Star Group - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 revenue declined 7.8% year-over-year to $305.6M as warmer temperatures (+2% YoY; ~19% warmer than normal), net customer attrition, and lower selling prices drove reduced product sales and volumes; Adjusted EBITDA loss widened to $(10.6)M and net loss increased to $(16.6)M, with acquisitions providing a partial offset.
• Home heating oil and propane volumes fell 3.8% YoY to 36.2M gallons, while product margins were slightly lower; service and installation gross profit improved by ~$0.6M YoY, reflecting operational focus and acquisition mix.
• Management emphasized continued progress improving service/installation profitability and contribution from recent propane acquisitions; net customer attrition was “roughly flat” YoY, and the team remains active on acquisitions, with four deals closed fiscal year-to-date and AI deployed in customer interfaces for selective use.
• Dividend actions remained supportive: the Board previously increased annual distribution by $0.05 to $0.74 per unit (April) and declared $0.1850 per common unit for Q3 (payable Aug 6); FY2026 weather hedges of ~$15M are in place, similar to FY2025.

What Went Well and What Went Wrong

What Went Well

• Continued improvement in service and installation performance; combined service/installation gross profit rose ~$0.6M YoY in the quarter and contributed meaningfully year-to-date as operational initiatives took hold.
• Acquisition-related Adjusted EBITDA positively contributed in Q3 and year-to-date, with propane assets described as “slightly less seasonal,” supporting resiliency during non-heating periods.
• YTD Adjusted EBITDA increased by $28.2M to $169.5M, driven by higher per-gallon margins, increased volumes from colder weather and acquisitions, and better service/installation profitability despite a $10.6M headwind from the weather hedge contracts.

What Went Wrong

• Volumes declined 3.8% YoY to 36.2M gallons in Q3 due to warmer weather, net customer attrition, and other factors; selling prices fell with wholesale costs down ~$0.3525/gal (14.3%), pressuring product revenue.
• Adjusted EBITDA loss widened to $(10.6)M from $(4.1)M YoY as lower volumes and slightly lower per-gallon margins in the base business outweighed lower operating costs and positive acquisition contribution.
• Delivery, branch, and G&A increased by $4.3M YoY (acquisitions +$5.8M, base business −$1.5M), D&A rose $2.0M, and net interest expense increased ~$0.9–$1.0M, reflecting the impact of recent acquisitions.

Transcript

Speaker 4

Good day and welcome to the Star Group fiscal 2025 third quarter results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Chris Witty, the Investor Relations Adviser. Please go ahead.

Speaker 1

Thank you and good morning. With me on the call today are Jeff Woosnam, President and Chief Executive Officer, and Richard F. 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. Whether 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, 2024, 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 statement. Unless otherwise required by law, the company undertakes an 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?

Speaker 0

Thanks, Chris, and good morning, everyone. Thank you for joining us to discuss our third quarter and fiscal year-to-date results. While outside of our core heating season, the third quarter was still negatively impacted by lower volume due to slightly warmer temperatures than last year, along with net customer attrition and other factors. That said, we were pleased with our continued improvement in service and installation performance, and adjusted EBITDA from recent acquisitions positively contributed to the quarter as well as the year-to-date period. We believe we are on track for strong financial performance in fiscal 2025. As I've shared on previous calls, we are dedicated to providing our customers with superior service to improve retention and drive additional revenues.

Consistent with that objective, we continue to look at ways to sell more value-added products and services to our existing customers, while also expanding our HVAC services offerings in select markets beyond our traditional home heating oil and propane account base to gain access to a larger audience. To support this initiative, we have made an investment in additional training for our sales and technical teams. Fundamentally, Star Group is a service provider, so any effort to improve what truly differentiates us from our competition is a sound investment. We are pleased with the way our team has responded and become engaged in what we are trying to accomplish. Although there is still much work to be done, I am encouraged with our progress to date.

As we pursue a strategy that includes growing our home heating oil and propane customer base through acquisitions, while at the same time improving service and installation profitability, we believe we are positioning Star Group as a fully diversified energy provider that over time will be more resilient and adaptable to varied weather conditions. With that, I'll turn the call over to Rich to provide additional comments on the quarter's results. Rich?

Speaker 3

Thanks, Jeff, and good morning, everyone. For the third quarter, our home heating oil and propane volume decreased by 1.5 million gallons, or 3.8% to 36 million gallons, as the additional volume provided from acquisitions was more than offset by warmer weather, net customer attrition, and other factors. In terms of weather conditions, temperatures for the fiscal 2025 third quarter were 2% warmer than last year and almost 20% warmer than normal during this non-heating season period. Our product gross profit decreased by $3 million, or 4%, to $72 million due to both a lower home heating oil and propane volume sold, as well as lower per-gallon margins driven in part by the mix of volume associated with recent acquisitions.

We realized the combined gross profit from service and installation of $14 million, or $0.6 million higher than the prior year's comparable quarter, as we continued to focus on improving service and controlling expenses. Delivery, branch, and G&A expenses increased by $4.3 million year-over-year, reflecting additional operating costs associated with acquisitions of $5.8 million, partially offset by lower costs in the base business of $1.5 million, or approximately 1.6%. Depreciation and amortization rose by $2 million, and net interest expense increased by about $1 million year-over-year. These changes were largely due to the impact of recent acquisitions.

