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

This afternoon to hear from eEnergy who announced their interim results earlier this morning. If you haven't seen it already, we have initiated coverage. You can find this research on our website at equitydevelopment.co.uk. But for now, we are here to hear from the management team who are going to talk us through the presentation, there will be an opportunity for Q&A at the end. Please, again, feel free to submit questions as we go through the presentation. But for now, I will hand over to Harvey Sinclair. Over to you.

Thank you. Good afternoon. So a strong sets of results published today, demonstrating continued organic growth across the business, which follows a period of successful integration and new product launches over the last year. We're able to move the slides on, please? Thank you. So yes, as you know, we tend to market as a buy-and-build strategy in 2020 and very much focused around integration last year to ensure that we retain our customer base and consolidated our revenues within our expectations post-acquisition. We invested quite heavily in new products and tech platforms last year. So over the last 12 months, it's all been about ensuring that we've delivered consistent results, which we're pleased to have done. So organic growth has come through. But post that, with revenue up 50%, earnings were up 55% to GBP 4.7 million. But more importantly, finally starting to generate operating cash flows and delivering a PBT of GBP 1.1 million after a loss GBP 2.2 million the previous year. So I think what's important is to see that we put the foundations in place to deliver strong end of year expectations, that we're now focusing very much around improving our cash generation. It's still slightly below where we'd like it to be. More on trajectory, which Crispin will talk about, improving that. And we've got a very, very clear and deliverable plan to make sure that happens. We also look forward reviewing a number of strategic options to see how we can strengthen our balance sheet so that we can underpin and support the growth that we are expecting, and we believe that will enable us to have a smoother trajectory to continue to grow the business. So for those who aren't familiar with our business model, we've got 2 divisions, 2 businesses: Energy Management, which is a supply-side business, which enables customers to access the lowest cost, clean energy, very much a technology-driven business, a platform business, that allows us to deliver 3% to 5% saving on procurement of energy. The business has been the combination of 20 years, respectively, of 2 businesses we've acquired. [indiscernible] was single brand, very strong gross margins, 78% gross margins and a very sticky customer base and reoccurring contracts where we're able to see an 85%-plus renewal rates coming from those customers. This is a business that has 130 strategic customers with consumption of 5 gig or more, and 190 old customers that have got a position of 1 to 5 gigs in what we call mid-market. So a very strong recurring business, very predictable business. An essential service that customers need and a business which we're looking to develop into more of a consulting play over the next 2 to 3 years. So maintaining our supply-side business as an entry point of businesses. We're very much expanding into providing compliant carbon reporting, carbon compliance and net zero consulting advice to companies, large organizations that are looking to decarbonize, the major strategy. Our Measure division, which is around our smart metering business that we acquired back in '21, is a smart metering and analytics platform. This enables customers to see and visualize granular energy consumption within buildings. It's proprietary owned and over the course of last year, we were very much focused on developing a product, which we were funding on our own balance sheet. And now we have got an off-balance sheet solution funded by 2 financial institutions that will enable us to develop a much more cash-generative business model which allows us to see strong gross margins but also enables us to wrap that product up into procurement and supply-side services. So to give you an example, within our schools environment or our multisite retail environment, customers are able to pay by subscription, GBP 70 to GBP 100 a month per meter, per distribution model in their buildings and also access our procurement services at the same time. So it gives us recurring revenues as we begin to scale our business, and also allows us to differentiate in the market. And we see that as being one of the strong growth levers that our NG management division is going to be building out. It also has a nice segue into providing data insights and consulting services once we get data on behalf of customers. In our Energy Services division, we do use the measurement and technology as part of verifying savings for customers. But the core service that we offer is around reducing energy consumption to energy efficiency solutions such as lighting controls. We focus on education in this marketplace, but we are expanding into broader public sector customers. We've been very successful this year in penetrating the health care sector and also more widely into education, local authorities, further education, prior education and universities. We use third-party funding solutions to unlock savings to customers. Again, balance sheet right for us. We maintained strong margins, and we've been consistently hitting strong margins in this division despite inflationary pressures across the market. And we've got a market-leading position in the education sector, having done over 1,200 projects now. Huge market to go after, a very deep and wide niche. There's still 25,000 schools effectively addressable by our products and services, and we've established ourselves as a leader in this marketplace. Last year, to complement our energy reduction services, we launched our Renewables division, which comprises of a solar to service solution and also an EV-charging product. EV-charging product has got good traction, and we're looking to continue to add EV solutions as part of all of the other services we provide our clients. But the solar business is really taking off at pace, and we're starting to see real growth coming through this division now with margins of 25% to 30%. A number of growth drivers that are consistently here this year as they were last year. And the difference, I guess, this time is that we've got a years' worth of planned new prices behind us. And although energy prices come off from what were exceptionally high levels last summer. We essentially seen a sort of a circuit breaker in people's mindsets to run organizations, the decarbonization agenda is here to stay, whether that's driven by compliance and regulation or whether that's driven by financial objectives to reduce OpEx costs or there is simply to meet sustainability goals that are imposed or that are desired through the organization. I think it's fair to say that decarbonization and delivering energy savings is now on the agenda and here to stay. And as a business that's established itself as a market leader in our various market niches, we're in a very good position there to start leveraging climate solutions for our customers. I think two things that differentiate us in the market with significant drivers. One is the as-a-service solution that doesn't require our customers' invest the same capital. As we move into a more constrained environment, this is ever more important and we've established a wider panel of funders over the last 12 months to help fund a variety of different products and services. I think also having an integrated proposition is a big benefit to our business because we're able to act as a one-stop solution for a customer looking to decarbonize without having to go to multiservice providers. And we've seen evidence now that once a customer starts engaging with one of our services, we can quickly start cross-selling and servicing that customer in a variety of different ways. Sometimes that's leading with energy reduction. Sometimes that's leading with energy advisory consulting services. And then the half of everything we're doing is technology. So whether that's our unified platform in energy management, which allows the customer to enter through one digital portal, whether it's look, manage and control all of their energy data in one place from their supply contracts due to the savings that they're either looking for or they are experiencing. Data platforms we are submetering are also fed into that platform. And then the proprietary technology we've got within our tools and apps that we've built for the Energy Services that allow us to collect data from sites and tenement, automatic proposals which set us apart from the competition. So I'll hand over to Crispin to talk through the numbers, and then we can talk about the outlook.

