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Operator
Good day and thank you for standing by. Welcome to the UGI Corporation Q2 2024 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. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Tamika Morris, Senior Director of Investor Relations. Please go ahead.
Tamika Morris
Good morning, everyone. Thank you for joining our fiscal 2024 second 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 provide a strategic update on the business and discuss our 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 report for an extensive list of factors that could affect results. We assume no duty 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
Thank you, Tamika, and good morning, everyone. I'd like to begin by commenting on UGI's second quarter and year-to-date financial results before providing a broader strategic update. UGI had a strong fiscal 2024 second quarter, reporting adjusted earnings per share of $1.97, which was a $0.29 increase over the prior year. This performance reflects the resilience of our portfolio, and the dedication of our people, and was largely driven by the natural gas businesses. These natural gas businesses delivered record second quarter earnings, a 32% increase in adjusted net income over the prior year. We also implemented effective cost control across the enterprise, and this resulted in a $27 million year-over-year reduction in operating and administrative expenses. With a robust performance in the first half of the fiscal year, we are on track to deliver within our fiscal 2024 adjusted EPS guidance range of $2.70 to $3. We are also pleased to mark the 140th year of consecutively paying dividends demonstrating our commitment to returning value to shareholders. Sean will provide further commentary on the financial performance shortly, but now I will pivot to the broader strategic update. As we announced yesterday, we completed the strategic review of the LPG businesses primarily focused on Amerigas that was launched at the end of August 2023. The process was extensive, and together with our financial advisors, we considered different scenarios, including a potential sale, spin, and joint venture of Amerigas. Although we conducted a due diligence process with multiple strategic and financial parties, the board decided that in the current market, the company should focus on a restructuring and operational improvement plan for Amerigas. The Board remains open to all opportunities to maximize shareholder value. Also, in conjunction with the review, over the past few months, we have reassessed our operating strategy, evaluated whether there are opportunities to change the way we work to achieve greater operation efficiencies, and scrutinize how we allocate and prioritize capital. This assessment was based on our objective to create sustainable shareholder value by improving the earnings quality of our businesses to enable reliable earnings growth, strengthen the balance sheet, and prudently allocate capital. As we move forward, we firmly believe The disciplined execution of our reposition strategy will accomplish these objectives. We must operate as a high-performing, customer-centered, and results-driven organization where we capitalize on our market-leading positions, optimize our strategically located assets, and sustainably grow earnings through strong execution, effective cost control, and disciplined capital deployment. It is clear to us that we have an attractive business portfolio. Our growth-oriented regulated utilities business operating constructive regulatory environments and have a long runway of investment opportunities that provide top-tier return on equity. Our midstream and marketing business holds LNG peaking facilities, natural gas and propane storage, gathering systems, and pipeline assets that enabled the business to sustain earnings growth as evidenced in the second quarter results. While these natural gas businesses continue to deliver strong results, we are committed to further optimizing their performance, holding the businesses to higher levels of operational excellence. Turning to the global LPG business, At UGI International, we have market-leading positions and strong brand loyalty in select markets, which supports our ability to achieve strong margins in attractive free cash flow generation. Similarly, in the U.S., Amerigas has a market-leading position in retail propane distribution in a highly competitive market. We must run that business differently and better. to realize the benefits of that position. And so, shortly, Bob will walk you through the basic approach to accomplish that objective. Moving forward, we will pursue opportunities to streamline our global LPG footprint and create more operational efficiencies, and specifically at Amerigas, we will share an overview of our plan to turn around that business with the intent to achieve stability and growth. Ultimately, through organic growth and continued investment, we intend to further shift the portfolio to become more predominantly a natural gas business in the future. And now that takes me to four strategic actions culminating from the review. And these strategic actions are, one, to pursue opportunities to enhance our portfolio and drive reliable earnings growth. Two, stabilize and optimize Amerigas. Three, achieve operational efficiencies. And four, strengthen the balance sheet. Looking at our footprint, we operate in 18 countries in the US and Europe, as well as across several customer segments. Within the portfolio, particularly in the LPG businesses, we will continue to explore options for the underperforming and less strategic areas or customer segments. As an example, in April, we entered into an agreement to divest of our LPG businesses in Switzerland, which service approximately 3,800 customers, and we anticipate receiving net cash proceeds of approximately $27 million. Next, over the past few months, we have shared our intention to permanently reduce costs and strengthen the balance sheet. We have made clear progress in both areas, as evidenced by a $60 million decline in our year-to-date operating expenses, as well as various financing and debt reduction actions taken in the past year. Those efforts will continue, and the team will provide further insight shortly. I will now hand the call to Bob, who was integrally involved in the strategic review. He will take the lead in implementing the action plan to stabilize and optimize Amerigas.
