Ugi Corp (UGI) Q1 2024 Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the UGI Corporation’s Fiscal 2024 First Quarter Earnings Conference Call. At this time, all participants are in a 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 would now like to hand the conference over to your speaker today, Tameka Morris, Senior Director of Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining our fiscal 2024 first quarter earnings call. With me today are Mario Longhi, Interim President and CEO; Sean O'Brien, CFO; and Bob Beard, COO. On today's call, we will discuss our near-term priorities and financial results for the quarter before concluding with a question-and-answer session. 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 Mario.

Thank you, Tameka, and good morning, everyone. As I have been engaging with our people at all levels of the organization, a key objective of these interactions has been to better understand our culture, strengths, and the improvements needed for greater financial performance. Now, what is evident from my time on the board and engagement with the organization is that the fundamentals of our core business are solid. In Pennsylvania and West Virginia, we operate attractive regulated utility businesses that deliver over 10% return on equity in aggregate. These businesses provide earnings, stability, and growth due to continued customer additions, the long runway of opportunities to replace aging infrastructure, and reduced weather sensitivity due to a weather normalization rider. At the Midstream & Marketing segment, we continue to optimize our portfolio and benefit from earnings reliability given the significant proportion of fee-based contracts. This business serves electric utilities, including our own UGI utilities and many top-tier customers in the mid-Atlantic region. As I move to UGI International, there is no doubt that the propane distribution business has and continues to provide attractive free cash flow which helps to meet capital needs and pay the dividends. While there is some weather sensitivity in regulatory considerations, the business has strong market share in key countries and great brand recognition. Now, our final segment, Americas, has experienced several challenges over the past few years. They have affected volumes and ultimately earnings. While efforts were made in the past to address performance, it is evident that there needs to be a renewed focus on execution. As a result, we are examining the operating model and business processes to determine the adjustments that are needed along with disciplined execution to effect a positive change in the overall performance. And this takes me to our key near-term priorities as we embark on the journey to better position UGI for the long-term. We're taking actions that should realign our cost base to the underlying business performance and enable us to become more cost-competitive in a sustainable manner, as well as allocating capital to segments that have a solid track record of providing attractive returns. These actions, along with other prudent measures, will allow us to strengthen the balance sheet, improve our credit metrics, and evolve into an organization with more financial flexibility to capitalize on future opportunities. We have a dedicated team of employees who are instrumental in accomplishing these goals in advancing UGI. Going forward, it is crucial that we operate as a unified and collaborative organization, one that is customer-centric and has a high-performing culture. With that, I will share some of our key highlights for the quarter before handing the call to Sean, who will cover the financial results in more detail. For the quarter, UGI delivered an adjusted EPS of $1.20 in comparison to $1.14 in the prior year. These results reflect the strong performance of UGI International and the natural gas businesses and underscore our commitment to our customers, shareholders, and employees. As the team previously anticipated and discussed on the year-end earnings call, AmeriGas experienced a decline in its year-over-year financial results. Also of note during the quarter, our regulated utilities continue to deploy capital, primarily in infrastructure replacement and betterment, and added more than 3,500 new residential heating and commercial customers. In December, we received approval of the gas rate case for Mountaineer, which went into effect on January 1. As a part of the settlement, we were also pleased to receive approval of a weather normalization rider with a 2% debt benefit from October 1, 2024. This rider normalizes revenue and customer bills when weather deviates from normal by more than 2%. And finally, during the quarter, we completed the sale of several energy marketing portfolios in France and the Netherlands, further progressing on our objective to exit the non-core energy marketing business. With the action statement since January 2022, we have reduced our customer supply locations by over 97%, thereby significantly reducing our exposure. And with that, I'll hand the call over to Sean.

