Earnings call transcript: Star Group Q2 2025 sees strong growth but stock dips

Star Group reported solid financial performance in Q2 FY2025, with net income reaching $86 million, a significant increase of $18 million compared to the previous year. The company also saw a rise in adjusted EBITDA to $128 million, up $32 million YoY. Despite these gains, shares of Star Gas Partners LP (SGU) fell 1.74% in the market, closing at 12.62, suggesting mixed investor sentiment. According to InvestingPro analysis, the company maintains a "GOOD" overall financial health score of 2.98, with particularly strong marks in profitability and relative value. The stock currently appears undervalued based on InvestingPro’s Fair Value analysis, presenting a potential opportunity for value investors.

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Key Takeaways

• Star Group’s net income increased by $18 million YoY.
• Adjusted EBITDA rose by $32 million YoY.
• Stock price declined by 1.74% post-earnings.
• Operational expenses increased by $22 million YoY.
• Dividend raised by $0.05 to $0.74 per unit.

Company Performance

Star Group demonstrated robust performance in Q2 FY2025, driven by higher net income and adjusted EBITDA. The company’s strategic acquisitions and focus on expanding its HVAC business contributed to these results. With a strong return on equity of 17% and an attractive P/E ratio of 9.12, the company’s operational efficiency remains solid. The increase in operational costs and warmer-than-normal weather conditions posed challenges, though the company maintains a healthy gross profit margin of 29.5%.

Financial Highlights

• Net income: $86 million (+$18 million YoY)
• Adjusted EBITDA: $128 million (+$32 million YoY)
• Home heating oil and propane volume: 144 million gallons (+23% YoY)
• Product gross profit: $258 million (+25% YoY)

Market Reaction

The stock price of Star Gas Partners LP fell by 1.74% following the earnings release, closing at 12.62. This decline occurred despite the company’s strong financial performance, indicating potential investor concerns over increased operational expenses and external factors like weather impacts.

Outlook & Guidance

Looking ahead, Star Group plans to invest $15 million in weather hedges for FY2026 and is exploring acquisition opportunities post-heating season. The company remains committed to expanding its HVAC business and managing price increases effectively. InvestingPro data reveals management’s strong track record, with 12 consecutive years of dividend increases and aggressive share buybacks. The current dividend yield stands at 5.86%, supported by a robust free cash flow yield of 22%.

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Executive Commentary

CEO Jeff Woosnam praised the efforts of Star Group’s employees, stating, "Our frontline employees once again proved themselves working tirelessly to provide our customers with the best service possible." CFO Rich Ambury highlighted the company’s low bad debt rate, noting, "Historically, our bad debt rate has been 0.3% of sales or pretty close to that on an annual basis."

Risks and Challenges

• Increased operational expenses may pressure margins.
• Warmer weather could reduce demand for heating products.
• Price increases in HVAC parts and equipment may impact profitability.
• Potential tariff impacts on HVAC equipment could affect costs.
• Dependence on acquisitions for growth may pose integration risks.

Full transcript - Star Gas Partners LP (SGU) Q2 2025:

Conference Operator: Good day, and welcome to the Star Group Fiscal twenty twenty five Second Quarter Results Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Advisors. Please go ahead.

Chris Witty, Investor Relations Advisor, Star Group: Thank you, and good morning. With me on the call today are Jeff Woosnam, President and 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, the company’s annual report on Form 10 ks for the fiscal year ended 09/30/2024, 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 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?

Jeff Woosnam, President and Chief Executive Officer, Star Group: Thanks, Chris, and good morning, everyone. Thank you for joining us to discuss our second quarter and fiscal year to date results. Our performance this quarter was positively impacted by recent acquisitions and weather that while 4.5% warmer than normal was almost 13% colder than in fiscal twenty twenty four. This led to nearly 23% increase in home heating oil and propane volume and a $32,000,000 improvement in adjusted EBITDA versus the prior year period. We’ve been rather busy on the acquisition front this year.

As a matter of fact, since 02/01/2024, we’ve completed $126,500,000 of transactions, some of which were acquired during our current heating season and therefore are not fully reflected in our results. Our pipeline of opportunities remains active and we closed on two businesses during the quarter as well as a very small transaction in April. All of these companies are within our existing operating footprint and serve to further strengthen our presence in these respective markets. Along with strategically using capital to grow the business, we recently raised our annual dividend by $05 to $0.74 per unit, increasing value for our shareholders. All of this is consistent with our goal of allocating capital in ways that maximize returns for our investors.

