Ugi Corp /Pa/ Q2 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the UGI Corporation Q2 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Tameka Morris. Please go ahead.

Good morning, everyone. Thank you for joining our Fiscal 2023 Second Quarter Earnings Call. With me today are Roger Perreault, President and CEO; Sean O'Brien, Chief Financial Officer; and Bob Beard, Chief Operations Officer. Roger and Sean will provide an overview of our results and the entire team will then be available to answer your questions. Before we begin, let me remind you that our comments today include certain forward-looking statements, which management believes to be reasonable as of today's date only. Actual results may differ significantly because of risks and uncertainties that are difficult to predict. Please read our earnings release and our most recent annual and quarterly reports for an extensive list of factors that could affect results. We assume no duties to update or revise forward-looking statements to reflect events or circumstances that are different from expectations. We will also describe our business using certain non-GAAP financial measures. Reconciliations of these measures to the comparable GAAP measures are available within our presentation. Now I'm pleased to turn the call over to Roger.

Thank you, Tameka, and good morning, everyone. Before I begin, let me say that I am pleased to be joined by our recently appointed CFO, Sean O'Brien, who joined our team in April. I look forward to working with Sean, who brings a tremendous amount of experience in the energy sector. I would also like to thank Ted, our outgoing CFO, for his leadership and important contributions over the past five years. Thank you, Ted. I have really appreciated your insights and partnership over the past few years. Now on today's call, we will provide a business update, review our financial results for the quarter and discuss the outlook for the rest of this fiscal year before concluding with a question-and-answer session. This quarter is one where UGI demonstrated resiliency and the value of its diversified operating model as the company navigated several headwinds. We saw extremely warm temperatures across most of our service territories in the US, severe weather events in the West, which impeded our ability to efficiently serve customers and drive growth, significant energy conservation efforts in Europe due to the ongoing Russia-Ukraine war and continued cost inflation. It was a difficult quarter, and in the midst of these pressures, our teams worked diligently and with resilience. I would like to take a moment to thank our teams who have continued to serve customers and execute on our strategy, which is in line with UGI's 140-year plus history of providing essential energy solutions to customers. For the quarter, UGI delivered adjusted diluted EPS of $1.68, reflective of the strong performance from our natural gas businesses and the effects of the headwinds that I previously mentioned. In our natural gas businesses, we are pleased with the improved earnings reliability that we continue to experience, largely due to the weather normalization rider at our Pennsylvania gas utility and the large proportion of fee-based contract structures that we have in place at our midstream and marketing business. These are attractive elements of our diversified business portfolio and were particularly meaningful during the quarter. Over the past few years, we have shared with you our intent to disproportionately invest in the natural gas businesses and in renewable energy solutions in order to rebalance our portfolio. Of the year-to-date capital spend, roughly 64% was invested in our regulated utility businesses where there is a theme of sustained growth through customer additions as well as infrastructure replacement and expansion. On a fiscal year-to-date basis, we've added more than 8,000 new residential heating and commercial customers that are utilities, demonstrating attractive customer growth despite the tight construction market that is impacted by higher prices and increased mortgage rates. The utilities also remain on track to deploy a record level of capital in infrastructure replacement and betterment this fiscal year as we execute on our goal to replace and reinforce critical infrastructure and extend our gas mains to reach underserved areas within our service territory. UGI is a proven strategy for creating shareholder value. Yesterday, we were pleased to announce that our Board of Directors increased the quarterly dividend to $0.375 per share, making this the 139th year of consecutively paying dividends and the 36th consecutive year of increasing dividends. UGI continues to exceed its long-term target of providing 4% dividend growth. Lastly, given the results in the first half of the year, we now expect adjusted diluted EPS to be within a revised guidance range of $2.75 to $2.90, inclusive of the effects of margin management and expense control actions that our teams have implemented. Sean will now comment on the financial results for the quarter as well as our revised fiscal 2023 outlook.