Thanks, Harvey. So I'm pleased to report another period of significant growth across the group. Revenue of GBP 33.2 million was up 50% on the 12 months period to June 2023. And that drove adjusted EBITDA growth of 55% to GBP 4.7 million. Exceptional costs were significantly down on the comparable period, which included the costs related to the acquisition and integration of UtilityTeam. Now that's enabled us to report PBT of GBP 1.1 million, a marked turnaround on the GBP 2.2 million loss before tax for FY '22. I'm pleased with the continued significant momentum and Energy Services in particular. GBP 26.4 million of TCV was signed in the period, that was up 76% from the GBP 15 million in FY '22 and with a high level of repeat business. The strong momentum in eSolar in particular, with 29 megawatts undersigned contracts or heads of turns at 30th of June in 2023. Solar has long lead times. So that pipeline at the end of June has taken several months to develop. But it's now mature converting into revenue in the current period and giving visibility on FY '24 revenues. I expect solar to be a key growth driver of the business going forward. We show on this slide a demonstrable track record of revenue and earnings growth since coming to the market. That's included through an intensive integration period. We're continuing to deliver strong organic growth in both parts of the business. We've got clear momentum for the rest of FY '23 and beyond. Strong execution across both parts of the business have delivered 50% revenue growth. We're pleased with the 5% organic growth posted by Energy Management at the back of a period of intensive focus on integration and challenging market conditions with unprecedented volatility in energy prices. Our investment in the service delivery platform will ensure a best-in-class customer experience through the life of the relationship, which should maintain and enhance with already high retention rates, underpinning future revenues and improving quality of earnings. We see particularly high growth of 87% in Energy Services, reflecting the execution of the cross-sell strategy, favorable market conditions, which support compelling customer [ recognize ]. Sustained momentum in new business wins have a strong foundation for continued growth. That strong revenue growth and the benefits of operational gearing drove 55% adjusted EBITDA growth, with the EBITDA margin up 40 basis points from the prior year. We've maintained product gross margins despite inflationary pressures and reinvested those profits in sales, marketing and delivery to drive long-term growth, and we're continuing to see the benefits of that investment. We have seen a significant increase in working capital. That reflects a stronger balance sheet, but it did lead to a funding requirement for the business in the period in November 2022. That growth in working capital was driven by a GBP 6.2 million increase in accrued revenue, which represents contracted future cash receipts for the business. That growth partly reflects the organic growth in both Energy Services and Energy Management and is accentuated by longer lead times of solar projects and the interest we retain in completed funded projects which deliver a recurring contracted cash flow to the business over the contract life. The GBP 1.8 million pay down of legacy liabilities represents a major step forward for the business and the strengthening of the balance sheet. We did a good job negotiating a contingent consideration related to the UtilityTeam acquisition, which we managed to settle well below the amount provided in the balance sheet. The payment we did make was largely settled for noncash. There's a GBP 1.1 million increase in other net working capital, which largely relates to a noncash remapping of balance sheet line items as part of the new ERP implementation. Whilst the position has stabilized during the period, improved working capital management and cash generation remains a key management focus. That working capital improvement has helped stabilize net debt after significant cash burn in previous periods. This is made so looking at the second half of the period, which delivered a cash inflow from operating activities of GBP 0.7 million compared to GBP 2 million outflow for the first half. This reduced the net debt increase in that 6-month period to GBP 0.4 million after paying GBP 0.9 million to clear the historical HMRC overdue amounts. That's a significant improvement from the circa GBP 3 million-plus increases in net debt in each of the previous 6 months period. However, cash generation remains below target levels and is a key focus for management. Good progress has already been made on that front in Energy Management with improved contract terms negotiated with energy suppliers and growing contracted cash flows from customer contracts signed in previous periods. Let's put the business on an improving trajectory with cash conversion increasing from 34% for the 12 months to March '23, to 63% for the 12 months to June and a clear path for further improvement to total of 75% operating cash conversion in FY '24. Migrating Energy Services from 50% operating cash conversion total of 75% for FY '24 is now the key focus. The off-balance sheet funding solutions are in place for all products with new facilities from MY ZeERO and Solar now drawing down. And a focus on improving operating margins will flow through into further improvement in cash conversion. We've commenced to process to refinance the group's corporate debt facilities over the scheduled repayments date early in 2024. We have initial positive engagement with interested parties. As we stand today, we have visibility on 90% of full year revenue expectation -- for period revenue expectation, I should say. We have a robust near-term pipeline to support the remaining new business wins, and the key focus for management is to deliver this growth in a way which is more cash generative. Back to you, Harvey.