Let me add that it was quite rewarding to see how our team responded to the added demand brought on by colder temperatures. Our frontline employees once again proved themselves working tirelessly to provide our customers with the best service possible. I simply couldn’t be more proud of their efforts. As we come to the end of the heating season, we continue to focus on operational execution and efficiency as well as the ongoing expansion and improvement of our HVAC business. We are pleased with our results year to date and look forward to the opportunities that summer brings to further invest in our people and advance various business development initiatives.

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

Rich Ambury, Chief Financial Officer, Star Group: Thanks, Jeff, and good morning, everyone. For the second quarter, our home heating oil and propane volume rose by 27,000,000 gallons or 23% to 144,000,000 gallons as the additional volume provided from acquisitions and colder weather more than offset the impact of net customer attrition and other factors. Temperatures for the fiscal twenty twenty five second quarter were 13% colder than last year, but still 4.5% warmer than normal. Our product gross profit increased by $52,000,000 or 25% to $258,000,000 due to an increase in home heating oil and propane volumes sold, higher home heating oil and propane per gallon margins and an increase in gross profit from other petroleum products. We continue to make strides in our service and installation business, which contributed an increase in adjusted EBITDA of $1,600,000 Delivery, branch and G and A expenses increased by $22,000,000 year over year, of which $9,600,000 was attributable to our weather hedging program.

In the second quarter of fiscal twenty twenty five, we recorded an expense of $3,100,000 under our contract due to the colder weather compared to a benefit of $6,500,000 recorded in the second quarter of fiscal twenty twenty four, reflecting warmer temperatures last year. Recent acquisitions accounted for an increase of $7,000,000 in expenses, while expenses in the base business rose by $5,000,000 or 4.5%, largely due to the related 12% increase in volume in the base business. We posted net income of $86,000,000 in the second quarter of fiscal twenty twenty five or $18,000,000 higher than the prior year period, reflecting a $32,000,000 increase in adjusted EBITDA and a non cash unfavorable change in the fair value of derivative instruments of $6,000,000 more than offsetting higher income tax expense. Adjusted EBITDA rose by $32,000,000 to $128,000,000 due to higher home heating oil and propane volumes sold in the base business, the impact of adjusted EBITDA attributable to acquisitions and an increase in home heating oil and propane per gallon margins in the base business and improvement in service and installation profitability. Now turning to the results for the first half of fiscal twenty twenty five.

Our home heating oil and propane volume increased by 29,000,000 gallons or 14.7% to two twenty six million gallons, again reflecting colder temperatures and the additional volume provided from acquisitions more than offsetting net customer attrition and other factors. Temperatures in Star’s geographic areas of operation during the fiscal year to date were 9.4% colder than the prior year, but still again 6.8 warmer than normal. Our product gross profit rose by $58,000,000 or 17% to $4.00 $9,000,000 due to an increase in the volume of home heating oil and propane sold, higher home heating oil and propane per gallon margins and again an increase in gross profit from other petroleum products. As previously mentioned, improvements in our service and installation business profitability continued to as an increase in adjusted provided an increase in adjusted EBITDA of $4,100,000 during the six months of fiscal twenty twenty five. Delivery, branch and G and A expenses rose by $27,000,000 year over year, of which $10,600,000 was attributable to our weather hedging program.

In fiscal twenty twenty five, we recorded net expense of $3,100,000 under our weather hedge compared to a benefit of $7,500,000 recorded in fiscal twenty twenty four, reflecting weather conditions in both periods. Recent acquisitions accounted for an increase of $13,000,000 and expenses in the base business rose by $3,700,000 or just 1.7%, largely due to a 5% increase in volume due Net income posted was $119,000,000 for the six months of fiscal twenty twenty five or $37,000,000 than the higher than the prior year period, largely due to an increase in adjusted EBITDA of 34,600,000 and the after tax impact of a non cash favorable change in the fair value of derivative instruments of $19,000,000 Adjusted EBITDA rose by $34,600,000 to $180,000,000 due to an increase in home heating oil and propane volumes sold in the base business, an increase in adjusted EBITDA from recent acquisitions, higher home heating oil and propane per gallon margins in the base business and an improvement in service and installation profitability. Please note that for fiscal twenty twenty six, we have put in place $15,000,000 of weather hedges with similar terms to those in 2025. And also note that while we did benefit from the winter profits of the recent acquisitions, these acquisitions will also have losses in the non heating season, which will temper these profits.