Thanks, Roger, and good morning, everyone. I'll start with Slide 5 and highlight some key drivers by segment of our second quarter performance. For the fiscal 2023 second quarter, UGI delivered adjusted diluted EPS of $1.68 compared to $1.91 in the prior year. Our natural gas businesses had a strong second quarter, up $0.09 year-over-year, as the utilities benefited from higher gas base rates and the weather normalization rider, which offset weather that was 17% warmer than the prior year. In midstream and marketing, we optimized our gas storage facilities and benefited from acquisitions completed last year to deliver robust earnings for the quarter. Next, UGI International was up $0.02 year-over-year, aided by the previously anticipated benefits from the noncore European energy marketing business where we continue to work on our exit strategy. Lastly, AmeriGas reported $0.30 lower earnings year-over-year due to adverse impacts of warmer weather, continued volume pressures and driver shortages. Overall, three of our four reportable segments delivered higher results despite a challenging quarter. And looking forward, our teams continue to focus on controlling what we can control in order to deliver on our commitments for the remainder of the year. Next, for each reportable segment, I'll walk you through the key drivers of our second quarter results when compared to the prior year. Starting with AmeriGas. Weather was a challenge this quarter as we saw very warm weather in key regions of the U.S., particularly in the East and South where our customers and volumes are heavily concentrated. In the West, while weather was colder than the prior year, the region faced severe weather events, which impeded our ability to drive growth and efficiently deliver to our customers. In addition, we continue to experience driver shortages, which had a notable impact on volumes for the quarter. These driver shortages, when coupled with inflationary pressures, also led to increased operating and administrative expenses, particularly through higher overtime, contract labor and other employee-related expenses. Lastly, for AmeriGas, we also saw that the general macroeconomic conditions affecting distribution and packaging centers had an adverse impact on customer usage and ultimately, our volumes. At UGI International, LPG volumes were impacted by the effects of significant energy conservation efforts, which began in response to the ongoing geopolitical situation in Europe. Additional factors driving lower volumes included the mild winter weather and the strike that took place in France between mid-March and early April. Secondly, our UGI International segment experienced increased operating and administrative expenses due to the global inflationary cost environment. These adverse impacts of lower volumes and increased costs were more than offset by higher average LPG unit margins due to strong margin management efforts and higher earnings from the noncore energy marketing business where we continue to focus on our exit strategy. Next, Midstream Marketing had a strong quarter, reporting a $15 million or 28% increase in EBIT over the prior year period. The business experienced increased earnings from natural gas marketing activities including peaking and capacity management through the optimization of our gas storage and pipeline network. In addition, there was incremental EBIT of approximately $8 million from our UGI's Moraine East asset that was acquired last January, and the Pennant Midstream assets where we increased our ownership interest in August 2022. Lastly, we turn to utilities. The Utility segment had a strong quarter with EBIT up $11 million or 6% versus the prior year period. While volumes were lower than the prior year due to the significantly warmer weather, the effect was largely offset by the weather normalization rider in our Pennsylvania gas utility. Additionally, of the $21 million increase in total margins, $19 million is attributable to higher gas base rates that went into effect at the end of October 2022. Pivoting to our fiscal 2023 guidance. As Roger mentioned, we expect adjusted diluted EPS for fiscal 2023 to be within an updated and tighter guidance range of $2.75 to $2.90. As we look at the back half of 2023, we've highlighted the key assumptions that have been built into our revised guidance range. At AmeriGas, we expect continued near-term pressure on volumes as we stabilize and position the business for growth. To mitigate these pressures, our teams are focused on controlling expenses, identifying true operational efficiencies, attracting and retaining drivers, and being disciplined in maintaining margins. For UGI International, sustained energy conservation efforts in Europe are expected to impact volumes. And so the team is focusing on continuing to execute on strong margin management activities. We also expect further benefits from the ongoing exit of the noncore energy marketing business. Both the utilities and the midstream and marketing segments are projected to remain on track for the remainder of the year delivering a solid performance for 2023. Finally, we are focused on controlling what we can control, executing on strong cost mitigation efforts for the second half of the year. On Slide 8, I want to highlight our liquidity position. At quarter end, UGI had available liquidity of $1.9 billion, driven by strong proactive steps taken by the company. Previously, we renewed approximately $1.7 billion of credit agreements at UGI Energy Services and UGI International, which strengthened our position when compared to the prior year. In addition, as customary, UGI is supportive of its business units and may, from time to time, make a capital contribution in order to assure that we remain in compliance with our debt covenants. As you'll see in our 10-Q filed after market close today, given the challenging results at AmeriGas for the second quarter, UGI provided a letter of support and made capital contributions totaling $31 million to the business as an equity cure. And with that, I'll turn it back over to Roger to close this out.