Thanks, Crispin. So we're very excited by the market opportunity, having built strong presence and brand in our markets. We think we're well positioned for what will be a really exciting 5-year horizon. We think that education remains a huge opportunity for multiservice, multi revenue lines across the group, and we think health care is going to be sort of the next pivot for that division. The mix profitability is incredibly encouraging. And whilst we're still slightly behind where we would like to be on an operating cash ratio. We've got intense focus on management to make cash our priority. We're looking to increase margins where we can, and we're making sure that we are reducing the exceptional item layer that previously has been a big expense item to the business as we've come out of integration. Revenue remains a strong growth focus for our teams. And I think that as we look at our pipeline, which is increasingly stronger quarter-on-quarter, we can start getting more midterm visibility. And the heart of everything we're doing is product innovation and tech differentiation. And we think that's going to help that operational gearing in particular, with Energy Services, which as I stand at the moment, it's a 10% EBITDA business, but where we have an aspiration to turn it into a 20% EBITDA business over the next 2, 3 years. And that concludes our presentation.

Thank you both very much, extremely helpful. So let's make start on questions.

On MY ZeERO, how does the off-balance sheet solution work, do the financial institutions own the meters once they are installed and generate rental revenue from them?

So we have a fairly straightforward operating lease model with MY ZeERO. We've got 2 institutions that effectively buy the receivables. The meters are owned by the customer at the end of the 3-year contracts. So the financial -- the funder actually takes charge over those meters in the period of refinancing. But the client is also paying us a data services fee from day 1. So it's a service contract which is 2 parts, the hardware is financed by third party. The client keeps the hardware at the end of the 3 years, but the customer still continues to pay out for data services fee. So that then leads into a recurring revenue for us, and we're taking any margin from the hardware installation as we sell the receivable to the customer -- to the out of the funder.

