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

Good afternoon and thank you to those of you who are joining us this afternoon to hear from eEnergy. The company will have results at the end of April, where we will do a presentation on numbers. So as a reminder, today's presentation is an opportunity to talk through the changes that have gone through the business in the last month or so, including deleveraging of the business via sale of one aspect as well as refinancing with the news on the NatWest. So this is going to -- take an opportunity to go through the presentation with then Q&A at the end. So feel free to submit questions as we go through. Otherwise, without further ado, I will hand over to Harvey Sinclair.

Good afternoon, everyone. So look, the last 6 months have been very transformational for the business following the disposal of our energy management division. And we thought it was a nice opportunity today to talk through the strategy and outlook. There are a few key messages that I'd like to cover before we hand over to Crispin around some of the balance sheet and margin benefits. Key points are, we've now got a very focused and simplified business model. We're focused on a sector in which we've consistently seen huge growth. We've got a business which has got a track record of delivering strong growth. We've seen 63% CAGR growth rate in energy services coming to the market, that's over 330% in total. That's all organic growth. The business has now obviously got a very strong balance sheet, which unlocks a lot of our legacy constraints and a growth market and a growth business, clearly, our working capital is key, and we've always had a very thinly capitalized balance sheet. So this is going to significantly help us securing better terms with our supply chain. It's going to help us to give us more credibility to bid for much larger multimillion-pound contracts. For example, we have a large multimillion-pound health contract with a large private hospital group that we hope to announce in the coming weeks which have been aided by us on the balance sheet. The NatWest facility, which Crispin will be talking through has been possible as a result of our strong balance sheet. So these are all things which are going to give us a clearer path to faster growth and I believe now with our strategy and in which is a very addressable market, we've got a great opportunity to achieve the targets that we set ourselves for the year, which I'll talk about shortly. Just in terms of the market, we see this as a very addressable market. We've been building a big brand in this sector across the public sector, in particular. And in education alone, we've got a 70% market that still has yet to transition to LED. So that's not including some of the opportunities for solar, which we see as a 90% addressable market. So I look at education, we can't -- we see a GBP 2 billion market. The barriers to entry are actually quite high. This is a difficult market to penetrate. We've got a huge track record of having delivered over 1,000 projects now. We've got a heavily invested pipeline that we've been busy curating over the last 3 years, which has a long sales cycle. So when I look at the pipeline over GBP 120 million, a lot of that pipeline is 6 to 9 months in duration for this year, but a lot of it is over 12 months old, the larger deals, which are still very active. And with a track record of converting 50% of our proposals, we feel very confident that we've built a really strong base on which to develop the business over now that we've got stronger resources. So if we move to the next slide and talk a little bit around the backdrop to the disposal. As everyone knows, we came to the market with a strategy to deliver M&A, to diversify beyond energy efficiency, which is the core of our business originally. And I believe we've delivered a very successful track record on that stated strategy. We bought 3 businesses between 2020 and 2021. We were successful in integrating them onto a single platform. We delivered efficiencies, we launched new products. Customer retention has improved and I'm very proud of what we achieved in the backdrop of, frankly, a pretty challenging market with COVID and then a disruptive and highly volatile energy crisis. So when we clearly recognized there was an opportunity to consider the disposal following a number of approaches, I think it was relatively straight forward to see that we could deliver quite a lot of shareholder value by divesting this division and the deal we struck with DCC, I think, is a balance of strong returns on day 1, GBP 29 million in consideration, which is close to a 50% increase on the value we entered those deals at but plus upside of a further GBP 8 million to GBP 10 million in the next couple of years within a structure that we think is very sensible, a structure that's backed out of solid business plan, a strong team and with a strong track record of delivering. So we think that takes that risk off our balance sheet, it gives us the same enterprise value that we think is achievable. So this has given us clearly best of both worlds, we've strengthened our opportunity to succeed in energy services, which is the faster of the 2 growing markets and it's enabled us to clear all our balance sheet and debt obligations. So I'm very pleased with that outcome. I'm excited about the strategy, which if we go to the next slide, I'd like to talk through. You'll be familiar with our 4-pillar strategy previously. We've now got a 3-pillar strategy. It's evolving from what was already very clearly stated. And the strategy this year has delivered GBP 30 million of revenues as identified by the Equity Development research note, which is going to show strong 50% growth from the last 12 months. And really, the focus is going to be around these 2 pillars, reduction and generation, not to say that charging has fallen off our radar. It's just taking a little bit of a backseat as we focus-in the real opportunity in 2024 around solar, which -- we've invested heavily in last year. We put quite a lot of resource into that team. We've spent a lot of money building a pipeline with 6 to 12 months lead cycles, that's been on [ GAAP ], organically growing and invested P&L, we put in over the last 12 months. So in many respects, understated our profitability last year because we've quietly been building capabilities in solar. But what's important to recognize is that as I look into the 2024 forecast, the bulk of the revenues, which is circa 50% of the GBP 30 million that we expect to come from solar is largely locked in with customers to do either signed ahead of terms, are actually contracted with us. So it's around timing. Timing is key with solar, but we believe we've got a good shot at delivering all of that GBP 15 million from a handful of dozen or so customers that we've been working with either over the last 12 months or previously from the energy consultancy division. So I think generation and reduction for me is the core focus operationally but as we start thinking about 2025, we expect charging to be an interesting strategy. I think what's different this year is that we've got a bigger focus around our differentiated financing offer. That NatWest facility is a very unique product. It's different from what we've had before. It's not just better rates on the same type of relationship. It's a multi-technology compliant around new legislation for the public sector and gives us the opportunity to take proper carried interest in our projects. So we seem to be investing in projects without actually being on our balance sheet -- have that risk on balance sheet but the balance sheet investment that we have secured in having disposed of the consultancy division allows us to invest in the NatWest facility, let's say. The other piece around data is an important one. We did obviously divest the MY ZeERO platform, but we've still got a very strong position by being able to offer the same economics having signed a 2-year license agreement that gives us inclusive terms. So we've still got the differentiator of being able to offer verification, energy monitoring, visibility on energy wastage, clearly differentiated from our competitors, all the same economics. But without that -- the balance sheet constraints and having to build, maintain service software platform and hardware delivery capabilities. So just moving on to market and before I hand over to Crispin to talk about the financials, size of the market, route to market, 2 really important points for our business model. 2024 has seen 2 years of, I guess, disruption, energy volatility, energy crisis and whilst we come out of those explosive rates that we saw in 2022 where energy prices rocketed 5x 6x from -- highs. They're still -- they settled, but they're still over 100% what they were at pre-COVID levels. So whilst I wouldn't say that cost saving is the only driver. It's still a big driver. It's not the only driver in organizations, accelerating their net-zero projects and energy conservation projects. Compliance and regulation are now significantly driving decision-making and particularly in the public sector where you've got net-zero targets being only 5 years away. Scarcity of capital has become much more focused for organizations. The change in interest rates has, I guess, driven a lot of funders out of the market. We've got a very rare product in the NatWest facility, it's competitively priced and it's available through its compliant contract form. So we think that, that as a service business model is starting to become ever more exciting to our customers who have got no available budget but a very compliant and regulated market to drive energy efficiencies in. EPC ratings for landlord, particularly the big funds have all got huge drivers now, so that it increases property value. So there's a big driver in trying to maximize property portfolios and being a service provider in this space is clearly a big traction for us. There's also carbon tax and supply chain pressures continuing to pressurize organizations and government policy and net-zero commitments are only intensifying. So -- but overall, we think there's a backdrop of a really exciting 10 years ahead of us. But in what is, in my view, quite a thinly serviced sector, we don't actually see -- there's more than only handful of credible competitors that do what we do. And so that, for us, we want to leverage that market leading brand. We've got education, get the same kind of credibility in the other public sectors and hopefully leverage that over the coming years. In terms of our route to market, historically, we've had a direct sales model. It's been very successful, remains very successful. It's been aided by technology and platform differentiators that we've built but now what we're looking to do is to run in parallel to that, an indirect channel partner strategy. So building out on our frameworks and looking at third-party referral networks, partnerships with other procurement cost centers and having the ability to bid for multimillion-pound contracts through those tendering channels and frameworks is now much more achievable given our stronger balance sheet. So hopefully, that gives you, I guess, an overview of our strategy and route to market. I'll hand over to Crispin before I sort of follow up on the outlook.