Bob
Thanks, Mario, and good morning, everyone. As you are aware, Amerigas has encountered operational challenges over the past several years that have impacted our service standards, resulted in higher customer attrition rates, and placed significant pressure on our debt covenants. The strategic review helped us better frame the weaknesses in our operating model. While these challenges are not new, and you've heard us discuss several of them over time, the strategic review identified a level of detail that was necessary for us to formulate a more comprehensive and effective action plan to address those shortcomings. We gained more clarity on what needs to be done, and we're committed to doing this. Our overall focus will be on improving our performance and customer satisfaction, service reliability, and overall operational excellence. We are committed to addressing these challenges. To initiate this journey, we have streamlined our operational model, creating a simpler and more focused model that enables us to anticipate and more effectively address the evolving needs of our customers. While there are many key indicators associated with measuring these continued operational improvements, the ultimate measure of our success will be the financial results of the business. To support this overarching goal, we're actively pursuing efficiency measures to ensure that our cost structure remains aligned with the earnings trajectory of the business. In line with this objective, we have initiated permanent cost reduction measures that do not compromise our operational capabilities. A number of these actions were completed in late April 2024. Next, as Mario shared, we remain open to opportunities to streamline our footprint and focus on core customer segments. Also of importance, we are working to adjust our capital structure and address Amerigas' balance sheet which is currently constrained. Sean will speak to the progress we've made and additional actions that will be taken in the near term. Overall, with diligent execution of our new operating strategy and a renewed commitment to our values, we anticipate that Amerigas will begin to see stability in its operating performance and resume being a cash contributor to UGI by fiscal 2026. And now, I'll hand the call over to Sean.
Mario
Thanks, Bob, and good morning. First, I will provide my comments on the performance for the quarter before turning to the midterm outlook for UGI. As Mario mentioned, for the fiscal 2024 second quarter, UGI delivered adjusted diluted EPS of $1.97 in comparison to $1.68 in the prior year period. The utility segment was up six cents, largely due to higher gas rates in both Pennsylvania and West Virginia, as well as higher electric rates that were implemented during the fiscal year. Midstream and marketing was up 25 cents. The business realized higher margins from natural gas marketing activities and the effect of investment tax credits on completed RNG projects. UGI International was down a penny from lower earnings attributable to the non-core energy marketing business, and this was partially offset by higher LPG unit margins and lower operating and administrative expenses. Amerigas was down 17 cents predominantly due to higher income taxes resulting from limitations on interest deductibility. Lastly, corporate other was up 16 cents where tax benefits were realized, offsetting the effects of the tax headwind faced at Amerigas. While there was variability in the segment level tax expense, UGI's annual effective tax rate is expected to be slightly lower than prior year. Turning to the next slide. I now will walk you through the key drivers for each reportable segment when compared to the prior year. At the utility segment, EBIT was $226 million for the fiscal second quarter, up $21 million over the prior year period. We saw a modest increase in core market volumes with weather for the quarter being 5% colder than the prior year. Utilities realized an increase of $25 million in total margins due to higher gas and electric base rates, incremental benefits from the DISC program, as well as continued customer growth. The business continues to expand its customer base and added more than 3,000 new residential heating and commercial customers during the quarter. Operating and administrative expenses were comparable with the prior year as lower uncollectible account expense and contract labor costs were largely offset by higher employee benefit expense. There was also increased depreciation and amortization expense with the continued investment in the distribution system. On a year-to-date basis, we invested roughly $170 million at the regulated utilities, primarily in replacing aging infrastructure. Midstream and marketing reported EBIT of $153 million, a $48 million increase over the prior year. Total margin was up $41 million on higher margins from natural gas marketing activities, including the effects of peaking and capacity management margins. Operating and administrative expenses were down $6 million due to lower salary and benefits, as well as maintenance expenses. At UGI International, EBIT was $131 million, up $3 million on a year-over-year basis. LPG volumes were comparable to the prior year, as the effect of warmer weather was offset by natural gas to LPG conversions and higher auto gas volumes sold. Total margin was down $10 million, driven by lower margin as we exit the non-core energy marketing business. This was partially offset by higher LPG unit margins and the translation effect of stronger foreign currencies amounting to approximately $5 million. Operating and administrative expenses were down $16 million due to lower personnel and maintenance costs, partially offset by the translation effects of the stronger foreign currencies. Lastly, at