Good day, and thank you for standing by. Welcome to the UGI Corporation’s Fourth Quarter 2023 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 host today, Tameka Morris, Senior Director of Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining our fiscal 2023 fourth quarter earnings call. With me today are Roger Perreault, President and CEO; Sean O'Brien, CFO; and Bob Beard, COO. On today's call we will review our financial results and some notable performance highlights for the year, discuss the strategic priorities and financial outlook for fiscal 2024, and conclude 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 Roger.

Thank you, Tameka, and good morning, everyone. We appreciate your interest in joining our call today. Fiscal 2023 was a year where we continued to see uncertainty in the macroeconomic environment, particularly with high interest rates and elevated inflation levels. Across most of our service territory, weather was significantly warmer than normal and we experienced challenges within our global LPG businesses, largely due to operational headwinds at AmeriGas and energy conservation, in Europe. Against that backdrop, UGI reported adjusted diluted earnings per share of $2.84 for the fiscal year. The Utilities and Midstream & Marketing segments delivered record earnings and an 8% growth in EBIT over the prior year. This performance was aided by the weather normalization rider that was implemented in the fiscal first quarter and the higher gas base rates at our Pennsylvania gas utility, as well as incremental earnings for the prior year acquisitions of UGI Moraine East and Pennant. We also benefited from margin management actions taken to alleviate volume and costs-related pressures in the global LPG businesses. These businesses continue to generate attractive free cash flow which support actions to return capital to shareholders, service the balance sheet and make growth investments in other portions of the business. This diversified portfolio has provided a solid foundation for consecutively paying dividends over the past 139 years, increasing dividends in the past 36 consecutive years, and delivering a 10-year EPS CAGR of 6% and dividend CAGR of 7%. Of course, our performance would not have been possible without the tremendous dedication of our employees who continue to safely serve our customers and other stakeholders despite the challenging economic and operating environment. In fiscal 2023, we continued to execute on critical elements of our long-term strategy in areas that provide the foundation for reliable earnings growth in the…

Thanks, Roger, and good morning. I'll start by sharing the key drivers of our financial performance for the year. As Roger mentioned, for fiscal 2023 UGI delivered adjusted diluted EPS of $2.84 in comparison to $2.90 in the prior year. The utility segment was up $0.06 as benefits from the weather normalization rider and higher gas base rates offset the impact of warmer weather and higher operating expenses. Next, Midstream & Marketing was up $0.13 with incremental earnings from the prior year acquisitions of UGI Moraine East and Pennant, as well as benefits from investment tax credits associated with the previously announced RNG facilities that were placed into service during the year. Turning to the global LPG businesses. UGI International was down a penny as the impact of lower LPG volumes was largely offset by higher LPG unit margins, higher margin from the non-core energy marketing business, and lower taxes due to the optimization of foreign tax credits which yielded the benefit of approximately $0.09. AmeriGas was down $0.19 as the business [felt] (ph) with lower volumes and higher operating and administrative expenses as it experienced inflationary pressures and made investments to improve driver capacity. With these investments, we believe that AmeriGas is positioned to meet our customer demand in the heating season. Lastly, Corporate & Other was down $0.05 due to higher interest expense. Turning to the next slide. For each reportable segment. I'll walk you through the key drivers of our results when compared to the prior year. Starting with the Utility segment. Our regulated utilities delivered record EBIT of $365 million, up $29 million or 9% over the prior year. Despite significantly warmer weather, the business benefited from the weather normalization rider that was implemented in the first quarter. Utilities also realized higher margins due to higher…