Thanks, Mario, and good morning. As Mario mentioned, for the fiscal 2024 first quarter, UGI delivered adjusted diluted EPS of $1.20, $0.06 over the prior year period. The Utility segment was up $0.02, benefiting from the weather normalization rider and higher base rates, offsetting the impact of warmer weather and slightly higher operating expenses. Midstream and marketing was up $0.08 due to lower income taxes, partially associated with an increase in investment tax credits. UGI International was up $0.18 with a continued exit from the non-core energy marketing business and increased total margins from the LPG business. AmeriGas was down $0.16 as the business continued to deal with lower volumes and increased investment in operations. Lastly, Corporate & Other was down $0.06 due to higher interest expense and income taxes. Now, turning to the next slide, I'll walk you through the key drivers for each reportable segment when compared to the prior year. Starting with the Utility segment, our regulated utilities delivered EBITDA of $135 million, up $7 million over the prior year period. Despite significantly warmer weather, the business benefited from the weather normalization rider that was implemented at the end of October 2022. Utilities realized an increase of $9 million in total margins due to higher gas base rates in Pennsylvania, incremental benefits from the disc and IRA programs, as well as continued customer growth. Electric margins were comparable with the prior period as higher base rates from the recently settled rate case offset the impact of the warmer weather. Operating and administrative expenses were down $3 million, largely due to lower contract labor costs and personnel-related expenses. Next, Midstream & Marketing reported EBITDA of $102 million in comparison to $107 million in the prior year. Total margin was flat year-over-year as higher margins from the natural gas marketing activities offset the effect of warmer weather and lower margins from renewable energy activities. The segment realized lower margins from renewable energy largely due to the timing of rent sales when compared to the prior year. Operating and administrative expenses were up $2 million, primarily due to the recovery of an uncollectible account in the prior year. At UGI International, EBITDA was $117 million, up $51 million on a year-over-year basis. LPG volumes were up 4% due to increased natural gas to LPG conversions and weather that was slightly colder than the prior year. Total margin was up $64 million as we realized year-over-year benefits from the continued exit of the non-core energy marketing business, increased LPG unit margins, and the impact of higher LPG volumes. Total margin was also impacted by the translation effect of stronger foreign currencies amounting to approximately $15 million. Next, while operating and administrative expenses were down on a constant currency basis due to lower personnel and maintenance costs, this was fully offset by the translation effect of the stronger foreign currencies. Lastly, UGI International realized a $7 million decline in other income, largely due to lower foreign currency translation gains. Lastly, at AmeriGas, EBITDA was down $39 million on a year-over-year basis. Total margin was down $34 million, largely due to a 13% decline in LPG volumes. This volume decline was primarily a result of customer attrition and warmer weather. Operating and administrative expenses were up $8 million, largely due to higher employee-related costs as the business increased its delivery capacity and vehicle expenses. The business also realized a $3 million increase in other income, largely attributable to gains from asset sales. Moving to liquidity, at the end of the quarter, UGI had available liquidity of $1.5 billion, inclusive of cash and cash equivalents and available borrowing capacity on our revolving credit facilities. As we've shared with you over the past several months, we are focused on strengthening the balance sheet. This is an important near-term focus, particularly at AmeriGas, where we expect to further reduce debt and provide more buffer on the credit metrics. And now I'll hand the call back over to Mario.

Thanks, Sean. To summarize, we had a strong start to the year, which was in line with our expectations. The team is focused on the near-term priorities that I mentioned earlier, while also continuing to execute on the strategic review. While there are no new updates at this time, we are in the latter stages of the review and anticipate providing additional information by the Q2 earnings call. Lastly, our actions are intended to address the business performance, continue returning value to shareholders through dividends and strengthen the balance sheet, which should provide financial flexibility and enable value creation in the years to come. With that, I'll turn the call back to our operator to open the line for questions.

Thank you. Our first question comes from Gabriel Moreen with Mizuho. Your line's now open.

Thank you, good morning, everyone. Maybe, Mario, if I can start out, the comments you made about examining AmeriGas's operating model, if you just would care to elaborate on that, and I'm also curious about that within the context of where customer attrition stands at the moment and I guess what metrics you're looking for on that, that customer attrition metric to see it improving where you want to see it going and also just other facets of how you're thinking about running the business?

Good morning, Gabriel. Every operating model has a number of elements that need to come together in order for us to have a sustainable and efficient way to deliver value to the bottom line. And we created a framework to examine all of those elements. Their interactivity is what will define our ability to achieve a more sustainable situation and then evolve into improvements. If you just pick one element and you focus on it and you improve that, but the other ones are not evolved in the same manner, you don't get the results you seek. So we're actually starting with the bottom line and we're checking every contribution that we must expect to have from all of those elements in order to translate these improvements to the bottom line and sustain them there. So that's the framework in place that we're using to make decisions and how to improve the business.

Thanks, Mario. And Sean, you mentioned in your comments about trying to accelerate, if I understood you correctly, accelerate debt repayment at AmeriGas. Can you just talk about what that may mean from an evaluation standpoint and then also where AmeriGas stands at this current quarter relative to its leverage, covenants, and just curious, in the near-term and long-term cap structure, what you may or may not be contemplating.