Amerigas, EBIT was comparable with prior year, as reductions in total margin were offset by reduced operating and administrative expenses. For the quarter, we saw warmer weather, which when coupled with customer loss, led to a 6% reduction in retail volumes over the prior year. There was a modest increase in silver exchange volumes and a slight reduction in national accounts, with lower usage in the railroad customer segment. The effects of lower volumes were partially offset by higher LPG unit margins, leading to a $4 million reduction in total margin when compared to the prior year. Operating and administrative expenses were down $5 million, reflecting, among other things, lower compensation and advertising expenses, partially offset by higher vehicle expenses. Moving to liquidity, at the end of the quarter, UGI had available liquidity of $1.7 billion, inclusive of cash and cash equivalents and available borrowing capacity on our revolving credit facilities. During the quarter, we executed $38 million of open market bond repurchases at Amerigas, and the business ended the period with approximately $100 million of cash on hand. Since the beginning of fiscal 2023, we have reduced absolute debt at Amerigas by approximately $340 million, executing on our objective to strengthen and provide more buffer on the credit metrics. During the back half of fiscal 2024, our goal is to reduce debt by another $350 to $450 million using both free cash flow generated from Amerigas and between $200 to $300 million of parental contribution. As Bob mentioned, he is spearheading the action to stabilize and optimize Amerigas. To support those actions, we will pursue options to address the revolver that, while undrawn, has restrictive debt covenants. This will enable the business to work through the planned operational improvements without quarterly covenant compliance pressures. As I pivot to our outlook, let me briefly remind you of our core financial objectives that Mario shared at the onset. Our objectives are to improve the earnings quality of our business and deliver reliable earnings growth. strengthen the balance sheet, and be disciplined in how we allocate capital, which will facilitate sustainable shareholder value creation. Starting with our fiscal 2024 guidance. For the fiscal year to date, UGI has delivered $3.16 of adjusted EPS, led by increased margins from natural gas marketing activities in the U.S., higher base rates at the regulated utilities, increased LPG volumes and year margins at UGI International, and lower operating and administrative expenses across the enterprise. These benefits were partially offset by the effects of warmer weather in the LPG businesses and reduced total margins at Amerigas Propane. We are pleased with the strong start to the year. Based on the cyclical nature of the business and our earnings projection for the back half of the year, we are holding our fiscal 2024 adjusted EPS guidance range of $2.70 to $3. Now, this slide summarizes several financial targets between fiscal 2024 to 2027. Over that period, we are targeting a 4% to 6% EPS growth rate. Fiscal 2025 and 2026 will be rebuilding years. where we continue to execute the strategy that was previously outlined. We anticipate investing capital of approximately $3.9 billion across UGI during that period. A primary driver of the targeted EPS growth is our planned investment of approximately $2.6 billion at the regulated utilities, which will facilitate 9% plus rate-based growth, as well as organic growth throughout the remaining portfolio. As I'll address shortly, the outlook does not include incremental debt. We anticipate that UGI will achieve its targeted leverage ratio during the planned period. As we shared previously, our team is focused on increasing efficiencies and lowering our operating costs. We are on track to deliver the targeted permanent cost savings of 70 to 100 million by the end of fiscal 2025, using fiscal 2023 as the base year. We have line of sight into the labor and non-labor actions required to achieve these targets, and we've already executed on actions that are intended to deliver the savings projected for fiscal 2024. On a fiscal year-to-date basis, these measures have already contributed to the $16 million reduction in total op-ex when compared to the prior year. Turning to capital allocation, we will continue to apply a disciplined framework where we prioritize returns to shareholders, actions that will strengthen the balance sheet and improve financial flexibility, and invest in areas with the highest potential returns to our shareholders, which will also benefit our customers. On the next two slides, I'll comment on our outlook through to fiscal 2027 as we adhere to this framework. UGI has a long track record of paying dividends. As we balance our priorities over the next two years, we remain committed to preserving that history. Between fiscal 2024 and 2026, as we focus on strengthening the balance sheet and stabilizing Amerigas, we expect that dividends will stay flat, while still achieving a payout ratio close to 50%. Now as we move to fiscal 2027, we anticipate returning to our targeted 4% dividend growth rate over the long term. Slide 21. wash you through our targeted cash deployment plan for fiscal 2024 through 227, which aligns with the priorities that we shared previously. The plan will be fully funded by cash flow from operations as we do not anticipate any additional equity needs while reducing absolute debt for UGI. In addition, Of the roughly $3.9 billion in capital expenditures, approximately 85% will be invested in our natural gas businesses, predominantly in our regulated utilities, where we have ample opportunities to deploy growth capital. And with that, I'll hand the call back over to Mario.
