Chris Witty - Investor Relations Steve Goldman - President and CEO Rich Ambury - CFO

Andrew Gadlin - Odeon Capital Group Matthew Spiegelman - Locust Wood Capital

Good day, and welcome to the Star Gas Partners' Fiscal 2017 Second Quarter Results Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Steve Goldman, Chief Executive Officer. Sir, please go ahead.

Thank You, Steven. 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 the fiscal second quarter ending March, 31, 2017. 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 partnership's expectations and beliefs concerning future events that involve risks and uncertainties and 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, we 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 partnership's expectations are disclosed in this conference call and in the partnership's quarterly reports and annual report in Form 10-K for the fiscal year ended September 30, 2016. 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?

Thanks, Chris. One year later and I find the summary of this past quarter not too different from last year's comparable period. The weather for the quarter was somewhat of a disappointment and very similar to 2016. It was much warmer than we would have expected in total, and the weather variances were rather difficult to adequately plan for in terms of staffing. But nonetheless, our well managed operations did their best to serve our customers where the need presented itself, while simultaneously working to shrink expenses where and when they could. Overall, we did not let the less than ideal weather deter us from moving the company forward and as we continue to strengthen our platform to serve and expand our footprint. Notably in the past year, we have given special attention to our IT group. Starting at the top and encompassing every level in terms of execution, our IT team now under very strong leadership, has spent the past 12 months working on several new technological areas designed to improve our relationship with our customers. We believe that once these initiatives are woven together, they can positively impact how we interact with our customers, help us understand their views and shed light on what things we could be doing better to increase customer loyalty and profitability. We are implementing such measures in a very careful steps so as not to disturb anything that our customers are used to experiencing now. We have already begun deploying many of these tools and they have been positively received by both our employees and where they impact our customers. It also appears that in terms of improving customer service, our actions are showing real promise. While our new initiatives will take time to measure, one thing that has changed in a positive way versus last year has been our customer attrition. Most specifically, our retention of existing customers has greatly improved over last year for the same period. During the first 6 months of fiscal 2017, we posted organic account growth of 0.5% as opposed to 1.5% net attrition in the same period last year. While this improvement was helped by the fiscal first quarter's colder weather, we are nevertheless, encouraged by the results and believe our new, stronger focus on the overall customer experience will lead to further gains going forward. The changes we've made run all the way through the company, starting with our new employee selection process, continuing to enhance training and ultimately, implemented into management accountability. Everything is tracked and measured by reports, which allow us to thoroughly understand what our customers think we are doing right and wrong, and which things particularly they are not happy with. Turning to acquisitions. This has become a very big, busy year in terms of potential transactions. Some of this increased activity is due to our presence in more markets with more owners getting to know who we are. We're hopeful that we will be able to complete some additional acquisitions within the next few months. Our focus remains strong, and while we will be diligently looking for opportunities to cut expense for the rest of this fiscal year, we will not back away from the directions we're heading in. We will continue to clearly differentiate what we do from the competitors and the communities we serve. And our people understand our objectives, and through their efforts, we look forward to attaining results that both our customers and unit holders are proud of. Star Gas recently announced that it has raised the quarterly distribution to $0.11 per unit. Based on our never-ending efforts to strengthen the business and shareholder value, we believe this increase is part of our rational approach consistent with the 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?

Thanks, Steve. For the quarter, our home heating oil and propane volume decreased by 3 million gallons or 2% to 154 million gallons, as the additional volume provided from acquisitions was more than offset by net customer attrition and other factors. Temperatures were equal to last year and 13% warmer than normal. Our product gross profit rose by $2 million or 2.4%, as the impact of higher home heating oil and propane margins more than offset the decline in home heating oil and propane volume. Our delivery and branch expenses increased by $1.7 million or 2%, largely due to a higher spending relating to certain marketing and customer's feedback initiative. We recorded a noncash charge of $12 million for our derivatives. While on the prior year's comparable quarter, we recorded a credit of $14 million. We posted net income of $40 million or $15 million less than in the prior year period. Our adjusted EBITDA decreased to $88 million, down $0.5 million or less than 1%, as the impact of higher home heating oil and propane margins along with acquisitions, virtually offset the decline in home heating oil and propane volume, an increase in the gross loss from service installation and increases in certain operating expenses. For the first half of fiscal 2017, our home heating oil and propane volume increased by 17 million gallons or 7% to 254 million gallons, as the additional volume provided from acquisitions and the impact of colder weather was somewhat offset by net customer attrition and other factors. Temperatures were 11% colder than last year's comparable period, but again, around 12% warmer than normal. Our product gross profit increased by $16 million, due to the higher home heating oil and propane volume, partially offset by just slightly lower home heating oil and propane margins. Our delivery and branch expenses increased by $90 million, due to higher delivery and branch expense, an increase in spending for certain marketing and customer initiative and the absence of a $12.5 million credit that was recorded under our weather hedge contract in the prior year period. We recorded a noncash charge of $4 million for our derivative versus the prior period, which was a credit of $9 million. We posted net income for the first half of $58 million or $9 million less than in the prior year period. Adjusted EBITDA decreased to $119 million, down $5 million or 4% versus last year, as the impact of higher home heating oil and propane volume was more than offset by the absence of the $12.5 million credit, which was recorded in fiscal 2016 under the partnership's weather hedge contract, higher marketing and service costs, lower service and installation gross profit and slightly lower home heating oil and propane margins. Now moving over to the balance sheet, at the end of the quarter, we had cash of $53 million, 0 borrowings under our credit facility for working capital purposes and $81 million of long-term debt. And now, I'd like to turn the call back over to Steve.

