eEnergy Group Plc (A1Z1.F) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the eEnergy Group plc Interim Results Investor Presentation. [Operator Instructions] The company may not be in a position to answer every question it received during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. These will be available via your Investor Meet company dashboard. And we will notify you by e-mail when these are ready for your review. Before we begin, I would like to submit the following poll. And if you give that your kind attention, I'm sure the company will be most grateful. And I'd now like to hand you over to CEO, Harvey Sinclair. Good morning to you, sir.

Good morning, and welcome, everyone, to our interim results. It's been a very successful 6 months and just to recap for those who are new to the, I guess, positioning and strategy of eEnergy, we're a leading digital energy services company, empowering our customers and organizations to achieve net zero. So our vision is to help organizations make achieving net zero possible, but also profitable without the need for upfront capital investment. We're in a very large addressable market, where there are strong headwinds driving, I guess, the U.K. and European commercial community and public sector community to net zero. There are increasing legislation, which is helping our business model achieve traction, and we don't believe we have any direct integrated competitors doing what we do in the way we do it in the U.K. We're pleased to announce, we've seen a 42% year-on-year revenue growth in the first half and a 200% plus increase in our contracted forward revenues. We've successfully completed 4 acquisitions since IPO, and we believe we've got a very stable and scalable platform for integration and growth going forward. So just to give you a recap on those highlights. Strong year-on-year growth. The Energy Management businesses are outperforming our expectations. And despite the integration period, we've seen no disruption in our organic growth there. The pipeline in Energy Efficiency has increased by 100% year-on-year and despite being slightly down in H1 in Energy Efficiency, we've seen the strongest demand in, I guess, in our customer base for net zero solutions. And we believe now that we've got a pipeline of investment-grade proposals, which are at a record level to enable us to deliver our H2 number. 44% of our top 50 strategic accounts that we've acquired through both Beond and Utility Team are now engaged with the eEnergy offer to be able to deliver a net zero solution. We're seeing explosive growth in our renewables business. We launched eSolar back in December and completed our first integrated on-site generation and LED solution to a commercial industrial customer, and since January, we've developed over a GBP 10 million investment-grade pipeline of qualified opportunities with existing customers for solar solutions funded. Likewise, you may have recall seeing the announcement of our increased investment in outsmart metering platform. So having launched MY ZeERO as the rebranded old Measure My Energy business. We've now got a really unique proposition in the market around providing our customers with visibility around energy wastage and a performance measurement platform on energy efficiency measures. We've seen an accelerated adoption of that platform, which has been launched as a subscription model, and I'll talk you through that shortly. The qualified cross-sell opportunities has been really encouraging, and those 44% of our top 50 customers have generated a GBP 10 million pipeline for net zero solutions as a service, whether that's whether it's energy efficiency through lighting and other optimization measures, smart metering or whether it's renewables and in most cases, a combination of all 3. We're seeing increased engagement from our customers in the backdrop of what is a very volatile high energy price market. Obviously, we've been very busy with our acquisitions. I think the last 6 months has been about creating a stable platform. We've consolidated our offices into 2 hubs. So we have an operational hub in Coventry, which is now, I guess, picking up all of our back office customer services, technical solutions functions across the group. And as a hub for all operations across the different divisions. And then we have centralized all of our other businesses into a new office by London Bridge. So that has helped stabilize the management team, has been able to optimize performance across the teams. And again, a really great platform from which to grow the business. And then finally, we're delighted to have Silicon Valley Bank on board as our new banking partner, and we think it's a fantastic name and an endorsement of our technology strategy and believe we've now got a partner there that can really help us scale through our different financing needs. So it's worth just taking a moment to talk about the current energy market because I'm sure most investors will be asking what are the risks and opportunities. And I guess there's 2 parts to this answer. The first is, clearly, we've now got a very volatile energy market as a result of the sort of geopolitical situation happening in Eastern Europe. I guess, on the downside, what is that doing? That is creating a more difficult pricing situation for our Energy Management business where despite having strong customer engagement for customer supply contracts, the supply market has been temporarily disrupted, but we are seeing that stabilize now, albeit at a higher level, the markets are back open, and we are starting to lock in our customer supply