We posted a net loss of $16.6 million in the third quarter of fiscal 2025, or $5.6 million more than the prior year period, reflecting a $6.5 million increase in our adjusted EBITDA loss, higher depreciation and amortization expense of $2 million, and higher acquisition-related financing costs of $1 million, partially offset by a $2.3 million greater income tax benefit and a non-cash favorable change in the fair value of derivative instrument valuations of $1.6 million. The adjusted EBITDA loss increased by $6.5 million to $10.6 million, as the additional positive adjusted EBITDA from acquisitions and lower operating costs in the base business was more than offset by lower home heating oil and propane volumes in the base business and slightly lower per-gallon home heating oil and propane per-gallon margins.

The positive adjusted EBITDA realized from acquisitions during this historical loss quarter was due in part to our recent propane acquisitions. Now turning to the results for the first nine months of fiscal 2025, our home heating oil and propane volume increased by 28 million gallons, or 12%, to 263 million gallons, reflecting colder temperatures and the additional volume provided from acquisitions, more than offsetting net customer attrition and other factors. Temperatures in our geographic areas of operations fiscal year to date were 8% colder than the prior year period, but still 8% warmer than normal. Our product gross profit rose by $55 million, or 13%, to $480 million due to an increase in the volume of home heating oil and propane sold, higher home heating oil and propane per-gallon margins, and a slight increase in gross profit from other petroleum products.

As previously mentioned on prior calls, we've successfully improved our service and installation business, which contributed to an increase in gross profit of $4.8 million year to date, with $2.7 million attributable to acquisitions and $2.1 million due to initiatives in the base business. Delivery, branch, and G&A expenses rose by $31.5 million year-over-year, of which $10.6 million was attributable to our weather hedging program. As a reminder, in fiscal 2025, we recorded an expense of $3.1 million under our weather hedge compared to a benefit of $7.5 million recorded in fiscal 2024, reflecting weather conditions in both periods. Aside from this, recent acquisitions accounted for an increase in expenses of $18.7 million year-over-year, while expenses in the base business rose by just $2.2 million, or 0.7%. Depreciation and amortization rose by $2.6 million, and net interest expense increased by $1.4 million.

These changes were largely attributable to the impact of recent acquisitions. We posted a net income of $102 million year to date, or $32 million in the prior year period, largely due to an increase in adjusted EBITDA of $28 million and a non-cash favorable change in the fair value of derivative instruments of $20 million, more than offsetting higher income tax expense of $12 million and other factors. Adjusted EBITDA rose by $28 million to $170 million, primarily due to a $21 million increase in adjusted EBITDA in the base business and a $17 million increase in adjusted EBITDA from acquisitions, partially offsetting a $10.6 million increase in expense relating to the company's weather hedge contracts, which applied to both the base business and the recent acquisitions, as I just previously discussed. I'd like to turn the call back to Jeff.

Speaker 0

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

Speaker 4

Thank you. We will now begin our question and answer session. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Again, those instructions are to press star then one if you'd like to join the question queue. Our question is from Michael Prouting from Ten Ks Capital. Please go ahead.

Speaker 2

Hey, good morning, guys. Just a couple of questions. Firstly, Jeff, I was wondering if you could update us on the acquisition pipeline. Secondly, I just thought I'd have to ask the question, but curious as to whether you see any applications for artificial intelligence in the business. It seems like the obvious would be customer service, but just kind of curious to get your feedback on that. Thanks.

Speaker 0

You bet, Michael. In terms of acquisitions, obviously, we've closed on four transactions so far this fiscal year. Our last one was in April. The team remains very busy with opportunities. You never know how that's going to end up coming out, but we're extremely pleased with what we've had in our pipeline and what we've been able to close over the last 14 months, some sizable deals. We just continue to push forward, and there's plenty of activity in the marketplace right now. In terms of artificial intelligence, we have certainly instituted some of that technology into our customer interface. The one thing we always want to keep in mind is we want to remember that we're a service business first, and to the degree that artificial intelligence can assist with that and allow us to serve our customers in a way that they prefer.

We always like and prefer that personal touch and allowing them to be able to talk to an employee that can provide them appropriate assistance and a comfort level that we're going to react and respond as they need us to. We always have to kind of strike that balance, but there's certainly opportunity there for us in the future.

Speaker 2

Okay, great. Yeah, thanks for the updates. I definitely hear what you're saying as far as the human touch, so yep, thanks for the updates.

Speaker 0

You bet.

Speaker 4

As a final reminder, if you'd like to join the question queue, please press star then one. At this time, there appears to be no further questions, so I'd like to return the conference to Mr. Woosnam for any closing remarks.

Speaker 0

Thank you for taking the time to join us today and for your ongoing interest in Star Group. We look forward to sharing our 2025 fiscal fourth quarter results in December. Thanks, everyone.

Speaker 4

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