And with that, I’d like to turn the conversation back to Jeff. Thanks, Rich.

Jeff Woosnam, President and Chief Executive Officer, Star Group: At this time, we’re pleased to address any questions you may have. Operator, please open the phone lines for questions.

Conference Operator: The first question comes from Tim Mullen from Laurelton Management. Please go ahead.

Tim Mullen, Analyst, Laurelton Management: Hey, thanks for taking my questions. First, I was just curious, given the lack of buybacks that have occurred in the past couple of months, I was curious if there’s any changes to that program and if the recent acquisitions, given their size, had any impact on that program?

Rich Ambury, Chief Financial Officer, Star Group: There’s really been no change to the program. It’s still operating as we have it in place at the strike price that we have in place with JPMorgan. Mean it’s on automatic pilot. Don’t enter the market every day and say buy, sell or buy, buy, buy. We’re out of it.

It’s on automatic pilot.

Tim Mullen, Analyst, Laurelton Management: Understood. And then switching gears. The in terms of the acquisition pipeline, are you looking at any that are kind of in the HVAC installation servicing business? Or is this really just more on the distribution side?

Jeff Woosnam, President and Chief Executive Officer, Star Group: It’s more on the distribution side, primarily heating oil and propane businesses. We are undertaking an initiative on a limited basis to try to build out our own HVAC business internally organically.

Tim Mullen, Analyst, Laurelton Management: Okay, great. Thanks. If I could just ask one last one. In terms of just the consumer, it didn’t seem like there was much in terms of changes to various allowances for credit losses. But I was just curious just qualitatively if you’ve seen any difference in terms of customers’ ability to pay, timeliness, that kind of thing?

Thanks.

Rich Ambury, Chief Financial Officer, Star Group: Historically, and I’ve been here for forty two years, our bad debt rate has been 03% of sales or pretty close to that on an annual basis. Now it has been cold, and people need home heating oil to heat their homes. So they will pay that bill during the winter. So we’ll have to see how all that kind of settles up at the end of the summer when they don’t really need us, so to speak, because there won’t be any deliveries. But historically, that’s been our bad debt rate for almost ever.

Michael Prouting, Analyst, Ten Ks Capital: Thanks.

Conference Operator: The next question comes from Michael Prouting from ten ks Capital. Please go ahead.

Michael Prouting, Analyst, Ten Ks Capital: Yes. Good morning, guys. Congratulations to the entire team, a terrific execution. Just a couple of questions. One is, do you anticipate any impact from tariffs on heating oil prices in your markets?

And then secondly on the acquisition front, I’m just wondering is there anything that’s happened tax wise or otherwise to do you think increase the availability of acquisitions? And do you feel like you have sufficient firepower right now to execute on the opportunities in front of you? Thanks.

Jeff Woosnam, President and Chief Executive Officer, Star Group: So Michael in regards to tariffs, obviously, it’s fluid situation as I think everybody can understand. We have experienced some price increases, especially on the HVAC side of our business with parts and equipment, that ranges anywhere from 3% to 15% roughly is what we’ve seen so far. Fortunately, our vendors have provided us enough notice in order to adjust adjust our pricing. So that’s kind of what we’re experiencing right now. And that’s where we are on that.

On the acquisition front, no, I don’t know that we’ve seen any difference related to taxes or anything like that. I would say that we had some pent up demand going into the heating season and we had obviously a busier season overall. We had heard from various sources that there were going to be additional opportunities hitting the market after the season concluded and that’s pretty much what we’re seeing right now.

Michael Prouting, Analyst, Ten Ks Capital: Okay, great. Keep up the good work. Congratulations.

Chris Witty, Investor Relations Advisor, Star Group: Thank you.

Conference Operator: At this point, there’s no further questions in the queue. I’d like to turn the call back over to Mr. Woosman for closing remarks.

Michael Prouting, Analyst, Ten Ks Capital: Okay. Thank you for taking

Jeff Woosnam, President and Chief Executive Officer, Star Group: the time to join us today and your ongoing interest in Star Group. We look forward to sharing our twenty twenty five fiscal third quarter results in August. Have a great summer.

Conference Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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