjusted EBITDA during a period in which the winter temperatures were 20% warmer than normal. If this had been our year end, this would have been our third best year ever. And with that, I'd like to turn this over to Steve. Steven J. Goldman: Thanks, Rich. At this time we'd be pleased to address any questions you may have. Operator, please open the phone lines for questions.

We will now begin the question-and-answer session. [Operator Instructions]. The first question is from Andrew Gadlin with Odeon Capital Group. Please go ahead.

Hey, good morning gentlemen. Richard F. Ambury: Good morning Andrew.

I was wondering if you could talk about some of the acquisitions you announced in the release, that there are two small acquisitions. Richard F. Ambury: Yes, those were the same acquisitions that we announced in the first quarter. One was primarily a heating oil business, and another one was in the -- down on our southern area and was in the propane business.

And could you talk a little bit about valuation? Richard F. Ambury: We've always said that when we make acquisitions, we try that they're between 3.5 to 4.5 to 5 times EBITDA.

And it was in that range again? Richard F. Ambury: Yes.

Okay. Thank you very much, gentlemen. Richard F. Ambury: Okay.

The next question is from Mr. George Schultze with Schultze Asset Management. Please go ahead.

Hello, gentlemen. How are you? Richard F. Ambury: Good George, how are you?

Good. Thanks for taking my call. I was curious, just looking at your financials and your run rate, LTM run rate of revenues and EBITDA. And I was looking at the June and September quarters of your performance last year. Richard F. Ambury: Right.

For June of 2015 and September. And as you know, those two quarters you had somewhat negative EBITDA. I guess it's a pretty seasonal business. Do you expect a similar trend this year, or would you expect with the acquisition that you swallowed last year, towards the end of the year to have less negative EBITDA going forward during the off months? Richard F. Ambury: Well, we're not going to project what we anticipate for the next six months. But we are primarily currently a heating oil company. And we generate the majority of our EBITDA, and more than our annual EBITDA in the first six months. And the last six months have always been loss EBITDA, adjusted EBITDA for us. To a certain extent, if we make a heating oil acquisition and we grow the business, the summer losses actually could uptick a little bit as well.

So you would expect as the business gets larger, that you'll have even more negative loss or negative EBITDA. Richard F. Ambury: That's -- we're not projecting that, but that's something you could probably expect, yeah.

Okay. And in terms of guidance going forward, I know that you generally don't provide that. I'm not sure why because most companies do these days. But through the end of this year, since we're already near -- it's just a couple months now to finish the September year -- would you expect a similar drop off versus what you've had versus last year so far? Or does some of that hedging contract that you had in place, do you expect that some of that will help offset the drop off that we've seen due to weather? Richard F. Ambury: Well, during the six months, we recorded a $12.5 million credit under our weather hedge contract. We did receive the cash for that. And we don't have any weather hedge for April through September.

Okay. So I guess the follow-up question to that then is there anything that can be done at the business to reduce costs even further during these off quarters, in light of how you're running versus how you were running last year? Steven J. Goldman: Well, first let's start with the last year was an extraordinary unusually unexpected high profit based on the very cold weather, which is certainly not normal, and a declining oil price market, which is relatively not usual as well. So comparing to last year, our normal trends aren't going to ever follow that unless we have successively very cold years in a row. We always look to counterbalance decreased profitability in the early part of the year, if we're off where we expect to be internally, with looking at other additional expense cuts or other changes that could help offset that. We are certainly looking at those. How well will they translate into reductions in expense? Depends on a lot of circumstances. There is a weather component of the summer as well that we're yet to understand how that will unfold. We do a lot of air conditioning service and installation work, and a very hot summer could be opportune for us, and could drive some expense, but some additional net profit. Or if it's a milder summer, we may be cutting more expense and have less profit than we would hope to have during that period. But we will be working on controlling and reducing expense, certainly, to the foundation of your question.

Okay. Question about net customer attrition. How were those trends falling this quarter? I didn't see them in the release from yesterday. Steven J. Goldman: They are trending worse than last year for the same period.

What were the percentage changes? Richard F. Ambury: Well, we lost 1.2% of the business this year in the second fiscal quarter. And in the second fiscal quarter of 2016, we lost a net 0.5%.

Okay. All right, thanks. And I just have one last question. Thanks for taking my questions. It looks like on the balance sheet you have almost $150 million of cash now, if I'm reading it correctly. What can be done with that cash to make it more productive for the benefit of shareholders? Steven J. Goldman: We are -- one thing that we are working on as always, we are in discussions with several acquisitions. And we are hoping at least some of them in the coming months we'll be able to execute on. And that -- to us, that's one of the best uses of that cash, as we always say. Because not only do we try to buy stuff that's accretive to the business that'll give return, but it also strengthens the durability of the business for the long-term investor. We are also looking at some other smaller things that we can do. Rich. Richard F. Ambury: And when you look at the cash we have about 37%, 38% of our customers are in a budget payment plan. And to a certain extent they really -- they paid a little bit more into that plan this year because of the 20% warmer weather. In addition to that, we had significantly declining cost of product. And if cost of product went back from let's say $1.20 to $3.25, there would be a significant need for the equity cash that we would have to supply for the increase in our receivables. So we're enjoying -- to a certain extent, we're enjoying a benefit of abnormally low receivables due to one, warm weather; two, customer credit balances; and three, low prices.

Okay. Is the stockholder or the stock repurchase plan, is there any active stock repurchase plan, or has that expired or been fully expensed? Richard F. Ambury: It's still active.

I'm sorry. You said it's still active. I forget what the size of it, if you could just clarify, and then I'll be out of the queue. Thanks again for all the questions here. Richard F. Ambury: Sure. The balance is -- let me just look it up for you. We got about 2.2 million of share, or units, rather, that we can still repurchase.

Okay. Thank you. Steven J. Goldman: You're welcome.

[Operator Instructions]. There are no more questions. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Goldman for any closing remarks. Steven J. Goldman: Thank you. Again, thank you for taking the time joining us today and for your ongoing interest in Star Gas. We look forward to sharing our third-quarter 2016 results with you in August.

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