Thanks, Sean. As we've highlighted before, we are evaluating our AmeriGas business as part of our previously announced strategic review. AmeriGas is the largest propane distribution company in the US with an unparalleled supply and distribution network. Over the years, AmeriGas has been a generator of robust free cash flow that was used to fund growth investments in natural gas businesses and return capital to shareholders. Despite the current challenges, the business has continued to generate free cash flow and as we look to fiscal 2024, we have the opportunity to use that cash to improve the balance sheet and reduce leverage. Simultaneously with the strategic review, we will continue to focus on the operational improvements needed to improve customer experience and ensure that we are running the business as effectively as possible. This means that we will continue to support and enhance our customer-facing activities, optimize our process, and scrutinize our cost to achieve savings and reduce inefficiencies. We're also looking at ways to more accurately forecast demand and optimize our transportation network as we continually work on meeting the needs of customers. That is of the outmost importance in our distribution businesses. Similarly, we are focused on improving the balance sheet. We have reassessed our capital spend to ensure that we are being disciplined in how we are deploying capital within the LPG businesses. In particular, we anticipate that capital will be primarily focused on maintenance spend and select organic growth initiatives that provide a strong return. As I close, I want to emphasize that we are confident in our ability to execute on the key strategic priorities that will further solidify our foundation to deliver consistent and reliable results and create long-term value for our shareholders. We have already identified many of the actions required to drive further improvements in our business and fiscal 2024 will be an important year in executing on these initiatives. Thank you for your continued interest in UGI and your participation on today's call. And with that, we will open the line for your questions.

[Operator Instructions] Our first question will come from the line of Gabriel Moreen with Mizuho.

Hey, good morning, everyone.

Good morning.

[Multiple Speakers] maybe to start out on the strategic review. Can you give us a sense maybe around timing of the valuation with a specific focus on AmeriGas, given AmeriGas being embedded in the guidance for FY 2024, we do assume that UGI will still be AmeriGas' owners through the winter heating season. So any comments you could maybe make in that regard?

Good morning, Gab. And thanks for your question. Yes, as we announced at the last -- the last earnings call, the strategic review is something that's still in its early days. So we have launched it. And at this time, we really don't have an update that we can provide on weather timing or the outcome. Just as a reminder, right, the strategic review is -- was launched with a view on the LPG businesses with a focus on AmeriGas. In parallel to that strategic review, we also announced that our operational efficiency objectives here, which is, to take $70 million to $100 million of expense out of the business. So that's something that we are executing. So what you see in our guidance right now is the impact of -- about the 30% of that, that we will get in addition to a continued focus on operating AmeriGas and continuing to improve customer delivery metrics, which are trending quite nicely. And once we have more information on the strategic review, we'll be pleased to come back to you and to the market with some updates.

Understood. And then maybe if I can drill down a little bit on the Global LPG assumptions for 2024. I think you're assuming normal weather. But you're also assuming volumes declined despite what was as a warm winter last winter. So I'm trying to reconcile those and I know you talked about a little bit in your remarks earlier. And then also as far as margins declining, it seems like the propane pricing environment is pretty benign at the moment. So I wondering to what degree that may be a conservative assumption or not, given I guess propane prices being so low right here.

Yes. I can start Gabe, this is Sean. Hi. Let me hit the volume question. So we'll start with the international LPG. It was a warm winter last year. So we did have, I think around 8% more -- 7% to 8% warmer than normal. So we have normalized that with the 10-year average in our 2024 assumptions, but -- and we have assumed -- we saw some of that conservation last year. We've kept that constant. So that would not be a variable as you go into 2024. We'll keep an eye on that. But we've kept that at the levels that we saw in 2023, maybe closing out the international with the EM exits, we see some -- we definitely see some improvements in the EMs side of the equation that are helping the outlook for international. And then as Roger said, we've got a lot of self-help initiatives underway and that's across the board. So we're going to continue to focus on cost. On AmeriGas, we did not -- remember, we were fairly balanced on the weather front. When you look at 2023, we had some areas that had warm weather. We had some areas that had cooler weather. So really what you're doing -- what you're seeing from AmeriGas going from 2023 to 2024 is a pretty -- really not much of a weather shift. What we're indicating on volumes there is that, we do still expect to continue to see volume declines. We expect those volume declines in 2024 to be at a lower rate than what we saw 2022 to 2023. Roger alluded to some improvements that we're seeing. We're going to be cautious, but we've made some investments, and we really are focused on getting through the winter, but we still anticipate some volume declines at AmeriGas. Same concepts there, self-help, we're focused on cost in that business as well. And you heard Roger say, capital is going to be pretty focused on just sustaining and maintenance type capital. So that's sort of the outlook on AmeriGas as you move from 2023 to 2024.

