Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

UGI Corporation (NYSE:UGI)

International Propane Teach-In Conference Call

July 2, 2013 11:00 ET

Executives

John Walsh - President and Chief Executive Officer

Kirk Oliver - Chief Financial Officer

Simon Bowman - Investor Relations and Treasury Manager

Reinhard Schodlbauer - Chief Executive Officer, Flaga

Eric Naddeo - Chief Executive Officer, Antargaz

Neil Murphy - Chief Executive Officer, AvantiGas

Paul Ladner - Vice President, Marketing, Europe

Analysts

Carl Kirst - BMO Capital Markets

Nathan Judge - Atlantic Equities

Chris Sighinolfi - Jefferies & Company

Operator

Good morning, and welcome to the UGI Corporation International Propane Teach-In Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to John Walsh. Please go ahead.

John Walsh

Thank you, Chad and good morning everybody and thanks for joining us this morning for this discussion of our international propane business. It’s certainly one of the areas of our business that we have built over the last 10 to 15 years. We certainly have a high degree of interest among the analysts and our investor base in this business, so we wanted to take the opportunity today to share more detail about this business with you and also give you an opportunity to ask questions of myself and our team with regard to the business.

Before I begin, I just like to make a few statements about the presentation. As you can see, if you are looking at the slide pack, this presentation contains certain forward-looking statements that we believe to be reasonable as of today’s date. And we certainly encourage all of you to read our Annual Report on Form 10-K that we will provide you with a lot more information in detail on an extensive list of factors that could affect results.

In terms of our agenda, I’ll take you through a quick introduction. We’ll provide an overview of our international propane business, give you a financial perspective, myself and members of the team in Europe will talk about the growth opportunities we see in Europe; and finally, we’ll summarize and open it up for questions.

With me today are Kirk Oliver, who is our CFO and Simon Bowman, who is our IR and Treasury Manager. And with me today in Valley Forge and with me on the phone today is a group of our senior management team in Europe, Reinhard Schodlbauer, the CEO of Flaga; Eric Naddeo, CEO of Antargaz; Neil Murphy, our CEO of AvantiGas in the UK; and Paul Ladner, who is our VP, Marketing for Europe.

As all of you are aware, UGI Corp is a distributor market of energy products and services. We have four businesses. One of the great strengths of UGI is that base of four strong significant material businesses that provide the diversification that’s been so critical to our strong financial performance over time. And just as critically, these businesses share a lot in common. So, we feel we kind of have the best of both worlds. We have the financial benefits of diversification and we have the strength that comes from having businesses that share common DNA and common ground.

Obviously, today we are digging in on our international business. And within that business, we have a significant level of diversification when you look at the range of countries where we operate, languages, currency diversification, we operate using different brands. So, even within Europe, we have an interesting range of markets that we serve. We will get into a little bit more detail as we describe those differences. So, within the international propane business itself, we have a level of diversification that is noteworthy and has become more diversified over time.

Just a quick history, we have been active outside the U.S. for just coming on 15 years now. Slide eight provides you a sort of a summary level history. We entered Europe with our acquisition of Flaga in 1999, followed that with our acquisition of a minority position in Antargaz in 2001 and then purchased the remainder of Antargaz in 2004, which significantly changed our position in Europe since Antargaz is our largest business. So, that was the major step for us. Followed that in 2006 with a joint venture with PROGAS which took us into a number of new markets in Eastern Europe, and then over the last five years made some significant moves that further enhanced our position in Europe. We acquired our partner’s position in the joint venture in 2008, and then in 2010 and ‘12 followed up with acquisitions of businesses from both Shell and BP that took us into a number of new countries and strengthened our position. With those acquisitions, we are adding quality assets, quality people, enhancing our reach in Europe and have significantly strengthened our business in Europe as we have added those new businesses to our portfolio.

Slide 10 gives you an overview of our business in Europe for our three entities, Antargaz, Flaga, and AvantiGas. You can see - I won't go through the detail here, but you can see the countries that we serve with each of those brands, you can see the relative size of the markets in terms of our businesses just under 300 million gallons in France as an example, approximately 220 million gallons across the various countries served by Flaga and in the UK with AvantiGas approximately 60 million gallons in retail and another 80 million in wholesale. And you can see something that’s noteworthy in Europe that’s somewhat different, the number of competitors is certainly a lot more concentrated than we see in the U.S. and those of you that are familiar with AmeriGas are aware there is about 3,500 competitors in the U.S. In Europe, we tend to have more concentrated markets, very competitive still, but fewer and larger competitors in Europe.