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

[Operator Instructions] And our first question comes from Andrew Gadlin with Odeon Capital Group. Please go ahead.

Can you talk about some of the M&A targets that you're looking at? What geographies and any particular mix of business? How it's different from or the same as what you just think, perhaps?

The M&A targets are basically in nearly every geography we're operating in. So we have some now in the Midwest that we're looking at. We have some in the New York area. We have some down in the southern part of our, where we have a footprint. Several of the acquisitions represent new geography for us to operate in. There is businesses we're looking at that are relatively small, and then some that we'd consider medium size. The mix is very similar to what we currently have as far as product type. We have some -- mostly heating oil acquisitions, we have some -- nearly all propane acquisitions, we have some that are half propane, half heating oil and some diesel and other distillates. But it just been have a healthy flow of communication with potential sellers. Again, like previous conference calls, we've been speaking aggressively with a lot of potential sellers for the last 5, 6 months, and our last thing we closed was a very small acquisition that was mostly oil, down in the Delaware marketplace, Maryland, Delaware marketplace. We, with a couple of them, our confidence level's pretty high, over 80% probably looking like, but there is always work out to be, the facts at the end. But I'm feeling pretty good about just the flow that it's picked up so much. I think some of that has to do with couple of tough years of weather. And people who have, that are on business are frustrating and I think they will monetize what they have, and that's good for us.

[Operator Instructions] And our next question comes from Matthew Spiegelman with Locust Wood Capital.

Congrats on the good quarter. I just had 3 quick questions. The first was on the technology angle that you mentioned. Can you give us any flavor of what sorts of things you're doing there? The second was just on the fuel margin. And it was very impressive, despite stronger oil prices. We're just sort of curious how we should think about sustainability of that fuel margin? And the third was just on the corporate structure. And in light of potential tax reform, do you have any thoughts on the MLP structure versus any potential change to a C Corp and what barriers that could be there?

Let me, I'll address the first 2 and Rich can talk about structure. I'll talk about margin, the easiest. We don't really deviate from our strategy on trying to get the best margin for the conditions in the marketplace. Certainly, a volatile oil price, as we've seen in the last several months, gives us some window to do that. I think the cold in March helped us also in that. It kept customers buying, even though they didn't buy as much in January, February as we would've liked. There was enough cold in our footprint to push customers to still value what we were doing, and extend their winter sort of this year, differently than they may have, if there was a warm March. And that certainly helped us with margins. We were aggressive with a focus knowing that other revenue aspects of the business were under duress. And it's a challenging year, but I think our team of management is pretty seasoned. And we have a good platform to manage our pricing correctly. And I'm happy with the execution in that area. Technology, it's interesting. We've been, some of these projects we've been working on for a bunch of months. They start the discussions, have started in some cases a year ago, in some cases six months ago, and it's just this large convergence of a lot of things that are now really coming together for us. And I'll talk about couple of them, because there are just so many small enhancements that our key group has been able to work on and see some benefit for us as a business. One is, the technology that's new to us, which is a handheld alternative for our service technicians, and that device, it's by a company called Click. And what's nice about that for us is, this software package allows us to do some things for our customers that our previous platform, which we're still on, to a greater degree, doesn't do like track the technician's location and give the information to the customer. So they have real-time feel of what our technician is doing, when they're going to show up, a picture of the tact, basically an introduction before he even get into the home. We have ability to post the transaction, communicate with the customer in a positive follow-up. We think that is really different than what we've been doing in the past. We've begun transitioning of home system to a Voice over Internet technology, which we kind of lagged a little bit on doing that, because of the expense of doing that. But we believe at this point in time, the expense can be offset in -- at least in part by the benefit of being able to reflow calls when needed during high-volume periods, control our phone system better, avoid downtime that we've been having with legacy phone systems. And we're doing the conversion with a company called West. And the technology platform they have allows us to do some other interesting things for users on the phone, some information about customers in the form of -- introductory information letting our customer agent know who's on the call. We can get some screen prompts before the agent's ever on the phone with the customer, so a little more intelligent transaction upfront. We've also begun re-facing our customer tools with a layer of salesforce product, which allows our customer service representatives to consolidate all the information we believe they need to have a more familiar conversation with our customers quicker, more intelligently and more productively with those customers and in a more knowing manner about their accounts, instead of kind of fishing through all the detail when a customer needs something done. So I think our customers will find our adjustments to be more effective, more efficient and more friendly. Those are, to me, three of the favorite things we're doing in the highlights. We have a bunch of things in the way of new reporting mechanisms for us to better understand our operating performance, which will help us peel out expense over time. We also have some new internal measurements and ability to communicate with our customers and we've begun actually creating interactive surveys with our customers for the first time ever. We've gone through, probably about 10,000 of them in the last few months. That's given us greater visibility to what customers are thinking about us, allows us to introduce other products we're selling to them, allows us to follow up in real-time with anything they have a concern about. And the response has been extraordinarily good. And, Rich?

And with regard to the structure, we really don't know except for the one pager that was kind of put out as to where tax rates are going. We really don't know too much about any changes to the IRS rules and regs. So I really have no kind of comment as this structure right now.

[Operator Instructions] And it appears there is nobody in the queue at this time. So I'd like to turn the call back over to Mr. Goldman for any closing remarks.

Thank you, Steven, and thank you all for taking the time to join us today and for your ongoing interest in Star Gas. We look forward to sharing our third quarter 2017 results with you in August.

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