Thanks, Sean.

In terms of the price [Multiple Speakers]

Sorry, go ahead.

Sorry, Gabe. You mentioned pricing. I think we see pricing at similar levels in terms of how we are currently forecasting, but we did see obviously -- you're referencing that maybe pricing is down a little bit. So we don't see that as a big driver in terms of the delta, the variance to our 2024 versus 2023.

Okay, great. Thanks, guys.

Thank you, Gabe.

Our next question comes from the line of Julien Dumoulin-Smith with Bank of America.

Good Morning, Julien.

Hey, good morning, guys. This is actually Cameron on for Julien. Thank you guys for taking our questions.

Hi, Cameron.

Hey, good morning. Happy Friday. Real quick, I wanted to just continue on the discussion of volumes in -- for AmeriGas in 2024. So, can appreciate the fact that obviously, you guys are working to right size the business or just kind of getting on more solid footing. You've got a couple of quarters now, three quarters of elevated OpEx as you kind of embarking on this effort. So maybe just could you speak to the any benefits you're seeing thus far. And I guess just considering you've had a few quarters to work on this, why maybe we're not seeing a little bit more of a positive impact for volumes in 2024 versus what maybe you would expect given these efforts.

Yes, let me kick that off. Yes, a couple of things to keep in mind. When we went into 2023, Cameron, we saw a very severe driver shortage. And we've talked extensively about that throughout the year. That did lead to customer losses and what we're seeing going into 2024 is kind of the tail end of that, right? We're seeing a continuation of volume that really is lost from the driver shortage issue we had at 2023. So it's a lingering effect. When we look at the elevator -- the OpEx we put into the business, that OpEx was very focused on ensuring we have the right number of drivers going into fiscal 2024, service tax, frontline employees, ensure that we are delivering the promise we make to customers. What we are seeing and we continue to see an improvement in this throughout the summer and leading into the winter is good progress on on-time deliveries, good progress on improving zero fills or minimizing zero fills, good progress on inefficient fills and that's thanks to the fact that we now feel very good about the staffing levels we have going into 2024. Now that's -- that did put pressure on OpEx and that is why we also are very focused on the $70 million to $100 million of expense takeout, because what we've done is, we've put OpEx in more customer-facing areas. And of course, we're very focused on taking and controlling costs that do not impact the customer experience. So what we're seeing going into 2024 is some lingering effects from that. As Sean mentioned, we are -- we are confident that we're going to see some improvement in that, but it is going into the year with still a negative trend, but smaller than what we saw in 2022 to 2023.

Got it, got it. Okay, thanks, that's super helpful. Maybe pivoting here just to the strategic review. A few questions here. One, just want to confirm that I understand that the review is LPG focus on AmeriGas, but just to what extent is International also being kind of lumped in here? And than what are some potential avenues you guys are thinking about as far as the International LPG business goes? And then related on Midstream, obviously, strong year. That's been a good business for you guys. What's the potential for any kind of Midstream assets to enter into the strategic review just in terms of just -- how are you guys thinking about the go-forward business on that side of the house as well?

Yes. So a couple of things, and I'll encourage Sean and Bob to add commentary [indiscernible]. So, the strategic review is really focused on LPG businesses. So we were very deliberate in that focus, with a focus on AmeriGas. What we see is a focus on AmeriGas as the area that would have the biggest impact on shareholder value. Right. The whole process of us launching strategic review was really to commit to unlocking and maximizing shareholder value. And where we see that potential is with a focus on AmeriGas. Now, that being said, we remain very open-minded on the strategic review process and really, again, with an eye on what's going to unlock shareholder value the most. So we're not eliminating ideas from the process, but we are wanting to ensure that we're very clear that the strategic review is LPG businesses with a focus on AmeriGas. Which then leads to your second part of your question, which is Midstream. And -- in the Midstream part, I mean, Midstream has been and is just a phenomenal business. Right. This is a business that continues to show very nice progress on vertical ratios, on ability to control costs, and a very effective shift to more fee based contracts, right? More fee based structures. So a business model that is very robust, with a very good relationship with LDCs, including our regulated utility, and with some good opportunities for continued growth and investments, as we continue to provide that essential service in Pennsylvania to move molecules from various sites to LDCs, et cetera. So we see Midstream as a very core business. It's a business we are excellent at, like we are at operating a regulated utility. So that's going to continue to be a focus. And as you can see in our thesis that we talk about in our fiscal 2024, we continue to allocate more and more capital to that natural gas business.