One of the points we make consistently as we talk to investors and analysts is that these businesses, our business in the U.S. and our business in Europe share a lot in common. And again, it comes back to that common ground in DNA, common DNA that I referenced earlier. From an operational perspective and a commercial perspective, the business of propane distribution in Europe and the business of propane distribution in the U.S. are very much alike. And that shows on slide 11, if you look at the various elements as we describe the customer segments, as we describe what we need to do well to be successful. One significant difference between the U.S. and Europe is that autogas, which is the use of propane for over-the-road vehicles is quite significant in Europe, and that’s certainly true in markets such as Poland, which is a quite large autogas market and is not a significant market in the U.S. as yet although we are starting to see some penetration of certain segments in the U.S. with autogas.

From a competitive standpoint and the things you need to do well or the basis for effective operation, you can say U.S. and Europe very much the same. It’s about scale and efficiencies. It’s about logistics, safety management, levels of customer service, and also unit margin management, which we’ll come to later. So, critical point here is that there is a tremendous amount of common ground. We can share best practices from U.S. between the U.S. and Europe. And as we think about markets in Europe and opportunities in the U.S., basically we are looking at the same set of critical factors as we make our decisions around business performance, but also new investment.

One of the elements, interesting elements about our European business is the diversity in the cylinder segment in Europe versus the U.S. So, I thought at this point, I turn it over briefly to Paul Ladner, who is our VP of Marketing in Europe and just let Paul. Paul has experience in both the U.S. with AmeriGas and now working in Europe. So, I thought I’d let Paul comment on cylinder business in Europe versus cylinder business in the U.S.

Paul Ladner

Thanks, John. Yes, the cylinder exchange business is quite similar in Europe and the U.S. You will see the cylinders at the same type of points of sale in Europe as in the U.S., hardware stores, grocery stores, small stores in smaller villages. A couple of notable difference is that in the U.S., the cylinder exchange business tends to be for the leisure application for barbecue grills or patio heaters. In Europe, we certainly have the leisure applications, but there is the added benefit that we also have a domestic cooking application. So, customers in many countries, France, Poland, Czech Republic, and others will actually bring the cylinder in the house, put it in the cabinet, hook it up to a cook top, and do their domestic cooking with a cylinder. One other difference is that in the U.S. it’s just a propane cylinder, whereas in Europe, it can be propane, butane, or a mixture of the two.

John Walsh

Okay, thank you Paul. Next, we will talk about the financial performance at a summary level of the business and some of the key factors that drive financial performance. As I said, we have been in Europe for just coming on 15 years now, slide 14 provides just an overview of total margin generated in Europe from very early in that period 2002 you can see right through our forecast for 2013, and you can see the significant growth over time, you can see factors, major factors such as the full consolidation of Antargaz in 2005, which was a major step forward for us. You see some impacts in terms of weather in certain years, but that in more recent years you see the impact of our acquisitions most recently that we have added that I talked about in 2010 through 2012.

So, clearly, we have built over time a significant business for UGI Corp through acquisition and organic growth, and in particular, in recent years, we have added density in some critical markets and entered new markets. So, it’s been a nice balance for us of investments that have enhanced our return in an existing market by virtue of increased efficiency in driving cost down and opportunities to enter new adjacent markets that have attributes that are attractive for us, so a nice combination in terms of the nature of growth over the last two to three years.

One of the critical areas for us we will talk in more detail about it is our focus on unit margin management. Those of you that are familiar with us and have met with us know that when we talk about propane, our propane businesses, we spent a lot of time on our focus on unit margin management, because it is a critical sort of operational execution challenge for us that we put a lot of effort into and our track record is quite strong. And you can see just a comparison on slide 15 showing our unit margin history at Antargaz over the last 7 years or so and the same for AmeriGas and it’s been quite a challenging period. If you look at the blue bars there would show the underlying cost of the commodity and then the line, the green line for Antargaz, the red line for AmeriGas shows our unit margin performance. It hasn’t been the easiest set of factors to work within certain years when you are trying to maintain an upward trajectory of your unit margins and our goal in terms of unit margin is over time to grow them in line with inflation and we have been able to do that.

But you can see on that slide for both AmeriGas and for Antargaz, you can see how we have done as the commodity has fluctuated quite significantly. We have been able to maintain that upward trajectory. In some years, we get a little bit of added benefit if we see a rapid decline in product costs, particularly if it occurs in the winter, you can have an opportunity or you will experience some enhanced margins as that cost drops off rapidly. The offset to that is the real challenges when you have a significant run up in cost as you enter or as you are in the middle of winter, you’ve got to work very hard to keep unit margins on the trajectory that you are looking for and we have done a good job at doing that. And it’s one of the things that has evolved over the last decade. It used to be that pricing practices in Europe were quite different than practices in the U.S. And I think, particularly with the added enhanced volatility and commodity cost over the last decade, certainly we and everybody else was focused on the need to be timely in terms of changing, updating our prices and put a lot of effort out and the results have been good. And we will share a little bit more results in the few slides on some of the emerging markets and how we are doing there in terms of the discipline and the execution around unit margin management.