Thanks, Sean. Before concluding, I would like to spend a few minutes on our key priorities for the back half of this fiscal year. First, of utmost importance is maintaining our focus on operational excellence. A core value of UGI is providing safe and reliable operations as this is essential for our customers, employees, and the communities we serve. In addition, as a business, we have key operational metrics that align with our commitment to our people and customers. The focus on these metrics is unwavering, and we want to gain further momentum in improving on these metrics such as on-time deliveries, zero fills, inefficient fills, response times, just to name a few. Second, maintaining discipline in capital allocation and executing on our capital commitments are crucial to the success of UGI. This includes infrastructure replacement and betterment of the utilities and in our previously announced renewables projects. We will continue to strengthen our balance sheet with a near-term focus on refinancing our 2024 bonds at AmeriGas. Investing in critical infrastructure in our utilities drives the need for cost recovery. As such, as anticipated with our investment in Mountain Air, during the quarter, we filed a request with the West Virginia Public Service Commission to increase base distribution rates by approximately $20 million. Included in this rate case is a request for a weather normalization rider similar to what we have at our Pennsylvania gas utility. Next, as we look at the global LPG businesses, it's no doubt there have been a few challenges over the past few years. UGI International, particularly with the mild winter we've seen that customers are conserving volumes in response to government mandates and the overall high energy prices. We are monitoring the situation and we'll look to how customers adopt as prices normalize and we approach the next winter season. On a positive note, we are encouraged with how the exit of the European energy marketing business is progressing. In our domestic propane business, as we noted during our last year-end earnings call, we expected that fiscal 2023 would be a reset year for AmeriGas with earnings being relatively flat on a year-over-year basis. Unfortunately, fiscal 2023 unfolded with the weather-related challenges and driver shortages previously mentioned. And this has led to a slower-than-expected turnaround. With that being said, we are working to control what we can, focusing on continuously improving our operating metrics and controlling costs while ensuring that we are appropriately staffed so that we can serve customers extremely well. We remain committed to transforming AmeriGas operationally and position the company for volume and market share growth in the medium and long term. Lastly, we are advancing on our sustainability commitment and look forward to providing more disclosures and information in our next ESG report that will be issued prior to our Q3 earnings call. As we close, I wanted to emphasize that we remain confident that we will execute our strategy and meet our long-term financial commitments. Our diversified business model, strategy, and balance sheet strength provide a solid foundation to support earnings and dividend growth. I want to thank our global team for their dedication as they serve our customers and continue to make a difference in the communities that we serve. We thank you for your interest in UGI and your participation in today's call. And with that, we will open the line for your questions.

And your first question comes from Christopher Jeffrey with Mizuho Securities.

And welcome to Sean. Just a couple maybe on AmeriGas to start. Just wondering as far as the some examples of the measures put in place for the cost expenses. Kind of how much is left to do after the previous measures you put in place? And also, maybe the cadence of further capital contributions from the corporate level if there will be.

Thank you, Chris. Yes. So maybe I'll talk about the kind of the cost profile and what we're dealing with here in the second half and then I'll hand it over to Sean, who will talk about leverage and how we're treating that topic. So let me start with cost here. So from a cost perspective, there's no doubt we've seen some inflation, right? We looked at the first half of the year. Driver costs are up quite substantially. We've seen other products also be up quite substantially. So our focus has been on how can we control the evolution of cost as we go forward, as we continue to see the volume evolution of the business and ensure that we are appropriately staffed as we talked about in the call, to meet excellent customer service. So overall, when I look forward, and I think of the second half year, there's a lot of emphasis, not only at AmeriGas, but across the entire company on controlling the controllable and really controlling costs. You've seen us do that in prior periods and prior years where we have a good track record of being able to control costs, and that's exactly what we're going to see here in the next second half of the year as we are very diligent about all cost parameters, not only at AmeriGas, but across all of the company. With that, I'd like to hand it over to Sean, who can talk about liquidity.

