UGI Q2 2025 Earnings Call Transcript

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May 8, 2025

There are 6 speakers on the call.

Operator

Hello, and welcome to the UGI Corporation Fiscal twenty twenty five Second Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Thank you. I would like to turn the conference over to Tamika Morris, Vice President of Investor Relations and ESG. You may begin.

Speaker 1

Good morning, everyone. Thank you for joining our fiscal twenty twenty five second quarter earnings call. With me today are Bob Flexon, President and CEO and Sean O'Brien, CFO. On today's call, we will review our second quarter financial results and key business highlights 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.

Speaker 1

Actual results may differ significantly because of risks and uncertainties that are difficult to predict. Please read our earnings release and our annual report 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.

Speaker 1

And with that, I'll turn the call over to Bob.

Speaker 2

Thanks, Tamika, and good morning to all of you. Before we walk through our financial and operational results in detail, I want to start with a summary of our year over year performance on several key financial metrics. Starting with adjusted diluted EPS, UGI reported a 12% year over year increase for the fiscal second quarter, delivering the highest adjusted diluted EPS for the second quarter and year to date period in the company's history. All four segments provided EBIT growth has solid operational execution enabled us to effectively meet higher demand, particularly from colder weather in fiscal Q2, while maintaining cost efficiencies. With this strong performance, we have increased our fiscal twenty twenty five guidance range to three dollars to $3.15 The balance sheet continues to strengthen with $1,900,000,000 in available liquidity and an overall leverage ratio of 3.8 times at the end of the quarter.

Speaker 2

Now, let me also share several other highlights. During the quarter, our LNG infrastructure operated at peak capacity, responding effectively to the sustained cold weather patterns experienced, particularly in January and February. Regional natural gas demand continues to demonstrate robust growth, positioning our strategically located midstream assets to deliver these essential services reliably. Late last year, we initiated an expansion project to double the liquefaction capacity at our Manning facility. This significantly enhances our ability to fulfill additional peaking contracts and provide vital LNG services to customers in the Northeast.

Speaker 2

Construction has now been completed and the facility is currently in commissioning with full operational status expected by fiscal twenty twenty six. In aggregate, during the quarter, we deployed $160,000,000 in capital investment, primarily in the natural gas businesses. At the utilities, we continue to expand our reach, strategically extending our infrastructure to previously underserved communities. Our customer base has grown by over 6,600 new residential heating and commercial accounts year to date, reflecting the persistent demand for natural gas service throughout our service territories. Now before I hand the call over to Sean to walk through the financial results in more detail, I'd like to speak to our fiscal twenty twenty five guidance range.

Speaker 2

Given our strong financial performance for the first half of the fiscal year and the continued momentum we're seeing across our businesses, we are pleased to announce an increase in the fiscal twenty twenty five adjusted diluted earnings per share guidance range to $3 to $3.15 This increase is largely driven by several factors. First, during the fiscal second quarter, we experienced favorable weather conditions when compared to the ten year normal weather used in establishing our guidance. These weather conditions drove incremental earnings throughout all of our businesses. However, in order to meet the winter demand, we prioritize production and distribution over certain planned operational investments, which will be executed during the second half of our fiscal year. Next, we are beginning to see some operational improvements at AmeriGas, which have contributed to lower customer attrition levels.

Speaker 2

These early stage enhancements began with the pod model launched in September, which has removed silos and provided greater alignment, operational efficiency, and accountability. Combined with the favorable weather conditions, these improvements have resulted in a $19,000,000 increase in the fiscal year to date EBIT when compared with the prior year. Looking ahead, we are continuing our efforts to streamline and optimize key business processes to better position AmeriGas for the upcoming winter season. At UGI International, we are reducing the prior estimate of a $05 to $08 headwind from the jetty damage due to OpEx recovery. Our revised estimate is approximately $04 Lastly, we are operating in a fluid environment with continued evolution in trade and tariff policies.

Speaker 2

Given the nature of our business and the limited number of items internationally, we believe the tariff cost exposure is insignificant. We have seen that these policies have placed downward pressure on propane prices, which can be beneficial to our customers. Given the nature of our pricing contracts and hedging strategy, we do not anticipate material benefits or headwinds in this operating environment. In summary, the revised guidance reflects our confidence in the underlying strength of our businesses and our ability to continue executing our strategic priorities in the second half of the year. I'll now turn the call over to Sean to delve further into the financial results.