Mario
Thanks, Sean. As I close, I want to emphasize our conviction that diligent execution of the fundamentals will enable UGI to build a strong momentum of balanced growth and value creation. We have embarked on that journey and are taking the necessary actions to achieve the financial commitments that we have outlined. We have the financial capacity to maintain investments in the natural gas businesses, particularly in the regulated utilities, which are expected to deliver 9% plus in rate-based growth. These businesses provide strong return and benefit from the free cash flow generating LPG businesses. With this model, between fiscal 2024 and 2027, we will target a 4% to 6% EPS growth rate and leverage ratio between 3.5 to 4 times. We will also preserve our commitment to the dividends. which has been synonymous with our brand over the past 140 years, keeping the amount flat through fiscal 2026. Our intent is to return to a long-term dividend growth rate of 4% in fiscal 2027. I thank you for your continued interest and support of UGI. And I'll now turn the call back to our operator to open the line for questions. Thank you.
Operator
At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Christopher Jeffrey of Mizuho Securities. Your line is now open.
Christopher Jeffrey
Hi, everyone. Good morning. Maybe just starting with the, you know, around $400 million of debt reduction at Amerigas. Just kind of curious what the approach will be to accomplishing that, how much is involved with, you know, internally generated cash flows at Amerigas versus doing something more external, you know, intervention.
Mario
Yeah, good morning, Chris. This is Sean. I can hit that. Maybe I'll take you back historically. We took about 300 million out last year. Amerigas contributed somewhere around 20, 30 million of that last year. As we look at this year, first and foremost, we were able to take almost 40 million out through the OMR repurchases that we did in Q3. That was all with Amerigas cash. That 40 million came from Amerigas. As we look to the back half of the year and our goal to continue to improve the balance sheet, we see Amerigas cash providing maybe another $150 million of debt reduction, and then another maybe $200 million to $300 million from corp. And that should get you to that total that we're looking for. One thing to keep in mind, as we achieve all this, we'll have taken over $700 million of Amerigas debt off the balance sheet, so we're pretty proud of that. But directly to answer your question, you're looking at about $200 million coming from Amerigas cash and another $200 or so coming from a corporate injection.
Christopher Jeffrey
Got it. And maybe just to clarify that, coming from the corp, is that just cash on hand or would that be involved with the asset sales that you've mentioned? Yeah, all of the above.
Mario
We're also optimizing the structure. Obviously, that cash can be more optimally raised or utilized from corporate fungibility. But we also, as Mario mentioned, we had a $27 million asset sale. I think if you listen to the remarks that Mario made, we're continuing to look at the portfolio and opportunities to generate cash. through some potential asset sales. So all of the above, and the good news is we've already executed on almost $30 million of an asset sale that will contribute to that cash coming down.
Christopher Jeffrey
Got it. Great. And then maybe this last one on this, as far as options to kind of adjust the revolver at Amerigas, as you mentioned, any early insights into that?