Yeah. Cameron, maybe to add just one quick point. Roger talked about the strategic review. The overall goal of the company, which the review is helping us is to, we want to be a bigger -- have a bigger Nat-gas presence than LPG. I think we're sitting in that 60 to 40 range currently now, when you look at sort of the composite of the company, and I believe we want to grow the Nat-gas portion of that in the future. So a lot -- you mentioned actions overseas, obviously, the exit of the EM business that the company has been doing and other things that we're looking at. Just keep that in mind that the goal is to be a much more weighted Nat-gas company in the future, and we're well down that path already.

Got it. Thank you. And then just. Sorry, if I could squeeze one more. The asset sale that's included in the AmeriGas segment of $21 million. Can you comment on what that was, when that took place? I may have missed that, what exactly was that?

Yes, so a couple of things, Cameron. Those -- we have -- in the AmeriGas portfolio, there are asset sales that occurred -- that have occurred. They're pretty common throughout the years. That one occurred in Q4 -- late Q4. So that's -- so you didn't miss it. So this is the first time we're talking about it. But it was planned. It was in our guidance ranges, and those are common. And we have some in our guidance ranges for 2024 as well. It's something that we constantly are evaluating, some assets and some of the land and some of the facilities that we have in the AmeriGas business every year.

Perfect, Okay, thank you. I'm glad I didn't miss anything. Can you comment on what is baked into the guide for 2024 on that front?

What I can say is that 2023 was a heavier -- a little bit heavier than normal year, so you could assume that it's going to be smaller than what we saw in 2023.

Perfect. Okay, got it. Thank you, guys. I will turn it back.

Thank you, Cameron.

Our next question will come from the line of Sarah Akers with Wells Fargo.

Hey, good morning.

Hey, Good morning, Sarah.

Good morning.

Just a couple of questions on leverage. Can you talk about where you ended 2023 relative to the target? I think it was 3.25 to 3.75. And when you forecast you'll be in that targeted range?

Yes. Sarah, this is Sean. So there's two primary leverage targets we're looking at. The one you're referencing is Corp. So we're trying to get 3.5 to 3.75 on Corp, we ended in the low 4’s at the end of the year. And we do think we can get sub 4 -- we're very focused on this. We think we can get sub 4 in 2024. One other one that I think that's important to think through is AmeriGas. That's another one that we focus on every day. Our covenant range, our covenant max on that's 5.75. I'll take this opportunity to say I'm incredibly pleased that we were able to end the year and not utilize equity cure and actually free up the revolver at AmeriGas. That means we're not utilizing any equity cure at the end of the year. So I'm very, very excited about that. And we closed the year at AmeriGas at roughly 5.2, 5.3, and our goal is to get that by the end of the year sub-5. So we're making pretty good progress, actually almost a full-turn improvement at AmeriGas from just a couple quarters ago and we hope we're really focused by the end of the year to try and get sub-5 and sub-4, high 3’s sub-4 at Corp.

And getting to sub-5 presumably would be without additional equity from the parent, correct?

Correct, correct. As I mentioned, we got out of the quarter -- we got out of the year with no with, again, not having to utilize that equity cure, which is why that now the revolvers freed up, there's no restrictions on it. And our goals going forward are not to utilize additional equity cure, that's the plan.

Great. And then, in the release it mentions share repurchases obviously with balance sheet considerations that that would seem to be a constraint. But can you just talk about how you're thinking about the possibility and how that coincides with the balance sheet considerations?