Speaker 3

Thanks, Bob, and good morning. I'll now provide more detail on our financial performance for the fiscal second quarter. As Bob mentioned, we've delivered strong results across all business segments, while continuing to strengthen our balance sheet and maintain disciplined capital allocation in a dynamic market environment. UGI delivered adjusted diluted EPS of $2.21.00 $24 above the prior year period. The utility segment was up $04 given the colder weather, partially offset by higher operating and administrative expenses.

Speaker 3

Midstream and marketing increased $0.13 as the business benefited from the effects of higher investment tax credits associated with the RNG projects being placed in service this fiscal year. UGI International was consistent year over year as lower operating and administrative expenses were more than offset by reduced tax benefits. At AmeriGas, while EBIT was up $16,000,000 over the prior year period largely due to colder weather, the effect of higher income tax expense led to a zero six dollars decline in adjusted diluted EPS. As noted on the Q1 call, AmeriGas is experiencing a higher tax rate due to limitations on interest expense deductibility. On a consolidated basis, there is a corresponding offset to normalize the corporation's tax rate, and this is reflected in corp and other.

Speaker 3

Overall, corp and other was up $0.52 due to lower income taxes of $0.54 partially offset by $02 of higher interest expense. I'll now walk you through the key drivers for each reportable segment when compared to the prior year. Starting with the Utility segment, EBIT was $241,000,000 for the quarter, up $15,000,000 over the prior year period. Both core market and total system throughput showed strong growth, primarily driven by weather conditions that were 15% colder than the comparable period last year. This favorable weather pattern contributed to $22,000,000 increase in total margin.

Speaker 3

Though this gain was partially offset by the impact of weather normalization mechanism in our Pennsylvania and West Virginia territories. Operating and administrative expenses rose by $6,000,000 reflecting higher investments in system maintenance and increased uncollectible account expenses. Depreciation and amortization expenses also increased as we continue our capital investment strategy to enhance and modernize our distribution infrastructure. At the Midstream and Marketing segment, we reported EBIT of $154,000,000 which was comparable to the prior year. Total margin increased 2,000,000 driven by strong performance in capacity management and gas marketing activities, which more than offset lower margins from the gas gathering and processing operations.

Speaker 3

Margin was also impacted by the divestiture of our power generation asset, namely Hunlock Creek in September 2024, which contributed $3,000,000 in the prior year period. Turning to the global LPG businesses at UGI International. LPG volumes declined by 4% as the impact of weather that was colder than prior year was more than offset by continued structural conservation and the absence of certain customers who previously converted from natural gas to LPG. Total margin was down $3,000,000 as the effect of lower LPG volumes and the translation effects of the weaker foreign currencies were largely offset by higher LPG unit margins. The business demonstrated continued cost discipline, reducing operating and administrative expenses by $13,000,000 through lower personnel costs, optimized maintenance programs and favorable foreign currency translation effect.

Speaker 3

As a reminder, we employ a multi year foreign currency hedging strategy, which mitigates FX volatility within our overall financial results. Overall, EBIT grew by $12,000,000 driven by operational efficiencies and improved operating income that more than compensated for lower total margin compression and reduced gains on foreign currency hedge contracts. At AmeriGas, the business benefited from the colder weather conditions, which drove higher LPG volumes, and this effect was partially offset by continued customer attrition. We capitalized on advantageous weather conditions, which drove LPG volume growth, partially counterbalanced by continued customer attrition. Total margin expanded by $13,000,000 reflecting the combined impact of higher retail volumes and LPG unit margin improvements with minimal offset from reduced fee income.

Speaker 3

The segment reported EBIT of $154,000,000 up $16,000,000 over the prior year period, fueled by higher total margins and increased gain from tank sales. Turning to the balance sheet. I am pleased that our focus on balance sheet optimization is continuing to yield positive results, as evidenced by our available liquidity of $1,900,000,000 and the reduction in UGI's net debt to EBITDA ratio from four times at the end of fiscal twenty twenty four to 3.8 times as of March 31. Margin expansion, operational efficiencies and disciplined capital deployment led to year to date free cash flow of approximately four ninety million dollars up 55% year over year. Specifically at AmeriGas, there was also considerable improvement in the year to date free cash flow, which supported the segment's debt reduction of over $65,000,000 including a $21,000,000 partial prepayment of its two year intercompany loan with UGI International.