Okay. And how does this differ and MY ZeERO meter differ from other smart meters that are available?

Okay. So the majority of smart meters, that's almost exclusively in the market, people refer to smart meters. We're talking about a meter that is the main meter. So you're seeing half-hourly data. What you're not seeing is an intelligent submeter, which allows the meter to pick up individual circuits or individual assets. So if you can imagine, in a domestic scenario, you might have a smart meter that shows how much electricity your home is using in the half-hour period versus getting a breakdown of how much you kettle, your dishwasher, your lighting is using at that point in time in sort of 1-minute intervals. That's the difference. So we pick up granular information. These meters can be installed without deenergizing the sites. So you don't have to shut down a premise to be able to install. It's been a piece of technology. There's only a handful of products like this in the market. We're one of only of the few. Centrica bought one of our biggest competitors in Q2 2018, [indiscernible] that's well-documented available kind of [indiscernible] and Centric in-house embedded that across the world as a part of its business, Energy Solutions offering.

Okay. Solar, in Solar, are you mainly working with schools as in suites contract win? Or are your customers quite varied?

They're actually quite varied. We see schools being one of our large growth markets simply because we've got semi-retained customers, and we've got 600 schools under contract for lighting, for example, every one of those schools either has a need or is thinking and less than 5% have transitioned to solar. So it's a very addressable existing client base. So clearly, that's going to be one of the markets we're targeting as well as new schools. But then actually, our Energy Management division and our new business sales engine within the sort of commercial teams are picking up quite a wide, wide variety of commercial industrial opportunities. And we've done a number of contract wins across our commercial and industrial plants, and we've also done quite a lot in the health care and HS space as well.

Okay. And what is the value of a typical solar project?

So historically, I would say they're being somewhere between 150,000 to 200,000 kilowatts, so GBP 100,000 to GBP 200,000 per project. However, we're starting now to see some of the larger contracts that we signed ahead of terms, to start to drop with values of GBP 1 million to GBP 2 million. We saw 1 discrete drop, which was GBP 3 million contract value. So what we are anticipating is more larger, multisite solar portfolios signing because they're around the 1 megawatt, 1 megawatt is somewhere between GBP 700 million worth of value.

Okay. Is there still good growth to come from light-as-a-service, have high interest rates make these projects more difficult to fund?

That's an excellent question. So the answer to that is, there's a huge addressable market still in particular, the public sector, which has got great age, Victoria start buildings generally. We've seen all of the media around combing concrete, but it's just an illustration of just quite how aged our U.K. public sector states are. The schools market still has a 90% addressable roof space for solar and 90% addressable energy efficiency opportunities. We've got less than 2% or 3% market penetration in the market. And so we still see light-as-a-service to 5 to 10-year horizon, the very low end and possibly 15 to 20 years when you start to see retrofitting -- on retrofit. So we're often seeing that stage 1 LED solutions that were put in, in 2015 being surpassed by new technologies that can still say 50%. In the commercial space, I would say, it's a highly competitive market to customers wanting to pay for solutions themselves. The return on capital and the payback for lighting came down significantly with energy prices reaching the levels they were at. However, given that the U.K. corporate environment is so capital constrained right now, it's not necessarily can I afford to do this. It's a case of can I prioritize lighting over something else that I might want to do. So we often find that we give customers whether that's commercial or public sector, the opportunity to do more than one thing at the same time. So there is this race to decarbonize at the moment because of the crusty nature of energy prices but also because supply chains are increasingly putting pressure on big corporate customers to reach certain levels of decarbonization before that actually trade with them. And then to the interest point, Look, there's definitely been a sort of a swing on cost around cost of money in these projects. Two things have happened there. A lot of funders who were traditionally funding energy service contracts have pulled out of the market. That means that if you do have a product that can enable an off-balance sheet solution, it's a more precious commodity, and therefore, we've got a differentiated offer in the market. So it's quite a complex answer to that question, but hopefully, that gives some flavor to it.