Thanks, Harvey. So as Harvey has already referenced, the disposal of energy management has had a transformative impact on the balance sheet. This now gives us a key competitive advantage and a barrier to entry for the business. It's not unusual for high-growth businesses to experience balance sheet constraints and those constraints have restricted revenue growth in recent periods and they also held back margins. By necessity, decision-making was focused on short-term cash priorities, rather than for long-term strategic benefits. Going forward, we intend to maintain a robust cash position for precisely this reason. So whilst we see a number of opportunities to invest working capital to drive growth, we'll take a measured and prudent approach to capital deployment with a target to be net operating cash generative in any 12 period. Maintaining that balance sheet strength will allow us to manage a lumpy working capital cycle effectively, give us enhanced credibility to tender for large multisite projects, as Harvey has referenced, and secure better terms across the supply chain. That includes finance with the new NatWest facility announced last week, gives a good example of the benefits which can be delivered through this approach. So turning now to that facility. We're very excited to be working with a blue-chip funding partner with ambitions to scale their presence in this segment of the market. This facility is the result of many years of developing a compliant, fundable product suitable for public sector customers. The extensive due diligence process through the processes has validated that. It is also the result of achieving the scale to attract partners with access to substantial capital resources. And we hope this will prove to be just the first small step in a long-term relationship. The facility itself allows us to achieve a lower cost of finance in return for retaining a minority interest in completed projects. It's similar to a mortgage where lower loan-to-value loan would have a lower rate of interest than 100% mortgage. That lower cost of finance gives us an improved conversion of contract value to revenue, which flows strictly through to an increased margin. The net effect of the increased margin on the one hand and the retained interest in the project on the other equates to an approximate 10% cash investment. That investment pays us a predictable and recurring quarterly cash income over the duration of the customer contract of 7 to 10 years and is expected to deliver a return of over 2x compared -- over that period compared with financing the project through one of our previous funders. So for example, deployment of the full GBP 40 million facility over the next 24 months, would be expected to equate to a circa GBP 4 million cash investment in that period with corresponding cash receipts of circa GBP 8 million over the next 7 to 10 years. So to recap, we have a stand-alone operating platform in energy services, which benefits from strong market drivers and improving margins. We have a separate group PLC function focused on enhancing the capital value of the grid for example, as we have done with the NatWest facility and focused also on strategic expansion opportunities. It also houses the costs associated with meeting our PLC requirements. Our focus on rightsizing this cost base, following the energy management disposal, will see the cost run rate fall materially through the year. Thanks, Harvey, back to you.