One of the key discussion areas for us and others is cost of propane and what is likely to happen moving forward with the cost of propane both in the U.S. and Europe. We are not in the habit or position to prognosticate about directionally where it’s headed. As you can see on the chart in the last few years been a significant run up, particularly in the winter months with prices in Europe, which is the upper collection of lines there and a divergence, increasing divergence with the U.S. And now in the last few months as we came through this winter and to the present, we have seen those various metrics there and prices coming together converging again to what we would say is a more natural historic relative positioning of costs in both the U.S. and Europe.

We are not sure where that’s going to go. We are showing you a future estimate that’s not ours, that’s just an industry estimate. There is certainly a lot happening. You’ve got all the shale gas development in the U.S. and other development around the world where we see increasing availability of both propane and butane in the U.S. and elsewhere, which is a good thing for us as a distributor. And in particular for Europe, as we see increased diversification of supply options for Europe, again we see that as a positive if we have more options in terms of our sourcing for Europe. That’s a good thing. So, we are optimistic. Certainly, we are pleased with the most recent trends in propane costs, reduce cost of the commodity kind of reduce the burden on our customers. And as a distributor reducing that burden while maintaining our own unit margin is exactly where we want to be. So, we would love to see propane costs continued to moderate.

We are ready to deal with any movement in cost as we have shown as we discussed in the prior slide, but continued moderation in cost due to more supply options and increased production of NGLs to shale gas processing would be a very positive development from our standpoint. Clearly, there is going to be – there have been investment and there is other proposed new investment in export facilities in the U.S. And again, I think on balance that’s quite a positive development for us, because we’d love to have U.S. exports be an option for Europe and supply diversity in Europe would be a positive thing.

I talked about unit margins before and slide 17 just gives you data points with regard to our unit margins in various markets. There is a lot of things that go into unit margin. You have differences as shown here in terms of the customer segments you serve. You see the markets on the sort of upper side, on the sort of middle and upper left are primarily serving the residential segment, both bulk and cylinder. And our businesses on the lower right are primarily serving commercial and wholesale segments, and that would account for certainly significant differences in unit margins. You also have different supply methods, cylinder versus bulk that will also affect your average unit margin, but you can see quite a broad range of unit margins. They tend to be higher in more developed markets, particularly where there is significant residential business. We are focused across our entire business on unit margin management as I referenced earlier. And in particular, the opportunity exist in emerging markets such as those shown on the sort of the bottom left there in the blue in emerging markets to focus heavily on unit margin management and channel management how we get to customers through distributors or direct to make sure we are being as effective as we can be in terms of delivery, improved unit margin.

And just to dig a little bit deeper on that, if we take a few of those emerging segments, excuse me, emerging markets, and just give you a snapshot of our track record, you can see as you segment the bulk and cylinder businesses in Poland, Hungary, Czech Republic, and Slovakia, you can see kind of the fruits of our labor. It’s a lot of execution, a lot o work, and just in terms of how we execute managing as the commodity moves. And also our channel management strategies, how we go to market, how we work with distributors and agents versus going direct. And essentially that’s an ongoing set of activities.

The good news is as you look at each of those markets and each of the sub-segments within the markets, you can see the progress that we are making. Essentially, we do this with every business. It’s particularly important in markets that are in a more developmental stage, because the disciplines and the operational sort of execution of the strategies are more critical there as you are trying to establish new practices and reinforce them with our teams as they work with customers. So, good progress there. We are certainly not done. We’ll continue to work on unit margin management in these markets and then basically every market that we serve.

I touched on diversification at the outset that’s critically important to us. If you look back historically, if you go back five years, the vast majority of our contribution in Europe as you can see on the left side there, the pie chart on the left was from France and Austria, but France was predominant. You can see roughly for FY ‘13, you can see the spread there as we are in more markets today. France is still a very significant market quite important. The pie is growing, which is critical. It’s a much larger pie going from just over €100 million in EBITDA to €170 million in FY ‘13, but we’ve got a diversification and also critically we have got some markets there and Poland probably being the most significant, which we’ll touch on a little bit later, where we’ve got good growth opportunities in terms of organic volume growth, but also opportunities to enhance unit margin applying some of the disciplines I referenced earlier.

And we do have room to grow. And you can see here just our position, which are the green bars relative to the total size of the market, just one caveat here. When we talk about total LPG market for each of these countries that’s shown on this slide, we are including autogas and wholesale volumes, which can be somewhat distorting. So, one of the things we will work on in the future is how to best present the volumes in a way that’s the most meaningful to you and to us. But the key point here is that we are in markets, where there is some significant opportunities for growth, and we’ll look to take advantage of those growth opportunities through acquisitions, through targeted growth efforts which we’ll touch on in a few minutes and focusing in particularly on the segments that are most attractive to us, which would be residential and commercial, bulk and cylinder.

And speaking of growth, what I would like to do now is let some of the members of the European team just briefly describe a few of the focus areas of growth for our businesses in Europe. And first, I am going to ask Eric Naddeo, who is CEO of Antargaz to talk about the work Eric’s team has been doing in establishing our natural gas marketing business in France and also looking at now entering a second market for natural gas marketing. So, Eric, turn it over to you.