contracts. We don't believe that it's a mid- or long-term risk to the business. And in fact, what we are seeing is that because of the consultancy, risk managed nature of our Energy Management business, there's been a flight to quality of advice from our customers looking for us to help navigate what is a very difficult time for customers who are coming out of a 3-year fixed contract, let's say, GBP 14 per kilowatt and are now facing into a GBP 28 per kilowatt forward price. So we're seeing often situations where public sector customers seeing their annual energy bill go from GBP 2 million to GBP 4 million or more. And clearly, that is a big shock. However, from an opportunity perspective, is playing directly into the hand to our net zero as a service offer to customers. It is no longer now an option for customers to think about their energy supply as a pure procurement exercise, and it is now all about consumption. How can our customers reduce their energy demand and how can they address their energy wastage, we'll come to an interesting stat in a minute, which confirms that 1/3 of all energy consumed by commercial and public sector customers is wasted energy. So there is now an increased focus of our customers to think about reducing energy wastage and looking at reducing their demand and how can they start generating their own off-grid on-site power through their own renewable solutions. We've really focused our strategy now into 4 pillars of service. So ultimately, our goal is to make getting to net zero both possible and profitable for our customers. So what that means is where you've got customers who haven't got the availability of capital or access to capital, they're able to utilize our solution to get them to net zero and unlock operating savings. So our 4 services can be described quite clearly. The first is to transition our customers to the lowest cost clean energy, and we're doing that through our digital procurement platform that is now running across the group that was a proprietary platform that we acquired through Beond. And what that's helping us do is to be seen as agnostic in the pricing market, but focusing on the digital management services around how our customers can then navigate to the other 3 pillars of our service, which are tackling energy wastage. So with granular data and insight, our customers are able to see where, in their buildings, they're consuming their energy and therefore, how they're able to address operationally measures to address their wastage or by employing energy efficiency measures, and therefore, lock into performance measurement and verification. So that is our cloud-based smart metering platform with MY ZeERO. And services 1 and 2 are often packaged together through our Energy Management division as part of the solution for our customers when they are entering into an engagement with clean energy procurement contract. The third pillar is all around how do we reduce energy consumption. And that is about our ability to deploy energy efficiency solutions, whether that's lighting or other technologies such as HVAC optimization or building controls wrapped up into a solution without upfront cost that delivers day 1 savings whereby the customer is using the energy savings to pay for their monthly energy service cost and therefore, releasing surplus cash for the business. And then finally, our new pillar, which is actually the fastest growing area from a new business perspective is how can we deliver on-site generation to our customers, delivered as a service without upfront cost and at the same time, discuss and help navigate and deploy an EV charging solution. This is a customer case study graph that I've referred to in the past it is actually an indicative case study of a particular customer. We have now deployed 70% of these solutions for this customer. And you can see on the right-hand side, potential value of this customer over a 10-year journey for eEnergy is now very significant. And just to remind everybody, the steps that we deploy are again: one, transitioning this customer from brown energy to clean renewable energy sources and embedding effectively our Energy Management services around that solution. Deploying energy data and insights through the MY ZeERO platform, so we can pinpoint the energy wastage and identify energy-saving opportunities and then deploying funded energy efficiency and energy reduction solutions through the as-a-service business model to unlock savings from lighting, controls, heating and other optimization technologies. So this customer is fully engaged on this journey to net zero. They're part of a private equity portfolio and the private equity fund itself is actually using this as a case study for the other portfolio businesses from which we can then hopefully on the back of a successful case study to deploy similar solutions for all of their other clients. I think it's worth just spending a couple of minutes on the MY ZeERO platform. This is a really unique opportunity for eEnergy to create strong recurring revenues through a subscription model. And we believe that is an area of huge value creation. As I've mentioned, 30% plus of energy consumed by commercial businesses are wasted. The different here is enabling our customers to be able to see granular energy data within their buildings from which they can be empowered to either change the behavior of how they're managing their building. So in simple terms, using that information to help drive behavioral changes that require no capital costs, such as their facilities team managing those buildings better through actually just