Yes, sure, Gabe, good morning. A couple of things in terms of the long-term, I'll start with the success, Mario just said they need to translate into the bottom line. So we have taken $300 million, roughly $325 million of absolute debt off of AmeriGas's balance sheet. So we've made some progress there. My comments about the remainder of this year are to indicate that all excess free cash flow, AmeriGas is still generating a fair amount of excess free cash flow, will be utilized to continue to take debt off the balance sheet. And we're looking at, when I say accelerated, we're also looking at maybe going above and beyond that and trying to take off in total, maybe somewhere in the $400 million plus range of additional debt off the balance sheet. All that is in an effort to get their leverage metric down into the sub-five range, down into as close as we can get to four and a half. Step one, get it below five. Step two, let's start moving to that four and a half range. We're still sitting in the covenant range of 575. I'll remind you, Q1 is a high working capital quarter, it's typically the quarter we have the highest metrics. So we peaked right about at the covenant there in Q1, we anticipated that, but we will be working over the remainder of the year to continue to take debt off the books and try to get that metric below five and into what I would call the right range.

Thanks, Sean. And just to clarify, did you have to do an equity cure at AmeriGas this past quarter? Just, I'm just clear from the presentation.

Yes. So let me highlight. We took an equity cure in Q2 of 2023. That is available to us for four quarters. Gabe, so we utilized a little bit of it, it was $31 million, you may recall, that's what we utilized in Q2 of 2023. We utilized around $9 million of it. As I mentioned, we have it for four quarters in Q1, which would be the last quarter we had. We utilized around $9 million.

Okay. I appreciate it. And then maybe if I could just have one last one around international of the $64 million increase in margin year-over-year, obviously it seems like the base business did a bit better with the weather and margins. But can you just talk about how much of that $64 million may have come from the non-core marketing business? And should we think that that may repeat as you wind the business down? Let's say if we assume that European gas and electricity prices continue to decline. So I'm just curious how much of that may show up relative to the negative $0.05. I think you had talked about in exiting that business in the early impact.

Yes. So a couple of things in terms of international, Mario and I both highlighted a very strong quarter, somewhere in the range of half of that benefit was driven by the marketing. We anticipated that gain. You may recall Q1 of last year, there were some pretty sizable losses in that marketing business. We had actually a slight positive this year. So really, that's something we're proud of from the efforts the company has made to exit that business or the majority of it. You're seeing it pay dividends. So about half of that was driven by the energy marketing. Again, that was anticipated by the company. The other positive stories are unit margins were up. We're glad to see that. You're definitely seeing favorable volumes, aided by a little help from some weather. And then the big one are the natural gas to LPG conversions. That has been happening over the last 12 months, and we're seeing some of the benefits in international there. The last thing I would tell you is, I think you dialed in on the guidance we gave around losing around $0.05 to $0.06 this year on the marketing business. So two things: I think there is some timing to that. We had, as I mentioned, a slight favorable in Q1. It's not going to be a big driver the remainder of the year, Gabe. I think in every quarter, it's going to be relatively minimal. And we're still targeting that $0.05 to $0.06, which I'll remind you amounts to about a $0.50 improvement versus the prior year on the marketing loss.

Got it. Thanks, Sean. I appreciate it.

Thank you. One moment for our next question. Our next question comes from Julien Dumoulin-Smith with Bank of America. Your line's now open.

Hey, good morning, team. Thank you guys very much for the opportunity here. Maybe just picking up on a couple of things you said. In the preparatory remarks, you talked about Q2 there momentarily ago. Can you elaborate, what would you expect by that point in time to be able to talk to? Is the six to ten, some multiple to address at that point in time? And how far would you expect to be on kind of a revamping both what is core versus non, as well as how do you think about updating your plans on kind of refining and streamlining the business to elevate cash flow and improve the overall OpEx profile?

I can maybe start around improving the OpEx profile, Julien. We have already taken some actions that I mentioned, maybe on the last call. So we're looking obviously at $70 million to $100 million of sustainable reductions. We've taken some actions that were late in Q1. So I do want to point out that the impact of those actions was not significant, but those actions will continue to drive lower OpEx related to those actions for the remainder of the year. We have significant other actions targeted for Q2, late Q2 once again, and we're continuing to drive efficiencies. I think it's a big thing that Mario brings to the table to ensure that that OpEx trend continues to go down. Q1 is, Q1, we did not see an absolute reduction in OpEx. It was slightly up year-over-year. The primary driver of that was going to be AmeriGas, and we did make some, I call them investments, but we definitely spent some money to prepare for the winter. I think you're talking about in terms of the longer-term priorities; I think we need to get through the strategic review. We've not revised any of our longer-term priorities, including EPS growth or the dividend, but at the end of the day, I think we want to ensure we get through the strategic review and fully, and as Mario said, we're in the latter stages and will give you another update in Q2. And then I think we'll address some of the longer-term goals that the company had. In terms of the rebalancing of the portfolio, we've been very clear that we're moving more to a higher percentage of natural gas in relation to LPG. That's happened already, obviously, maybe not in the exact way we wanted to, but we are more of a natural gas company today than we were, above 60%. We do anticipate, and I think we've been clear, the goal of the company is to increase that percentage over the next few years, and we're utilizing the strategic review to help us in that effect.