Eric Naddeo

Thank you, John. Among those opportunities, there is the nat gas segment that we are currently developing in France. This development has been possible because of their regulation of this market in France, which started in 2000 and has been completely over in 2007 for all customers. This change was an opportunity for gas company at Antargaz to enter the market and to extend its activity. First of all, Antargaz has got the authorization of the government in July 2009 as a new natural gas supplier. And we started our commercial activity in 2010. The focus that we have decided to get is the most profitable segment of this market, which is the 700,000 small and medium C&I customer. This approach is similar approach to our U.S. strategy. And at the end of 2012, our portfolio was over 4 million decatherm in the contracts. So, we have yet from this segment we expect to get positive contribution in 2013 and expected annual EBITDA for this segment is from €2 million to €5 million for the next several years. With this feedback in France, we decided to start this activity in Belgium too, and we are now beginning the development of this new segment in Belgium.

John Walsh

Great. Okay, thank you Eric. And again it’s a good example of sort of common DNA, where we’ve got a history – a good history of natural gas marketing in the U.S. through our midstream marketing business saw the opportunity in particular to leverage Antargaz’s position, brand name, and awareness of customers and have successfully entered that market. Next growth initiative I’d like to touch on is our heating oil to LPG, our fuel oil to LPG conversion opportunities, and I’ll turn this one over to Paul Ladner.

Paul Ladner

John, since 2010 we’ve been converting heating oil users to LPG in Denmark, Norway, Sweden and Finland. Unlike what we do in UGI utilities where we’re converting mostly residential and small commercial users in these countries we are converting large commercial or industrial businesses from heating oil to LPG businesses such as steel mills or paper mills, asphalt producers and commercial bakeries. Customers will switch because there are economic reasons of course, but there is the added benefit of emitting CO2. And since 2010 we’ve – as the slide says we’ve added about 9000 new tons of LPG by converting heating oil users, that’s about 4.5 million gallons.

And as a result of this success, we’ve decided to expand the sales force, add a little bit to the marketing budget and we’re targeting 4000 new tons a year starting this year fiscal year ’13. We also expanded the program in Austria and Switzerland just recently in 2013 where the Alps the mountains create a natural barrier to natural gas expansion and as a result gives us an opportunity to pick up the heating oil users. And then we’re also considering exploring the conversion opportunities in other countries such as the UK where there is large heating oil usage.

John Walsh

Great okay thank you, Paul. I have mentioned a couple of times already the importance of Poland as a market and we also have a pending new investment in Poland that I’d like Reinhard Schodlbauer, our CEO Flaga to comment on.

Reinhard Schodlbauer

Thanks John. Poland is the third largest market in Europe is about 1 billion gallons of annual sold volume. Size wise, this territory you can compare to the three states in U.S. in New York, Pennsylvania and New Jersey about 40 million people are living there and what we see it was a very or still it’s a very substantial market, but two years ago market consolidation started and we still see that is ongoing and we also expect further consolidation in future.

We, at UGI, we have acquired Shell Gas Poland in fiscal year 2011 with the size of approximately 65 million gallons in all our product segments in bulk, in cylinder, autogas and also wholesale. Poland is the market, where we had significant organic growth potential as well as acquisition opportunities. From the growth, we see the Poland’s growth, the highest number of new pipe installations in Europe, mainly in the commercial and industrial sector which is providing us the best return on invested capital and improves our overall results. What we also see is that we are successful in the off-grid area, where there is no natural gas available that we can install pipe networks for small community or housing developments.

We have also a very recent acquisition opportunity. This is taking all of BP Poland (indiscernible) complex some months ago which will add 150 million gallons to our portfolio which contains of 30 million in bulk and cylinder business, residential as well as commercial business, and the remaining volume is then autogas and wholesale compared although together with our current business in Poland, we see significant synergies when we will plan to two companies together, mainly the synergies will be derived from operations and distribution expense reduction. The deal is expected to close December when we will get the final approval from the competition authorities to do this.

John Walsh

Great, okay, thanks Reinhard. And on an ongoing basis has been our history we will look for acquisition opportunities. Okay, I will look for acquisition opportunities, slide 25 provides a very simple metrics is we are not looking to be definitive here we are just sort of describing sort of the filter we use. Obviously, we look at stable markets with appealing characteristics and we list obviously the markets that we are in and other markets in Northern and – Northern Europe and Eastern Europe as being attractive and sort of the focus. There are some markets that are clearly out that we would not look at for the foreseeable future and then there are some other markets we would look at that are really opportunistic value driven not a target for us, but we wouldn’t ignore them and that they are adjacent to our existing markets and we would at least assess opportunities to push those boundaries if it made sense. But those have to be value driven opportunities and not in our target so to speak in Europe.

