UGI Corporation (NYSE:UGI) Q1 2024 Earnings Call Transcript

UGI Corporation (NYSE:UGI) Q1 2024 Earnings Call Transcript February 1, 2024

UGI Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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. [Operator instructions] 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.

Tameka Morris: 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.

Mario Longhi: 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 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 utilities business 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, yes, in 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 paying 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 adjustment that is 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 with 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 details. For the quarter, UGI delivered a justice 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 underscores 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 freight 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 weathered 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 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.

Sean O’Brien : 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 benefits from the weather normalization rider and higher base rates offset 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 now 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 even 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 all set the impact of the warmer weather.

Operating and administrative expenses were down 3 million, largely due to lower contract labor cost 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 the 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 [EBIT] 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, EBIT 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.

Mario Longhi: Thanks, Sean. To summarize, we had a strong start to the year, which was in line with our expectation. The team is focused on the near-term priorities that I mentioned earlier, while also continue 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.

See also 10 Highest Quality Egg Brands in the US and 15 Highest Quality Creatine Supplements of 2024.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Gabriel Moreen with Mizuho. Your line’s now open.

Gabriel Moreen: 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?

Mario Longhi: 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 frame to go and look into everything, one of those elements. Their interactivity is what will define our ability to get to 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 look. So we’re actually starting also with the bottom line and we’re checking every contribution that we must expect to have from all of those elements in order to get these things to translate to the bottom line and be sustained there. So that’s kind of the frame that is in place that we’re using to make decisions and how to improve that best.

Gabriel Moreen: 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, and create further buffer, I think on the balance sheet, can maybe 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 yes just curious, in the near-term and long-term cap structure, what you may or may not be contemplating.

Sean O’Brien: Yes, sure, Gabe, good morning. Couple 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 $300million , 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 cashflow, AmeriGas is still generating a fair amount of excess free cashflow, 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 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 the, as close as we tend 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, the covenant range is [575]. I’ll remind you, Q1 is, 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 and get that metric below five and into what I would call, the right range.

Gabriel Moreen: 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.

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

Gabriel Moreen: 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.

Sean O’Brien: Yes. So a couple of things in terms of, obviously international Mario and I both highlighted very strong quarter, somewhere in the range of half that of the benefit was driven by the marketing. We anticipated that game. You may recall Q1 of last year, there were some pretty sizable losses in that marketing business. So, and we had actually a slight positive this year. So really, that’s really, really proud of the efforts the company’s done to exit that business or the majority of that business. And you’re seeing a paid dividend. 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 were glad to see that. You’re definitely seeing volumes favorable, little help from some weather.