Yes, I can start and Roger can chime in. It's not to -- as you can imagine, we're doing forward modeling and we're looking at all the options and it goes without saying we think we're undervalued. But remember, I had a slide in there that talked about capital prioritization. It's the dividend, it's the balance sheet. We're going to continue to invest in the regulated utility, but as we look forward, the only thing we're trying to point out is that, we continue to get the company healthier, the balance sheet healthier. It is an option that we think should be on the table down the road. It's not something imminent at the moment though, Sarah.

Great. Thank you.

Thank you, Sarah.

We have a follow-up question from the line of Gabriel Moreen with Mizuho.

Hey, good morning, everyone. If I could just -- hey, just -- hello. again. I wanted to just ask a quick follow-up on the utilities outlook, specifically what you're assuming on O&M and any moderation there in 2024? And the second part of that is, I noticed that the CapEx outlook there over the next couple of years, maybe was tweaked slightly downwards along with rate-based growth. Just wondering what may be behind that?

Yes, I'll kick it off and I'll ask Bob to add some color as well. Yes, so as we've been talking about, we continue to prioritize capital in our natural gas businesses. And we're wanting to tighten it. In this higher inflation environment right now, we just see it as very prudent to keep our philosophy, keep investing a significant amount of capital in regulated utility and in our natural gas businesses. However, just being prudent and tightening a little bit. And that's what you're seeing. You're seeing us just being very modest on how we're tightening. We are ahead of schedule with our commitments to PUC, and that's our full intention, is to continue to be ahead of schedule with our pipeline and betterment process. We have the benefit of having been ahead of schedule in prior years, and that gives us this opportunity to -- in this high inflation environment to just be cautious and say hey let's right-size this for now, but keep to our game plan of being ahead of schedule for our programs. Bob, anything to add?

Sure. Good morning. Your question about OpEx, Gabe, the company has grown. The utility company has grown. We had anywhere between 13,000 and maybe 15,000 customers a year. So the company is growing. However, we continue to take a look across all four of our businesses at opportunities to become more efficient. So your question about OpEx creep, absolutely we're aware of that and we believe we've got a handle on that. And as far as capital, I'll just echo what Roger said. First and foremost, the agreement that we made with the Public Utility Commission a little over a decade ago, we're ahead of schedule on that. We're retiring non-contemporary material. System safety performance, things like leaks and leak occurrences are trending in the favorable direction. So we're comfortable. And again, as you pointed out, this is not a massive reset of capital, it's just a reallocation.

Understood. Thanks, Bob. Thanks, Roger.

Thank you, Gabe.

Our next question comes from the line of Michael Gaugler with Janney.

Good morning, Michael.

Good morning, everyone. I'd like to go back to the guidance range for a moment. So as I look across your presentation, we've got $14 million in new rates at Mountaineer, positive trends at AmeriGas. You're assuming normal weather across your businesses. I would think there would be some economic benefit from the RNG projects. And then you've got new assets of Midstream & Marketing. And you're taking costs out of the business. So I look at the guidance and where your midpoint is exactly what you did this year. So I'm wondering where the offset to all that good news is that would get you to the midpoint or lower of your guidance.

I can start, Michael. I mean, the slide that we have in there -- you highlighted all the good news and that is true. We do see some growth. We're blessed to have a diversified portfolio, so the utility is growing, services is growing. We see international growing slightly. But we do see -- it is a rebound year, recovery year for AmeriGas, so we do see volumes continuing to decline in AmeriGas. We do see some impact on our margins at AmeriGas, even on a 2023 to 2024 basis. So bottom line, we're seeing growth in three divisions and that's being predominantly offset as we continue to reset and get AmeriGas back on track.

All right, that's all I had gentlemen. Thank you.

Thank you, Mike.

That concludes today's question-and-answer session. I'd like to turn the call back to Roger Perreault for closing remarks.

Okay. Thank you Liz and thank you all for joining us today. We appreciate your continued interest in UGI. I wish you all a great weekend and Thanksgiving.

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