And we will pursue opportunities that will enhance our position in current markets. As I mentioned at the outset a number of the acquisitions we’ve made in the last few years have provided us with additional density in some critical markets which does a number of things for us. It certainly enables us to drive operational efficiency, deliver synergies and enhance our return on assets or return on capital employed in those markets. And the other half of that or the other potential is to as we push the boundaries of our business into markets that are attractive and have strong characteristics. UK is a great example of that. We entered the UK with the most recent acquisition from Shell in late 2011 and that’s been a really strong market for us and we are really pleased to be there. So, we will look for the opportunity to continue to build out the position in Europe. We are really pleased with our track record and over time and in particular last few years of being able to identify and select businesses that enabled us to enter new markets and enhance our performance by virtue of acquisitions.

So, we’ve taken you through a lot of information on our businesses. In summary, as you saw right at that outset we have about a 15 year history now in Europe. We believe we really understand what we need to do well to perform at a high level in Europe. We have built over time a strong leadership team in Europe. We are very capable and have a track record of being able to acquire and integrate businesses efficiently without loosing any momentum and we will look for opportunities to continue to do that. We will pursue both the organic growth opportunities that we described briefly to you as well as acquisition opportunities and look to drive operational efficiency, share best practice and enhance our financial performance through efficiency over time and strengthen our balance sheet and improve our return on capital employed. So, we got plenty on our plate. We believe we are well positioned as we look to the future in Europe and we are excited about the opportunities that we have as UGI to continue to develop that business.

With that I will turn it back over to Chad and we will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) [Danilo Juvane] [ph] you may ask your question with BMO.

Carl Kirst - BMO Capital Markets

Yeah, sorry, this is Carl Kirst. I appreciate the call guys. A few questions, the first is John you had gone through at the very end sort of showing the acquisition criteria and appealing and the less appealing countries and there was between the UK and the other countries there was the comment made of potentially many targets there. As we think about the nature of the targets changing now that you guys have acquired some assets from Shell, from BP I guess Total is still out there. Are the acquisition targets still coming from assets to shake loose from the majors or have they changed now to more sort of the independents and sort of the European mom and pop so to speak?

John Walsh

Sure. Thanks Carl, thanks for the question. In terms of the targets it certainly has evolved if you go back five years you had Shell and BP specifically with quite large businesses in Europe and elsewhere in the world and that certainly changed. I think what’s left is a combination, you still have some of the large integrated energy companies with you mentioned Total, Repsol as well that have pretty significant holdings still in the propane distribution business, so they remain. And you also have in addition to that relatively large focused entities, some of them private companies that are involved in propane distribution in Europe. And as their strategies evolve there could be opportunities there. And then you do have smaller, not so much like the U.S. but smaller country-specific pretty significant propane distributors in markets like Germany there are some larger independent distributors there as an example. So, it’s more of a mix bag now with some large companies, some significant regional companies and then some smaller or country-specific entities that would be potentially of interest to us if their strategies change and their positions evolve. So, we would look across a broader range now than perhaps four, five years ago where clearly the focus was on the majors as their strategies evolved and they look to exit propane distribution.

Carl Kirst - BMO Capital Markets

Okay, that’s helpful. Part of where I was wanting to go with the characterization was I didn’t know if either the changing nature of the size or perhaps maybe just the changing nature of the concentration if that would – if that is I should say altering the EBITDA multiples you need to pay as you continue to sort of assess an acquisition strategy do you see pressure on multiples going up or for that matter going down potentially?

John Walsh

Well, it’s always in the eye of the seller first of all. I think we – what we try to do in any investment we make as UGI is to be very practical when we think about value and what we bring to business and how it affects our valuation. And that certainly is true as we look in various markets in Europe, we will be disciplined with the multiples we pay because you are factoring in all of those elements as we think about the appropriate valuation for a business. So, my view would be – our view would be that we would not see a significant change in the multiples we are paying for businesses in Europe. It might vary from country to country based on differing outlooks for growth. Higher growth country might attract a higher multiple than a low growth country, but in general when we look to Europe now we don’t look at the multiples increasing. We’ve been really pleased with the quality of the investments that we’ve made and our ability to deliver the business case and we want that to continue, so we will stay very disciplined in terms of the way we think about valuation.

Carl Kirst - BMO Capital Markets

Great and if I can ask one last question and understanding this may have a hypothetical component to it since we are talking about taxes. But generally speaking and correct me if I’m wrong I have generally thought that all of the cash that’s been made in Europe has basically stayed overseas to kind of help with the reinvestment strategy. If the U.S. were to change tax laws to make it easier to repatriate dollars, do you see that having an impact at all on UGI’s strategy or quite frankly or the growth opportunities just sort of compelling enough that even without the tax friction and the idea of diversification you would still actually be wanting to keep that cash overseas regardless?