being smart turning things down, turning things off, and actually being more intelligent around where they manage buildings; or two, enabling actually technologies to deliver insights and energy reduction solutions. So it's a really important bridge between our traditional Energy Management business, which is all around clean energy procurement through our platform, consulting risk management and advice around their complex energy needs and actually providing deep intelligence through a simple dashboard that enables them to be empowered around reporting for compliance reasons, Scope 3 emissions reporting and making energy efficiency measures accountable on performance contracts, which is, again, an enabler for increasing conversion on those projects for eEnergy. So since launching, we've had a really, really strong uptake. We've already locked in GBP 400,000 worth of contracted revenues within literally a 12-week period. We've deployed 400 meters under contract, and we generated from existing customers a GBP 1.8 million pipeline. And you'll see that our 5-year goal here shortly which I'll talk you through, is to be able to deliver 25,000 of these meters over the next 5 years. So our goal really is to use this as an enabling bridge between all of our customers journey or the eEnergy, whether it's from Energy Management, Energy Efficiency or energy on-site generation, this is the bridge between all our services. I'll hand you over to Rick now to talk you through the numbers, and then I'll come back and start talking through some of the growth drivers we're seeing and the outlook for H2 as we move forward.

Thanks, Harvey. Let me start by talking about performance at a group level, and then I'll talk a little bit about the performance in each of the divisions. So we've posted year-on-year revenue increases of 42% to GBP 9.6 million. That is coming from the Energy Management division, and I'll walk through the revenue bridge in a moment. But that increase in revenue and the increase in operating profitability is translating through into our improvement and more than doubling of our adjusted EBITDA, which is our primary profit measure and also the doubling of our profit before tax and exceptional items. I think the -- if I stand back from the revenue for a moment, I think we put a lot of stove by the value of our contracted future revenues. And those are the revenues on the Energy Management and Energy Efficiency side, where we are contracted and they will be delivered over a period of time. The Energy Efficiency revenues are typically delivered within a much shorter window. So within the year, and indeed within 6 months. And on the Energy Management side, which is about 90% of that contracted future revenue that is over a 3- to 4-year period typically. So at GBP 5.3 million of that GBP 18.3 million will be recognized in revenue during the second half of FY '22, and over GBP 6 million is already locked in for the -- over GBP 6 million is already locked in for '23. One feature that we have seen, which is being accentuated by the crisis in the -- or the energy market crisis, has been an impact on the working capital. I think we've talked previously about the model where suppliers -- energy suppliers have paid a proportion of the commissions that are payable to us upfront. Actually, the volatility and the energy crisis over the past -- particularly over the past 6 to 9 months has seen a shift with the suppliers favoring payments in arrears rather than payments in advance. And that has had a bearing on our working capital cycle. Actually, it has no impact on the overall cash that we collect over the life of those supply contracts. But that if you like that -- managing that working capital cycle is what's led to as reporting a net debt at the end of December rather than net cash that we had at the end of June. And I think in terms of Harvey has already talked about as replacing our debt with a more flexible revolving credit facility. One of the benefits of that is to support us through that working capital cycle. So I'm confident in terms of the cash flow that we're generating going forward. If I talk to the individual divisions briefly, the Energy Management revenue has increased from GBP 0.2 million to GBP 4.8 million. We had acquired Beond in the middle of December 2020. So in essence, we had 2 weeks of activity within the group. So that accounts for that increase in the revenue period on period. But what I'm particularly pleased about is the improvement in the EBITDA margin. Harvey has talked about the integration that we've undertaken, and that has been driving the underlying profitability. And that comes from a combination of increasing the revenue per meter and having longer-term contracts where we've seen the contract length increased from an average of 28 months to 30 months. And that has that drives that near doubling of the EBITDA margin in the Energy Management business. Now in the Energy Efficiency business, the revenues that we've reported for this first half of our fiscal year are stable compared to the second half of the last fiscal year, but are down on the comparable period for FY '21, which was a period where we had a catch-up of projects that had been deferred from the first COVID lockdown into the summer of 2020 and so moved into H1 '21. That business, that is stable in terms of the reported revenues. And what we have seen is this enormous ramp-up of lead generation and proposal activity during the first half of 2022. So we've issued proposals with the value of in the 6 months, which is greater than the value of the proposals that we issued in