Speaker 3

AmeriGas' net debt to EBITDA ratio at 03/31/2025 was 5.4 times, down from six times at the beginning of this fiscal year. At 04/30/2025, AmeriGas had approximately $90,000,000 in cash and no short term borrowings. We are pleased with this enhanced cash generation, which supports our continued deleveraging goals while maintaining strategic investments and solid shareholder returns. And with that, I'll turn the call over to Bob for his closing remarks.

Speaker 2

Thanks, Sean. Before we open the line for questions, I want to emphasize how our focus on operational excellence is delivering measurable improvements across several key metrics. This progress combined with our disciplined approach to creating operational efficiencies has expanded our margins on a year over year basis. In addition, we're particularly proud of the 55% improvement in free cash flow generated, reflecting both the strength and sustainability of our business model. Looking ahead, our natural gas businesses continue to be our primary growth engine with strategic infrastructure investments predominantly in the regulated utility business, driving rate base expansion.

Speaker 2

At AmeriGas, we are making steady progress on operational improvements, enhancing business processes and service quality to drive higher levels of customer retention. Internationally, our disciplined approach is generating strong cash flows that support our corporate priorities. Through focused capital allocation, infrastructure, monetization, and strategic portfolio optimization, we are well positioned to navigate market uncertainties and create incremental value for our stakeholders. Thank you for your time with us today and we will open the line for questions.

Operator

And your first question comes from the line of Gabriel Marine with Mizuho. Please go ahead.

Speaker 2

Gabe?

Speaker 4

All right. Hey, good morning. Sorry about that. I was on mute. Okay.

Speaker 4

Wanted to start out with AmeriGas, clearly some improved performance with some benefits for some weather here. Can you just talk about kind of, I guess, learn more about the learnings coming out of the winter and also maybe what you're targeting kind of going into this upcoming fiscal year? And then on a related question, I think last quarter you talked about you're targeting trying to refinance the 26 maturities by the end of this fiscal year. Can you just give us an update there? Are you still comfortable with that objective?

Speaker 2

Sure. I'll take the first question and I'll let Sean take the second one. So what I would say Gabe is that we got through the winter, we took advantage of the better weather. What we're really focused on between now and the beginning of next year is how do we make the AmeriGas business processes better. And we're full fledged working on that.

Speaker 2

These are the type of projects that I love because it's little to no investment with big returns. So we're working on things like how we do routing and delivery, becoming more efficient on the density of our miles, which will drive OpEx down and customer satisfaction upward. We're working on how we purchase propane. We see tremendous opportunity to leverage our scale and consolidate our suppliers. We currently have 53 different suppliers for propane, so we're not taking advantage of our size.

Speaker 2

We're also looking at what's the most effective way to take advantage of propane prices, because what we're seeing with the tariff environment is pressure on propane prices to go downward. So we see a lot of asymmetric risk there, and we've got the capacity to start creating and utilizing a more strategic hedging program to lock in some of this lower propane costs better than what we have in the past. We're looking at the customer value proposition. So segmenting our customers and making sure that the ones with the highest margin are getting the best service that they deserve and they should be getting. And for those that are just marginal or at a loss, either we make them more profitable or we reduce those types of customers.

Speaker 2

For us, it's profitable volume that we need. It's just not being able to look and say, what's the volume this year versus last year? What's the profitable volume this year versus last year? So we're looking to improve all elements of that business, how it's run, take pressure off the customer service center, particularly as we redomesticate our customer service and make that a better performing entity as well. But right now, service has had to deal with an onslaught of questions or concerns from customers that we're making sure that we get to the root cause of all those things.

Speaker 2

So I'm very optimistic on what we can do by the time next winter arrives. And that's our goal here is to really improve how we do business in AmeriGas between now and next winter. And now is the time that we're doing it. We've got five key business process projects underway, fully staffed. This is being led by AmeriGas.