Okay. Great. So as we look ahead, there are a few points just worth recapping on. Leading brands with a clear pipeline to leverage where we've now got the opportunity to sell and upsell and cross-sell new technologies to essentially retain 700 customer -- group of customers that are in contract. So I think that's a really important point for investors to recognize that we built a strong customer base that are retaining contracts. They've enjoyed the energy savings to tackle energy waste through lighting and now have a big driver not just on cost savings, but also across the products I mentioned earlier to engage in solar. So we got a ready-made market to exploit using the existing team. I think it's easy to see that there's been perhaps a tailing off in the last 12 months of net-zero focus, that's going to come back and it's going to be an explosive race to the sort of finish line where people to meet their 2030 commitments. And we think we're going to be really well positioned and large enough to capture much bigger contracts where there's going to be an overdemand and undersupply into this market. We think we've built an interesting operating model that can be geared. So we're able to see much more profitable EBITDA as we start scaling revenue. So it doesn't take much to look through the numbers on the Equity Development note to see that for every GBP 4 million of revenue we're generating past GBP 30 million, we drop GBP 1 million into the bottom line. And that's in part because of the efficiencies we've driven through our processes, how we're using technology. We think and act differently than a normal services partner. We're using digital services and digital processes to get more from existing teams. So it's not a case of just adding x pounds per million of revenue and seeing the same linear EBITDA margin. We're going to see a much more geared and interesting profit line coming through. And we've got an aim to get up to that 20% EBITDA in the coming years. And we hope we're going to be in the high teens towards the end of this year. It's a big stretch goal, but that's what we're aiming to do internally. Yes, we've got -- we've got a very large pipeline, as I've talked about, that's been heavily invested. So shareholder funds have been put to work over the last 3 years in building an asset base of customers, and we think that's going to be leveraged now going forward. And that's, in summary, kind of our current status, and we look forward to updating investors in the coming months as to our progress.

Thank you both. We've had a number of questions, so let's make a start. Are you still potentially looking at acquisitions to add to your offering?

Good question. I think in short term, no. We want to develop good organic profits. We want to show investors we're not going to be distracted by acquisitions in the next 12 months. That's not to say -- in the midterm, we might not rethink that strategy. But right now, no, nothing in the next 12 months.

Okay. Recently announced Board for Luceco. What are their longer-term ambitions? Or what can you give us a steer on?

Look, we've known this Luceco for a while. They're a great supply chain partner. We've got great relationships with them. Having them as an investor is -- strengthens our proposition in the market. It gives us a much wider product portfolio, gives us the opportunity to align with them on very large lenders as we think about multimillion-pound contracts and helps us to get that a bit closer to towards an integration. That for us is our motivation.

You talked about how the NatWest deal was quite a unique offering. Why did none of your competitors have this funding financing facilities in place?

I guess, look, there's 2 reasons. One, this is a difficult and complex funding product to put in place. Crispin and I have been in the market for a number of years talking and discussing with different investment partners and different infrastructure funds. One of the key things is deal flow. The key things for a big partner like a NatWest is to get certainty on deal flow. And for that, you need a strong track record of developing a sales engine, which gives consistency and a set of customers that are investor [ borne ] and creditworthy. And I think one of the key things we've got is that public sector flavor, which gives confidence around predictability in default being effectively government-backed organizations. And I think that's probably the main reason.

Okay. And then perhaps leading on from that. What percentage of contracts do you think you have lost by not having the financing offer in place historically. And to what extent do you think NatWest can do away with that sort of loss ratio?

Do you want to answer that?

Yes. I mean I think with NatWest, I'll say it's more about the profitability of individual contracts. I think the margin, I think the sort of credibility and name recognition of our funding partner, the scale that they bring, I think all of that will help with customers. But I think the primary opportunity is with the funding rate and what that means for our profitability.

As opposed to customers who weren't able previously to do it, to do it now?

Yes. We have had a panel of funders previously. At any one point in time, we've had a number of funding partners we can use but the NatWest facility, I think, gives us an extra edge and a unique proposition.