John Walsh

Our track record Carl is in that – it’s really not really dissimilar in Europe to our other businesses. The businesses generate cash all of them and they satisfy their organic need for capital, for maintenance, etcetera. And then dividend back the cash to the U.S., so we have over time certainly dividended back some significant cash from Europe to the U.S. More recently as you pointed out we’ve been investing, so we’ve redeployed the cash as – a lot of the cash generated in Europe has been redeployed with investments. So, we haven't really been driven by the sort of tax impact in terms of our business strategies. We have got periods where cash has been dividended consistently, because we weren’t investing in acquisitions and now more recently we found some really attractive acquisitions and put the cash to work. And obviously we have to look at any specific changes to tax laws, but I don’t think it’s going to have a significant impact on our fundamental strategies.

Carl Kirst - BMO Capital Markets

Great thanks for all the color and I appreciate the call.

John Walsh

Great. Thanks Carl.

Operator

Our next question comes from Nathan Judge with Atlantic Equities.

Nathan Judge - Atlantic Equities

Good morning.

John Walsh

Good morning.

Nathan Judge - Atlantic Equities

I just wanted to focus a little bit on Poland if we could. As you have shown in your slides obviously that the margins in Poland are going to be – are a lot smaller and thinner than other parts of Europe. And as you add in your acquisition, it looks to reduce the overall margin in Europe quite considerably. But you have also made the comments that there are some synergies and obviously scale you will probably have north of a 10% market share there in Poland, how does that all play out as you see it over the next 12 months or so?

John Walsh

Yes, thanks Nathan. The opportunity in Poland is significant, and it’s relatively complex and that we have got, you get different factors as I mentioned that affect unit margin. Certainly, in Poland, we’ve got a pretty significant autogas business, that’s a high volume commodity business, so that has relatively low unit margins and we’ll look to improve them, but that’s a lower margin business. And we’ll focus much more heavily on our residential and commercial margin opportunities there. And we think there's a variety of factors that we will focus on to ensure that we deliver enhanced unit margin performance. First and foremost is just the sort of operational – sort of execution side and focusing our teams on it and Reinhard and his teams in each country and certainly Poland that’s a daily activity looking at how we were performing in terms of unit margins and just that focus will enhance.

And certainly what we found with the acquisitions we’ve made over the last few years is because propane distribution is our primary business and unit margin management is one of the primary activities. We bring a level of intensity and focus to that effort that is beneficial to the performance of the business. So, we will benefit from that as we acquire, our new business in Poland will bring that discipline. It will have an impact. You mentioned the benefits of enhanced density and synergies and certainly that will help us in terms of our cost of distribution and we will look to see an enhancement there.

And lastly in a market like Poland and it’s certainly something we look at in every market. One of the keys is to delivering over time sort of an optimized unit margin performance is making sure your channels to market are the most effective. So, we serve customers direct. We serve customers through distributors who then serve that customer direct and we also can serve to agents who might just store the product for us. And we will look in detail at our customer base and segments of customers and look at certain geographies and make sure from our standpoint we’ve optimized, so that the unit margin we are achieving for a particular segment of customers is from our standpoint appropriate and that’s likely the result and some changes in terms of the way we go to market in a country like Poland which is evolving. So, there are sort of multiple fronts we are pursuing in terms of unit margin management.

And adding scale to it and bringing in a quality business like the BP Poland business will help us tremendously in Poland. So, we’d expect FY ’14 to be another – a very busy year in Poland obviously with this large integration, but another year of progress with enhancement on unit margin. And the nice thing about Poland is you’ve got quite a large market. So, all the work we are doing is in a market of scale so you just get that leverage of as you develop the disciplines and you execute you are doing it in quite a significant market so the benefits can be significant for us and well worthy effort.

Nathan Judge - Atlantic Equities

John, you’ve mentioned the word significant is it looking at the differential between Poland and let’s say France, Austria where you have been for a while? Is it possible they get the margins up to those levels?

John Walsh

Well, we don’t Nat, we don’t expect – we don’t provide specific guidance certainly on unit margin. We’ve got the same effort everywhere. We wanted to be moving north, so we want to move it in excess of inflation, but in the case of Poland obviously even more or so. If you look at slide 18 you see the progress that we’ve been making on both bulk and particularly cylinder where we saw a significant opportunity for a focused effort in terms of unit margin and where some of that channel strategy work comes in. So, we are going to work hard. There will be a differential I think that will remain for a long period of time. I wouldn’t speculate exactly where we are going to be in terms of unit margin at any point in time, but I can assure you that unit margin management in Poland in particular is a huge focus for us because the opportunity that we have is great.

And so Reinhard and Paul and their entire team and particularly the team in Poland will be looking hard at both segments, as I said cylinder in particular is an area that where we believe there is major opportunities through execution and effective channel management. So, we’ll – it will take a long, long time but we’ll continue to move it every year, I think the good thing about it is we just took the last three years on the one slide. You can see it’s every year you take a positive step is a good thing and it just puts you in a better position to execute the next year. And part of that is because your training people and you’re getting your people from an operational and commercial standpoint trained and educated and how best to execute the strategy. So each year we have under our belt particularly in these emerging markets is another year of more confidence, more capability and a broader base of people who are effective in terms of unit margin management. So, we are really pleased we had that track record that we show on that one slide.