Speaker 2

This is not some outsource thing that sends you down the wrong path. So there's not a lot of cost to it. It's all about getting business better, driving margin, driving the appropriate volume, and being much more efficient in quality processes that don't result in customer service issues. So I think we're going to see a very different AmeriGas as we go into next winter. And we've got new talent in the organization.

Speaker 2

We've reinvigorated the talent in that organization. So I'm actually quite bullish on what we can do with AmeriGas. I think you're going to see a very strong propane business out there by next winter. So I'm excited on what that can do for this company. And as Sean mentioned in his comments as well, the great cash flow that we had to bring down our leverage ratio as well.

Speaker 2

I think we're positioned to really make a real difference when we go into next winter. And Sean, I'll hand it over to you to talk about the refinancing. Yeah,

Speaker 3

Gabe, a couple of things. In terms of the refinancing, question, nothing's changed on our goals. Maybe I'll hit some of the key things to remind everyone. So we have about $664,000,000 that comes due next August, late August. We're very focused on making sure we take care of that.

Speaker 3

What I'm excited about are a couple of things that I want to focus on AmeriGas, Bob. We've hit a bunch of them. The cash generation at AmeriGas has been very strong. We really took advantage of a really strong winter. A couple of examples.

Speaker 3

If you listened to my remarks, I mentioned we're sitting close to on $100,000,000 of cash here as we end April. That's pretty excited about that. We were able to start to already pay back part of the intercompany loan with International by about $20,000,000 And as Bob was alluding to, we took a half a turn or more, we're about 5.4% versus 6% on the leverage metrics. Fundamentally, these were all incredible things about AmeriGas that we're seeing as we head into starting to address those, the 2026 maturity. On the fundamental market, there's actually some good news there.

Speaker 3

There's been volatility since we last spoke in the capital markets, but the AmeriGas bonds themselves are actually they've held in very, very well. I've been very pleased with what I've seen on those bonds. And maybe the last point I'll make is we're actually trading at or better than where we were prior to a lot of the volatility we've seen over the last couple of months. So we're set up to get that taken care of. Nothing's changed in our objectives.

Speaker 3

And other than I think that the business is set up much better as we go in to address those twenty twenty six bonds.

Speaker 4

Great. Thanks, guys. And maybe if I could follow-up, just sort of sticking on a bigger picture theme on in basin sort of Appalachia natural gas demand, it seems like that's been very topical no matter who's conference call earnings conference call you listened to this quarter. Just wondering kind of latest thoughts on UGI's positioning in terms of partnering with any of those folks looking to take advantage of you know, or cheap Appalachian gas and just what those conversations might be looking like

Speaker 2

lately? The only thing I would say Gabe is that, you know, certainly echo all your comments that you just made and both our midstream business, which has the pipelines as well as our utility that has the distribution as well, are having a lot of discussions with potential generators, data centers, and the like. So we expect to see some really robust growth in those areas. And we're fortunate to be located in the middle of all of that. So we're proactive with folks that want to come in to talk about where does it make sense to locate, say, new generation assets and where you can get the natural gas.

Speaker 2

So we're well positioned to be a big part of that just by where our infrastructure is. As you'll see, as you know, our capital allocation is heavily skewed towards the natural gas business and that's not going to change for those reasons that you just really articulated.

Speaker 4

Thanks, Bob. Appreciate that.

Operator

And your next question comes from the line of Julien Dumoulin Smith with Jefferies.

Speaker 5

It's actually Paul Zimbardo filling in for Julien on a busy morning. Thanks for the time. Okay. Good morning.

Speaker 2

All right, Paul.

Speaker 5

Hi. Bob, thank you for all that color on Is there any quantification that you'd be willing to put on how much incremental margin or EBITDA you see from AmeriGas turn into fiscal twenty twenty six? Know that there's been a little bit weaker performance, but there's been some strong numbers in the past. Do you think can get back to some of that EBITDA level that you've seen in the historical periods?

Speaker 2

Well, Paul, I couldn't put a number on it now. What we need to do is strengthen our business processes. So we're working on that. We need to focus on the customer value proposition and ensure that our highest margin customers, which comes from the residential retail, is getting the right level of service. Delivery is efficient.