Indeed, I think you hit a category. Actually, just to follow up and clarify, right? So if Q2 is kind of the bogey for a bigger update here, how do you think about what's strategic here and kind of should we expect some level of divestment activity here in the interim, kind of leading up into that to kind of prepare to fully update things?

Julien, everything is on the table. That's what the strategic review is all about. And you'll hear more about that when we finish it off.

All right, no fair enough. And then just starting to come back to the numbers real quickly on where Gabe was. Do you mind speaking a little bit to the marketing? I mean, I think you were in your response, you said half of the benefit there was due to marketing. I think you guys had only been contemplating roughly a nickel for the year, so it seems like you guys are ahead of plan. Is that insinuating that maybe the back half there, there’s some fall off or just sustaining that benefit through the course of the year?

No, let me clarify. So there was a big benefit year-over-year. The primary driver, Julien, was last year there were big losses and this year was relatively flat. So the business, as we began to do the business, the earnings volatility that we're experiencing is gone, and you're not seeing big chunks. But to directly answer your question, we're pretty flat. We've given the $0.05 to $0.06, and that was a loss. So some of that is timing. So we do expect it's not going to be a driver and it's fairly spread out. If I look at the forecast, between 2022, 2023, and 2024, to have small losses, the remainder of the year, that'll get you to that $0.05 to $0.06. But this in Q1 was really pretty much a flat business versus a big loss that occurred last year.

Yes, we're down 97% from the original supply locations that we had.

97% of the risk taken off the table.

Yes, excellent, nice. Thanks for clarifying that. And then just a super quick on the other side of this business, if you think about that, you said a more substantive cash flow profile to continue to address deleveraging on the LPG side. Can you talk about how much cash flow you would expect, post-interest expense to be able to delever this year, prospectively if you will. I think I heard a couple of comments that earlier, but I just want to try to clarify versus what we saw in the quarter here versus prospects through the course of the year and being able to bring down principal?

Yes, and a couple of things to keep in mind just to give you some data points. AmeriGas closed the quarter, using round numbers, Julien, I think we had $50 million, $60 million of cash on hand. So we did have some, AmeriGas is in a cash position. We expect that, I think what I've said in the past is we anticipate, if we can deliver the year we had in our heads, about $150 million of cash or we'll give or take from directly out of AmeriGas, and that will be used to delever. So, that's on the $150 million of debt that’s going to come off the table. And then as we think about the additional delevering, I've been clear that we may provide, we may target something closer to $350 million to $450 million of delevering in total. Again, I'll remind you on the positive that we've already taken $325 million off. So there may be some additional support that continues to delever quicker. I think it's important for the company to get AmeriGas below that 50 and to get AmeriGas into a level that it can sustain a warm winter and a bump in the night. So that ought to give you a feel for the year, $150 million or so directly from AmeriGas, delevering. And then we're looking at another $150 million; it may be up to $300 million to $400 million from corporate.

Thank you for all that clarity. I appreciate it. Good luck, guys. Speak to you soon.

Thanks, Julien.

Thank you.

Thank you. One moment for our next question. Our next question comes from Sarah Akers with Wells Fargo. Your line is now open.

Hey, good morning.

Good morning, Sarah.

Just on AmeriGas, if I understand correctly, the equity cure won't be available for this fiscal Q2. So do you anticipate another equity cure this quarter? And if so, any sense of the size just given winter weather?

Yes, I think you're interpreting the first part right there. When we took that equity cure in Q2 of '23, it stays into, you have it available for quarters and Q1 would have been of this year's the last one. We have multiple, based on the agreements we have, we can take additional equity cures. Look, I think I've been clear, we're trying to run this company without equity cures. I think that's important as we go forward. The debt reduction is one element. And you heard Mario talk a lot about working on the operating model so that we actually see the volumes and the EBITDA grow outside of just the debt. So we are doing everything we can. Good news is, we have more equity cures available to us, but our goal is to do the best we can not to have to utilize it, but it kind of gives us some cushion as we continue to work to improve the business.