the whole of FY '21. I'm also pleased that we've been able to continue the trend of improving our gross margin that is up 440 basis points. That is a key measure in terms of the profit that we are making on each of the contracts that we installed. So I'm very pleased that we can report that progression. I'll talk briefly to the revenue bridge because I think I've talked about most of the features here, but this is really just to graphically set out where the growth is coming from. So you can see what I talked about in terms of the revenues from Energy Efficiency, but also bringing in Beond and Utility Team into the group. And it's very important to say that both of those businesses are performing ahead of the expectations that we had of them when we acquired them initially. And if I then walk you through the bridge for the adjusted EBITDA. Clearly, a lot of the gain on the adjusted EBITDA comes from bringing the Energy Management businesses on stream. So Energy Management at profit has increased from GBP 25,000 to GBP 1.4 million. And as I say, both Beond and Utility Team have performed ahead of our expectations for the first half of this year. MY ZeERO, as Harvey has described, is in that startup phase, we are seeing an accelerated rate of deployment, but it is not yet through the breakeven point. So we have a net investment or a net operating expense from that startup of GBP 149,000. And then you can see the effect of the period-on-period revenue reduction, which is to reduce the adjusted EBITDA and Energy Efficiency by GBP 0.6 million. But actually, the value of the improved gross margin close to GBP 0.2 million of that back for us. And then because of the scale of the opportunity that we are seeing and because of the importance of engaging with the marketplace through face-to-face events and marketing, we have invested more in our sales and marketing and operational delivery capability. So that is accounted for GBP 0.6 million of further investment. And that is what takes us from the GBP 372,000 that we reported in the like-for-like period last year to the GBP 807,000 that we report this year. I just wanted to, on the next slide, sort of just set out on a half year by half year period, the progression that you can see in terms of the revenue and the adjusted EBITDA, I think, yes, this is a combination of the strong organic growth that we've shown over time, but also the impact of the strategic acquisitions. But I think the trends that you can see on this chart are very clear in terms of the direction of travel. And so I just wanted to talk to the -- if you like, to the outlook for the full year. There are a number of circumstances and the factors that we've talked about that are outside of our control. So we do have dependencies on those external factors. But in terms of -- in terms of the positioning, for each of the principal operating divisions, so for Energy Management and Energy Efficiency. Actually, where we are gives us as a board confidence in our ability to hit the expectations of the market for 2022. So I think in particular, we've got -- there's a simple mathematical piece, which will have 6 months of Utility Team rather than 3. We have of that contracted future revenue, GBP 4 million of that is on the Energy Management side, and that will be recognized in this half year. And we are expecting and we are seeing maintenance of the renewal rates of contracts at the historical rates. And we have about GBP 6 million worth of Energy Management contracts, and we typically renew north of 80% across the board. And so that gives us confidence together with the fact that our new business pipeline regard the, as Harvey talked about, the impact of high energy prices and the crisis actually means there is a greater need in the marketplace for our consulting and risk management skills, but our new business pipeline is at record levels. On the Energy Efficiency side, I've talked already about the absolute increase in the level of proposals that we have issued, and we are seeing those converting at the historical rates of between 30% and 40%. So that is a big underpin for our expectations for the second half. And in particular, what we are seeing is the -- we have specific proposals, GBP 17 million worth of specific proposals out with existing clients and what we see with existing clients who are looking for a broader range of services is a much quicker decision-making process than if you're starting from scratch with the client. And I think as Harvey has talked about, the whole renewables, the solar, the on-site generation is an area of particular focus and particular opportunity driven by current energy prices. And so together, these are the factors that give us confidence that on balance, we are going to hit our expected results for FY '22. So as I stand back and look at the business and before Harvey talks to the 5-year goals, what I see is we've got a business here with strong annual recurring revenues, and we're well placed to be a participant in high-growth markets. We've got a very strong and very clear forward view of our contracted future revenues and that is increasing. We've got very strong renewal rates and customer stickiness. So over 80% across the Energy Management business. And then the length of the relationships that we've got on average are over 6 years. So we're seeing that repeating renewal. And I guess, possibly most importantly, in terms of the business, where we are with the proposal activity and the engagement with the market, we've seen that doubling of the pipeline over the past year. Harvey, do you want to talk to the 5-year goals.