Speaker 2

People don't need to worry about their propane. And so it's really just focusing on those types of things that are going to make a real difference. Beyond that, think it's not until we get closer to the beginning of the next fiscal year when we put guidance out that we put a number around that. But these are certainly the things that we need to do to make a difference for this business. And again, I'm really excited about what AmeriGas can be.

Speaker 2

And it doesn't require investment. It requires that our talented employees within AmeriGas bringing a structured problem solving approach to how do you make your business better. And we've identified what are the five things that we've got to get done before next winter. And we're all very engaged in all that. I believe we're going to be a very formidable competitor out there as we enter into next winter.

Speaker 5

Excellent. That's great to hear. And then the second one I had for Sean, just if you could comment a little bit on the fiscal second half drivers. The implied net loss is particularly high versus the historical levels. It sounded like you're pulling forward some costs into the second half of the fiscal year from the next fiscal year, but just if you could discuss the drivers, that would be helpful.

Speaker 5

Thank you.

Speaker 3

Yeah, Paul. Mean, we tried to give some color. Let me start with, in terms of pulling expenses, I think what we were trying to emphasize, it was a for all of our businesses, it was definitely we saw colder weather than we would have seen last year, and more so even domestically than we did internationally. So for our utility, for our midstream business, there was not only colder weather, there were some extended periods of that. So I think what we're trying to allude to on that front, Paul, is that some of the work, both capital and OpEx, that would have gotten done in the first half of the year, we delayed and we pushed into the second half of the year.

Speaker 3

So if you're thinking about our original guidance, there is going to be some timing in terms of those types of things happening in the second half of the year. Secondly, and I think you were alluding to this, Paul, the company I've been here two years. As I look at the company's earnings profile, most of the time it earns all or even more than its full year earnings in the first half of the year. So I think we're just trying to make sure everybody understands that it's a winter driven generally company, and therefore, you're earning most of your earnings or even more than 100 percent in the first half of the year. I'd be remiss if I didn't close on some positives.

Speaker 3

We did raise guidance from the midpoint of $2.9 We were seeing some really good things that we will take to the bank per se. The NORGAL that Bob mentioned overseas and international. We're very pleased with how the team executed around that. That was worth every bit of $05 AmeriGas is performing better than our guidance. We're very pleased with how that's performing.

Speaker 3

So we're holding on to a lot of the benefits that we saw in the first half of the year. And I alluded to a few things, which we're still focused on making sure that the efficiencies that the company has tried to deliver over the last two years are sustainable and ongoing. And so far, so good. We're hitting on all those cylinders. But that timing is what we were referring to, Paul.

Speaker 2

And Paul, I'm just going to add a couple of things. So I do rely heavily on Sean to make sure that we don't lose our way on cost management. But also the attrition for AmeriGas in our second quarter was in the very low single digits. So we're already seeing benefits of a lot of the work that the team has done to shore up how we deliver and maintain our customer service level. So we've got a good running start for next year.

Speaker 2

And the other thing I'd add to that is what I mentioned earlier around, we can be far more strategic in how we manage our propane costs than what we've been doing. And we have already achieved, locked in some savings as we go into the latter part of the year on our propane purchases. So I expect some real benefits, financial benefits from that. That again requires no cost, just requires some brainpower. And we've got good people within AmeriGas that are going to make that happen.

Speaker 5

Excellent. It's great to see and hear the momentum. So thank you both.

Speaker 2

All right. Thank you, Paul. Thanks, Paul.

Operator

And there are no further questions at this time. I will now turn the call back over to Bob Flexner for closing remarks.

Speaker 2

Thank you, Tricia, and thanks for those who attended the call. Just to reiterate, very pleased to see our strong year to date performance. What's particularly exciting for me is seeing our balance sheet improving both at the consolidated level and also down at the AmeriGas level. Strong balance sheet is a priority for us. We've got a lot of business process improvements underway, not only in AmeriGas, but in all of our divisions that we expect to see benefit from.

Speaker 2

We've got new talent We are reinvigorating the culture here. We've got a lot of good people that have been here for a long time as well. So we're really excited about the things to come. And we're going to go to work and keep working at the things that we're doing and expect to see some good results from that.

Speaker 2

So with that, I thank you again for everyone for joining the call.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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