Mario
Yeah, I think a couple things. You heard Bob and Mario lay out a plan to get, you know, to stabilize and optimize Amerigas, we want to be able to buy some time. So we are looking pretty heavily at removing, you know, replacing the revolver with another instrument that does not have a quarterly covenant that puts us under that quarterly pressure, that gives us some time as we work through this turnaround and gives us time to basically execute on the things we want to, without having that quarterly pressure uh on amerigas and probably more importantly on corporate as well so we have started down that path we have some strategies that we've been working on for a little while and and you know we'll keep you abreast but i'm hopeful that we can be successful okay thank you john and if i just use one last one just afford it for sure
Christopher Jeffrey
growth rate should we be thinking about that as you know kind of a CAGR from 24 to 27 are you looking at like kind of midpoint of guidance anything in particular as far as base yeah I think it's yes to most of that I mean it is a 24 to 27 Chris I think the way to think about that four to six is you know we're in a period in
Mario
of balance sheet repair we're in a period of you know being very disciplined with capital so you know that's why that that range came down a little bit i think from historical for the company but um it is that period um you know we feel comfortable you know on one side of the fence we have businesses growing quite a bit you've got nine percent rate base growth um you know you've got nat gas performing really well so we do think of it as a you know kind of we've got a midpoint in there but it is 24 to 27.
Christopher Jeffrey
Great. Thank you, and congratulations on the announcement and all the help throughout the process.
Operator
All right. Thank you for your question. Again, as a reminder, to ask a question, you will need to press star 1-1 on your telephone. One moment for our next question. Our next question comes from the line of Paul Stremont of Leidenberg. Your line is now open.
Paul
Thank you very much. I guess my question relates to the midstream and marketing. So if total margin is up 41 and marketing is 46, can you just walk us through what would be sort of the, what the chart would look like if it was just midstream and what the sort of comparator would look like?
Mario
Yeah, Paul, this is Sean. A couple things. I think you're looking at a big increase. The drivers, the biggest driver, I think, as we tried to elude is capacity values on our, you know, we've got basis differentials on the gas pipelines that we contract. And, you know, we saw some pretty good spreads on the basis. So we were able to take advantage of those contracts, those capacity contracts. And that drove a significant portion of the value. I think the other piece to consider is we have a storage business. if you look at this year that storage business was in the black you know and last year based on the timing of the contracts we we lost money so that's one of the bigger drivers as well you had a loss sitting in 23 and you had you know a modest earnings this year those are the two biggest drivers of that $48 million. You know, I know you didn't ask about it, but the other highlight would be that OPEX. Across the company, we see operating costs coming down. There's a pretty big focus on that, and the midstream business contributed to that goal as well. So hopefully that answers your question, but those are the drivers of what is happening in the energy services business.
Paul
Okay, I guess I'm still not understanding. So was midstream up quarter over quarter over quarter? By itself, if you exclude marketing from the picture?
Mario
If you exclude marketing from the picture, midstream was up quarter over quarter, yes.
Paul
And by how much?
Mario
It's going to be a much, the majority of the gain was the marketing side of the equation. So it's going to be less than $10 million.
Paul
Okay. And then I guess one of your peers seemed to experience a significant uplift in storage margins during the quarter. Did you experience any significant changes in storage margins?
Mario
No, as I mentioned, we were positive. We saw some gains in storage. I wouldn't call them outsized gains, but the big delta on the storage business was the fact that we had losses last year. So a solid quarter from a storage perspective, but I wouldn't say it was outsized gains.
Paul
And then I guess last question, with sort of very strong rate-based growth and sort of the time that it's going to take you to sort of focus on balance sheet repair, have you considered, you know, the possibility of issuing equity, essentially rebasing and doing the balance sheet repair upfront as opposed to doing it sort of over time?
Mario
Yeah, we've considered many, many scenarios, Paul. I think at the moment in our written remarks, I believe we've mentioned that equity, we don't have equity in the equation currently. But we are definitely taking a lot of steps to improve the balance sheet. We're doing a lot of cost reductions. We're being very careful on where we're going to deploy capital. We did announce that we're going to hold the growth on the dividend flat. And lastly, we're looking at some portfolio optimization to generate cash. So those are the avenues we're using to not put debt on, improve the balance sheet at the moment. Right now, we do not have equity in the equation.
Paul
Great. Thank you very much. Thanks.
Operator
All right. Thank you. I am showing no further questions at this time. I would now like to turn it back to Mario Longhi for closing remarks.
Mario
I want to thank everyone for taking the time to participate with us in this call. And we look forward to the next conversation we're going to have. So I wish everyone a good day.
Operator
All right. This concludes the program. So thank you for your participation in today's conference. You may now disconnect.
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