Yes, sure. Thanks, Rick. So look, where we are moving this business is to create stable recurring or reoccurring revenue streams. And if I look at where the big drivers of growth will come from. We see that principally in the renewable space, in the energy wastage around the MY ZeERO space and also in our move into EV charging and charging as a service. So our goals are to have deployed and have between 20,000 and 25,000 meters under management. So on an average, subscription rate of GBP 20 a month, we could see ourselves aiming for a GBP 5 million annual recurring revenue stream over a 5 year. So we look out towards 5 years. That is our goal. With EV charging, we're looking to be in a position where we've established a charge point operating network of over 10,000 meters. And we see that coming from existing customers. So one of our goals is to be the education sector's leader and main operator of charge points. We think the opportunity to create ownership in that niche is phenomenal, and we are well placed with our customers having established our brand in that sector as well as our other public sector sort of if you like divisions. Solar is a phenomenal opportunity for the group, and we expect to have 50 megawatts installed over the next 5 years, and we think that's a very achievable goal. And I guess when we look at the metrics, we're looking to sustain at 20% organic CAGR, and we're looking to achieve a stabilized EBITDA margin of 25% for the group revenues. I think when I look at the growth drivers for each of our divisions, they're really, really clear. So in the Energy Management procurement in the procure space, the demand for zero carbon energy is clear and has never been more relevant. And I think our position in that market as having a zero carbon marketplace for customers to get the lowest cost, puts us in a really, really good position there. And the ability to then blend in the data and insights piece over time, gives us the opportunity to scale that customer base and the revenue per meter that we're getting from that customer base. Then in the measure side, which is really all around energy wastage, which is being driven by both Energy Management customers, but also from our Energy Efficiency customers, I think, it's all around being able to leverage our customer base and be able to offer them additional differentiated services, and we think this is going to see exponential growth. On the reduction side, we talked about the market that we are now seeing. We are in a sort of almost certain decade of high energy prices. So regardless of even the best -- even with the best outcomes of what's happening on the geopolitical landscape, energy prices are set to be high -- higher than previously. And therefore, I think our customers have started to accept the fact that it's all around reducing consumption and being able to optimize their buildings. And then the growth drivers for solar our are pretty simple to explain. It's 50% cheaper to generate your own energy than it is to buy from the grid now. And we think that's also a great segue into being able to tie up solar with EV charging, again, leveraging our 2,000-plus customer base. I think it's worth just reflecting on the expertise and the track record that our team have had around delivering integration. And I think when you start looking at what we've been able to achieve in our business, in particular in the Beond business, that we've seen a 27% increase in contract duration, 37% increase in revenue per meter, contracted for revenues are up, and we've got a very, very attractive implied valuation multiple for our acquisitions to date. So really pleased that we've created a platform for scale. We've got a unified management team and we've got a really strong tailwind of opportunities being driven by a number of different factors. Things worth just touching on our position and our sort of strategy and criteria for future acquisitions. I think it's fair to say that our focus will be on renewables. We've demonstrated organic traction in this market, and we think there are some really interesting opportunities. What we're looking for future acquisition opportunities are high-growth businesses with very strong and aligned leadership. We're looking for companies that are led by strong entrepreneurs who are motivated to stay with the business and motivated to be [ read ] and aligned to our own motivations. And I think we're looking at attractive valuation metrics where we can see locked in to key management and where we're definitely going to see cash-generative earnings accretive metrics coming out of those businesses. On deal structures, we're clearly looking to find structures, which maximize our shareholder return, whether that's using share considerations or borrowings and cash reserve considerations versus coming back to the market. So we're definitely keen on leveraging earn-outs to ensure that we've got locked in performance, and we don't want to leverage more than 2x EBITDA. So hopefully, that is panting out sort of the picture of our focus in the coming months. So just in conclusion, we believe we've had a really strong 6 months on a number of fronts, really strong pipeline, strong engagement with our additional services, a definite move towards digitization of our solutions. I think, starting to play to our strengths around the experience and expertise that we have around the energy markets. I think the ability to acquire and integrate has now been proven. And I think that we're looking at some really interesting opportunities in what is sort of a still quite a highly fragmented market. So that concludes our presentation today. Thank you for your time.