A couple of things to think about AmeriGas and sort of the financing needs. First, the parental support is key, and you saw that in Q2, and we've seen it, I think, historically over the years when needed. So I want to start with that. There was a $31 million equity cure provided by UGI Corp. in Q2. So that's a very, very positive step. In terms of the future, Roger mentioned it, I think we mentioned it, we're looking at opportunistically taking out the $675 million debt maturity. I think that could be a very good delevering event for AmeriGas in the future. And I think also all the things that Roger talked about around focus on the positive trends, the leading indicators that we're seeing, we believe that can help the EBIT trend over the future. So we feel pretty comfortable. We're monitoring it. But I think we've got a good plan to focus on the leverage metrics and the debt at AmeriGas.

Got it. And then maybe sticking with AmeriGas. Just any initial impressions from first views of the market as far as customer acquisitions and I know that might be ramping up? Or kind of when do you expect that timeline to ramp up more?

Yes, Christopher. We are actively acquiring customers and targeting markets in specific segments where we have a presence and can drive both volume growth and efficiencies. This is a key focus for the company. As we mentioned in the earnings call, we have observed some sluggishness in certain segments. For instance, the forklift sector is experiencing a slowdown, particularly in warehousing. Additionally, similar to others in the industry, we are seeing a decline in housing starts, which presents growth opportunities that are not materializing as much as we would prefer. Nevertheless, we are concentrating on areas where we have momentum, and we are witnessing continued growth. In the first half of the year, we faced significant weather challenges, especially in the East and South where we have high volumes. Unfortunately, this affected our volume due to the weather conditions. While the West experienced colder weather, the severe weather events, including heavy snowfall and rain, were considerable. I commend our teams for their efforts in delivering under such circumstances, but there’s no doubt these factors influenced our ability to serve and impacted our volumes.

And your next question comes from Julien Dumoulin-Smith with Bank of America.

This is actually Cameron Lochridge on for Julian this morning. I wanted to very quickly start off on international. And just maybe parse out the contribution from the noncore assets versus the core. If you can give a little more detail around kind of what the two distinct pieces of the year-over-year increase in margin wise?

Yes, as we mentioned last year, we expect the noncore business, specifically the energy marketing segment that we are exiting, to perform better than it did last year. So far, it is meeting our expectations and even slightly exceeding them. In Europe, particularly in the energy sector, we have seen lower commodity costs and unusually warm weather, which has positively impacted our energy marketing business. Therefore, we are observing the performance trend we anticipated.

I appreciate it. For my follow-up, considering the challenges in the LPG business, I understand that much of it is beyond your control, influenced by weather and structural demand. Strategically speaking, do you see a scenario where you might consider selling or spinning off all or part of that LPG business? I'm curious about your thoughts on this given the structural issues.

We, as we've indicated previously, view the LPG businesses as a very strong cash source for us. We continue to favor a balance of LPG and natural gas, particularly as we invest more in our natural gas operations. The cash flow from our LPG businesses is crucial to our strategy. Therefore, we are committed to intelligently investing in our LPG businesses, increasing that volume, and exploring ways to enhance cash generation from them while we also invest elsewhere. Our strategic approach is focused on maintaining a balance between LPG and natural gas to leverage that cash flow and optimize cash use across all our businesses, especially in natural gas.

Yes. No, that makes sense. I appreciate it. Maybe just one quick follow-up. If you could talk about the synergies of those businesses or not so much to synergies, but speaking of cash contribution. As far as the renewables business goes, I mean you're injecting significant investment dollars there. Any update on the outlook there as you look into the '24, '25 time frame, what that contribution could look like?

Yes. What we've talked about is hitting kind of a $1 billion to $1.25 billion investment in renewables. We're on a trend that is really trending towards that number. We've now committed over $500 million in renewables, RNG in particular. I expect to see some gain and momentum in some of the bio LPG areas in addition to RNG over the next several quarters. So as a result, I think we're very much still on par for what we committed, which is an investment of the order of $1 billion to $1.25 billion.

And I see no further questions at this time. I will now turn the call back over to Roger Perreault.

Thank you, Bella, and thank you all for joining our call today. We really appreciate the opportunity to update all of you. In closing, I would just like to send another thank you to Ted for his contribution over the last five years, and very much welcome Sean aboard. And with that, I look forward to seeing and hearing all of you at the next earnings call. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Have a good day.