Nathan Judge - Atlantic Equities

Thank you.

John Walsh

Thanks.

Nathan Judge - Atlantic Equities

Can I ask one more question?

John Walsh

Sure.

Nathan Judge - Atlantic Equities

Just as far as it relates to regulatory scrutiny of margins, if LPG prices were to fall as they have recently and your margins continue to rise is there any risk that regulators in let’s say France or and maybe some of your higher markets – margin markets they begin to look at the margins?

John Walsh

Well, in terms of regulators, the good news and then the challenge in propane distribution is that there are lots of competitors, the barriers to entry are low, customers have choice and obviously regulators given their responsibilities can look at anything, but this is the business that even in Europe where we say that it’s more concentrated customers still have significant choice. So, we don’t see that as an issue, I mean from our standpoint we need to be competitive. It’s – we love it when our cost moderate because we are concerned about pressure on customer and affordability of energy. But in the end customers do have choice which I think from a regulatory standpoint is critical, they have a lot of choice.

Nathan Judge - Atlantic Equities

Thank you.

John Walsh

Thanks.

Operator

Our next question comes from Chris Sighinolfi with Jefferies.

Chris Sighinolfi - Jefferies & Company

Hey, good morning John.

John Walsh

Hi Chris. How are you?

Chris Sighinolfi - Jefferies & Company

I’m great. Thanks for the time this morning.

John Walsh

Sure.

Chris Sighinolfi - Jefferies & Company

I wanted to ask a couple of questions. I think first just wanted to go back of what Carl was asking in terms of future growth in new markets. And you’ve noted Germany as a potential new market obviously on slide number nine it looks like that’s sort of the connecting link geographically in the footprint. And with all the activity that you’ve undertaken on the continent in the last decade just curious why there haven’t – why there hasn’t been any activity in Germany if there is barriers in that market that don’t exist elsewhere or if value has been unattractive, frankly I am just going to play the ignorance out, I don’t know anything about the German market. But if you could just speak to that it seems like that could be a big opportunity and obviously as you talked about closing down footprints and sort of tightening things up the synergies that are possible, so just curious on the German market?

John Walsh

Sure, yeah, we do have its rounded as you can see on the map. So, we are ready, but now, I think over the last few years we haven’t specifically avoided an investment in Germany, where we are looking at investments on a continuing basis and it’s like all of our investments you are looking for the right balance of a strategic opportunity that makes sense for UGI coupled with a valuation that also makes sense. And we always try to make sure we are striking that balance and we’ll continue to so. And we’ll look obviously as we have noted Germany does make sense for us and we’ll continue to look for an opportunity for us that fits and hits on both fronts, both strategic fit as well as the compelling financial case, but clearly Germany would fit really well just in terms of geography. Also in terms of supply and logistics in Europe, it would be a nice adder. Having said that, we will only do if it makes sense for us financially, so that’s – we’ll just continue to try to most effectively strike that critical balance of discipline around valuation and dedication to finding new opportunities.

Chris Sighinolfi - Jefferies & Company

Okay, alright thanks. I guess we will just stay tuned on that front. Switching gears a little bit John, in terms of growth maybe limitations in some of these markets, I mean, obviously you’ve spent some time today talking about lots of room to run in various markets within this European footprint. I am just curious given the competitive nature of the marketplace in Europe, what maybe are the limitations in any one particular market to growth? Is there a market concentration issue, I know obviously it’s taking a long time with this most recent Polish acquisition to close obviously not asking directly in relation to that deal, but sort of considering that? What are some of the challenges going forward as you scale up in particular markets? Is competition viewed country-by-country or is it sort of taken more of a holistic approach regionally how big a player you become?

John Walsh

I am not an expert on sort of European competition framework, but basically certainly you have oversight on a country level and you have an oversight at a European level, so that we certainly are aware that you factored that in as you think about investments. But frankly as we look across Europe and we have solid positions in a number of markets, but there are very few markets, where we don’t have room for more growth. I think for us I mentioned a balance in terms of strategic intent to grow the business and invest and the financial discipline to make sure the investment is sensible and we can deliver the business case.

The other critical thing for us that I just touched on for a second earlier is that one of the things we have really focused on and the team in Europe has done a very good job on for the last few years has been building our organizational capabilities in Europe. We are a much larger business today than we were five years ago. We have added a lot of talent to the organization in terms of the people that have come from through the acquisitions who have added strength to our business. And frankly at times in our history that was a limitation in terms of our ability to grow, and we now have a much stronger leadership team in place and have added a lot of talented people and broadened our team. So, we are in a good position in terms of our capacity and we have now had across all of our businesses significant experience in integrating acquisitions, which is a talent and a discipline in and of itself, unto itself, which is important for us. So, I think we are well positioned and then again it comes back to that critical balance of wanting to investments that fit in terms of our strategic direction in Europe. In balancing that with making sure that we are making solid financial investments.