[Operator Instructions] I will shortly invite you to address those where it's appropriate to do so. But if I may, I wanted to start off the Q&A session with this pre-submitted question that came in before today's event. The question reads as follows: "Could you please give us a sense of how inflation is impacting revenue and costs?"

Yes, Jake, thanks very much. In terms of what we're seeing from -- there are clearly inflationary pressures around technology and around inflation. But actually, the inflation in energy prices is far greater than the inflation in those inputs. And therefore, particularly on the Energy Efficiency side, we are able to pass those additional costs through to our clients because the savings that they are realizing from reducing their consumption are getting greater all the time. Yes, I have a specific example, which was a single stand-alone school where we had done the survey and priced the energy just before Christmas. And actually, for this single school, they would have saved GBP 2,500 a year. We got the benefits of the improved lighting, the improved environment, reduced their carbon and saved GBP 2,500 a year. which would then increase with normal price inflation. We are now in the process of installing that and their energy. They've had the increased energy prices through because we are a fixed cost, their savings are now GBP 18,000 a year, which is a significant increase in the savings. And so there is inflationary pressure, but actually, we are able to pass that through because the -- as I say, the cost of energy is increasing at a much greater rate than the cost of our inputs.

Harvey, Rick, if I could just ask you to run through that Q&A tab, then answer any questions where it's appropriate to do so, and then I'll pick up from you at the end.

Okay. I'll tackle a few of the sort of the nonfinancial ones. And then I think the majority are for Rick to answer. So I think there is an interesting question here around, how are we going to fund the on-site generation solar opportunities. So we've started working with a joint venture partner who is an end-to-end solutions provider. So we have 2 clear funding routes for the solar projects. One is PPA contracts, our power purchase agreement, which allows us to essentially take advantage of the revenue upfront when that project has been secured and we've sold that to fund, and we've got a number of funds that are providing us with a PPA solution. The second is through our existing funding arrangements with our panel of funders, which enables us to offer our customers whether it to be a 10-year operating lease, which is a really attractive solution for the education sector who often don't want to sign up for a 25-year terms, which is the case for the PPA agreement. So we've got a really interesting opportunity there and both of which allow us to recognize the revenue upfront. So I think the answer really is, at this stage, we do not envisage taking those solutions on balance sheet. We're looking to, again, have that capital like high-margin type approach, which allows us to recognize revenues. There was a question around the average size of energy efficiency projects being lower. It's a confusing stat actually because the reality is we've engaged with fewer customers with larger portfolios, which just happened to have, overall, quite a large spread of smaller schools within their portfolios. So if we looked at the -- if you like, the average revenue for a customer, which show a different picture than the average revenue for a project. So case in point, we're seeing sort of, if you like, the average multi-academy trust have between sort of 10 and 15 schools within their portfolio and upwards of 30 in some cases. And I think actually, what we'll see is we'll see a trend towards some larger projects, which will do that number even further to the upside as opposed to the downside in terms of project value. There's a question here about the significance, how significant is the cost of the meters for the monitoring services. So we're pricing our meters to a customer between GBP 20 and GBP 50 a month, where the total receivable cost over the initial term would be somewhere between GBP 1,000 and GBP 1,500. Now the reality is that, that is a very, very low monthly cost compared to the value that we're able to deliver in period or so in a year for that customer. And it was an interesting stat in the market, which we now are quite familiar with and our clients are resonating with is that having access to granular energy data gives you the opportunity to see a 10% energy consumption reduction through 0 cost measures as a result of changing the behavior in your business so that you can impact the way you're managing the business in a smarter way. I think there was one other.