Got it. And I know heading into the year, volumes at AmeriGas were expected to decline, but can you kind of quantify in Q1 the impact of the attrition? It's obviously weather was a factor as well, but that attrition impact and how that compared to your original expectation was that in line or worse than the original plan?

Yes, I can. I'll do it in two ways. I'll start with the year-over-year because I know that's what everyone can see. So we highlighted 13% down, weather was 12% warmer than normal. So that had a meaningful impact, but then there was also a pretty large impact due to attrition. So that's year-over-year. Now you're asking, okay, what did you anticipate? Obviously, when we talk about our guidance, it's weather-normalized. So that's 12, and weather, I think, was 6% warmer than normal. So about half of what it was versus last year, but still warmer. So some of the impact versus our expectations was driven by weather. We did have customer attrition baked into our forecast, Sarah, but what we saw in Q1, the levels of attrition were higher than what we had baked in. So the teams working on that, but you did have weather that wouldn't have been in our forecast and we had some of the attrition baked in. It was, Mario obviously spoke around our focus. We saw more attrition than what we would have budgeted.

Got it. And in terms of UGI level financing, are you still confident that the company can weather the AmeriGas issues and execute on that debt pay down without external equity at UGI?

Yes, I mean, a couple of things, UGI consolidates all of the businesses. I think I've highlighted in the past that international, just to give you some metrics, in terms of where the international sits on its leverage, it's in the low twos. Energy services are in the low twos. My point being, they're very, very strong. When you look at the debt to capital ratios of our utilities, it's incredibly strong. It's in the 50%. So my point is, yes, we have that. That's one of the reasons, Sarah, we really need to improve AmeriGas. All these entities roll up and consolidate into the corporate structure. So the sooner we improve AmeriGas, it helps corporate, and the sooner we can continue to make inroads at corporate as well. So those are the two focuses: improve AmeriGas's debt metrics, and then continue to improve corporate. I've been clear; our goal is to get corporate below four times, and we're sitting in the low fours right now. So we have a little bit of work to do there.

Okay, and just to be clear, is the plan to get there without issuing UGI stock, or is that on the table as a tool?

That has not been on the table in any of the models I've run as a tool.

Perfect. And then shifting to international, the volumes were up, unit margins were up for the quarter. To what extent do you think that's sustainable? It's a trend that might continue throughout the year, and any comments on what's driving the underlying strength there?

And I can start, Mario can highlight some of what we're seeing over there, maybe from a conservation perspective. But in terms of the lines, we've benefited a little bit from weather, so that's going to be dependent on what we see for the remainder of the winter. The conversions that I mentioned should continue; those are two to three-year contracts on those natural gas to LPG conversions. So that's a tailwind that should continue to help us out. And the unit margins, they are up year-over-year. I think when I look at expectations, they're not up as much; we had some of that take place. So I think I feel pretty good about some of the drivers we're seeing. And I don't know if Mario, you want to talk about conservation.

The conservation situation over there has shown a little bit of a sign of improvement. Certainly, Italy and Austria have been more vocal about that. And we're beginning to see some signs, potentially, in other countries. But it's early to say whether this trend will continue, but at least we've had a start on it.

Thanks, and then if I could squeeze in one more, just on the modeling side, if you have it, the adjusted EBITDA for AmeriGas for the quarter and trailing twelve months, is that something you can provide?

Yes, after our financials are released today, Sarah. So Tamika will be happy to give those to you here after the call.

Perfect, thank you so much.

Thanks.

Thank you.

Thank you. One moment for our next question. Our next question comes from Julien Dumoulin-Smith with Bank of America. Your line's now open.

Hey, team, this is actually Cameron squeezing in for Julien real quick. I just wanted to follow up with one thing, and I realize it's only one quarter into the fiscal year, but can you, and sorry if I missed it, can you provide any color on kind of how you see full-year results trending relative to a guide after this quarter?

Yes, I mean, we're happy to see we started off, as Mario said, a solid quarter, but we're holding the guidance that we had out there.

Okay, so no more commentary, I guess, around like maybe trimming higher or lower the high and the low end.

I think you said it's the best Cameron with one quarter in. So, we're pleased with the quarter, but at this point, we're, no change.

Okay, got it, awesome, thank you guys.

Well, thank you for spending time with us today, and we look forward to continuing our conversation in the next quarter. Everyone be well, thank you again.

This concludes today's conference call. Thank you for participating, you may now disconnect.