But the last point I make is and Eric touched on it brief when we talked about nat gas marketing and it’s relevant in terms of our organizational strength. We have the ability certainly to leverage our organization and stretch in brand in the markets we are already serving in Europe by adding capabilities like natural gas marketing and we are doing it in France as Eric pointed out we are launching – have launched in Belgium. And we’ll look at those opportunities, which are sort of organic, but actually entering a new segment using your existing organization and some of your infrastructure from a back office standpoint, and we will look at making progress there, and those tend to be not capital intensive, at least that business not a capital intensive, there is some balance sheet impact, but not capital investment that goes into it beyond working capital.

So, that’s an interesting area for us, where we can branch out in an area that we understand very well. And as Eric pointed out, our natural gas marketing strategy in Europe is specific to Europe, but it also parallels and shares many of the same characteristics as our midstream and marketing business in the U.S. focused on commercial accounts, midsize commercial accounts for the same reason we chose to focus on that in the U.S. It’s an attractive segment. So, we have a range of growth opportunities. I feel really good about the strength of the organization that we have to work together to make good decisions about investment of capital, and for UGI, that’s fundamental, our ability to effectively generate cash and then effectively allocate capital is really sort of the key for us. And now in Europe, we have got a great team to work with as we look across the range of opportunities that we see.

Chris Sighinolfi - Jefferies & Company

Okay, okay great. Thanks John. One final question from me, you spent some time this morning talking about the opportunity for U.S. product supply growth to find its way into the European consumption market, just curious as we talk about seaborne product sourcing. There was some earlier commentary about interchangeability between propane and butane certainly within the cylinder side of the business. I was just curious given the precipitous decline recently in U.S. butane pricing, you know what that might mean for consumers in Europe, what that might mean for margins of the business? Is there an opportunity among your consumer base to switch between those two commodity products or if you are sort of very much burning or have burned propane historically are you tied to that fuel and that fuel oil?

John Walsh

Yes, clearly, there are some limitations. Maybe, I will let Paul comment on. There are specific product specifications that need to be satisfied that in some cases would be impossible to change other would be difficult to change, so that does provide some limitations. And maybe Paul you could comment on your view in terms of product interchangeability?

Paul Ladner

Yes, John, I’d agree with what you said. In Europe, we often use a mixture product and that mixture can change. It can go from 30% propane, 70% butane to the opposite. So, there are some equipment limitations, but at the same time, there would be the ability to change products without too much difficulty.

John Walsh

Yes. And certainly, there has been a lot of discussion and there is obviously some major investments taking place and planned in terms of export facilities, capabilities from the U.S. As a company with significant sort of distribution and demand in both the U.S. and Europe, when we look at that – when I look at that, I see that as a positive development. I think and also as a significant natural gas distributor in the Northeast Mid-Atlantic U.S., the demand for natural gas is extremely strong in sort of the core segments and also with all the work going on in power generation and conversions. As natural gas demand ramps up even more dramatically, I think the liquids coming off of that processing are today quite significant and are going to even get more significant. So, we feel good about propane and butane availability in the U.S. to satisfy the needs in the U.S. and with additional sources coming to market that are available for Europe.

So, that supply diversity and supply enhancement is from a distributor standpoint quite attractive and we think positive. We don’t speculate, we wouldn’t try to estimate where costs are going to be in six months or a year, but when we look at it at a high level, it seems positive. It seems there is a lot of supply coming to market. And as a distributor that’s a good thing. The best thing for our customers and for us as their supplier would be lower costs which takes the burden off our customers and encourages them to use propane or butane and that will be a great thing. And what we have seen so far has been certainly beneficial and well received by our customers in terms of the fallback. And we wouldn’t say the dramatic drop in costs, and it’s sort of returning to what we would consider more normalized values for propane and butane, but we are a little biased as a distributor.

Chris Sighinolfi - Jefferies & Company

I understood. Alright, well thanks again for the time today.

John Walsh

Sure.

Chris Sighinolfi - Jefferies & Company

I will be barbecuing for the fourth. So, I will be doing much hard.

John Walsh

We appreciate that. Alright.

Operator

At this time, there appears to be no further questions. So, I would like to turn the call back over to management for any closing remarks.

John Walsh

Okay, well thank you very much. Thank you all for spending this hour with us. We appreciate the opportunity to give you a little bit more insight and detail on our European businesses, and we look forward to continuing to share information with you about this critical segment of UGI’s overall business. Thanks again and have a great fourth. Take care.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: UGI's CEO Hosts International Propane Teach-In Conference (Transcript)
This Transcript
All Transcripts