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

Instruction at the end of the presentation. So please submit your questions in the Q&A box at the bottom of your screen. I will now hand over to Harvey and Crispin, who will run through the presentation.

Great. Thank you, and welcome, everybody. This presentation today is an opportunity to update investors on what's been a busy but very challenging 6 months. And to give investors an update on some of the changes post the divestment of the Energy Management business earlier in the year, and some of the implementations that we've invested in, in order to secure a strong and productive scale business. So as I said, has been a challenging first half. I think there are a number of things I'd like to just surface before we go into this sort of trading update generally. As a macro environment, we've suffered a little bit of ESG fatigue over the last 12 months following what was frenetic energy crisis in 2022. This was exacerbated, I would say, by 2 things. Firstly, the rise in interest rates and the stabilization and coming off the peak and reducing energy prices. So created a slight perfect storm for businesses like ours in our sector globally, I might add, where there's been a lot of activity around energy transition and then trading off where our businesses were investing internally on their own, if you like, stabilization strategies. I have to say that I think that time has passed and that we're now in a period of strong recovery as a market. But I wanted to just to say that we were not alone in the market in the sense that there was a slowing down of energy transition projects in our sector. I think the disruption during and post divestment of the Energy Management division was significant for our business. We're a small business, and we were divesting over half of our operating model. And with that change and challenges as we decouple that business to enable a seamless transition. And I think overall, slightly weaker-than-expected first half of the year, masks what has been significant and substantial progress across the business. As part of the divestment we have taken the opportunity to restructure our operating model within Energy Services and taking the opportunity to pause and reset to allow ourselves to build a really strong foundation for growth. And there was really only one opportunity to do that, and we seize the opportunity to do that in Q2. And I think that we are now going to see the benefits of that as we move forward. So we've invested in upgrading our management team and particularly the Renewables division. We hired a new COO, Nick Clark, who I know him for some time who we've built strong operating strategy around. And we've also invested in technology, which we'll talk about shortly. Combined to that, we have the support and the benefits now of our strengthened balance sheet as we've renegotiated supply chain across our various divisions in the business. And we've seen the first few drawdowns of the NatWest facility bed down, and that now allows us to move at pace with that funding facility. We've seen a strong recovery in the first few months of this period. And I think that is in relation to a government change, in relation to refocus the public sector on their Net Zero strategies. And in the first few months of the year, we've seen a record pipeline growth in terms of origination of new projects to assessment. And so we're expecting that to now flow through into the second half of the year. But most importantly this a fact that we've got visibility and sight of the majority of our required contracted revenues in order to deliver our H2 number, and we're maintaining our full year guidance. Wrapped around that is confidence in our margins and in some cases, and that would trend in those margins, which we can talk about a little bit later. So a very busy and challenging period, lots of investment, huge confident in our platform now and a very strong pipeline. So please move to the next slide. For those investors that have joined today that haven't been part of the previous strategic sort of, if you like, proposition. We've now simplified our services offering into 3 pillars of service, all of which have the same philosophy, which is end-to-end turnkey solutions, delivered capital free for our customers with an off-balance sheet solution with our proprietary funding platform and the data wrap around, measurement verification and visibility of energy data. So when we think about energy reduction, we're in the -- main talking about energy efficiency, investment in lighting and controls, where we're able to use our proprietary technology and our energy app to deliver rapid investment-grade proposals to our customers at scale, maintaining a high and strong gross margin of 38%, which has the potential to trend upwards as we've now started to see some margin improvements around supply chain and funding facilities. So reduction, core stability of our business as where the heritage comes from with over 1,000 projects now, and we expect to deliver somewhere between 250 and 300 energy efficiency reduction projects in this calendar year. Generation, this refers to turnkey Solar EV solutions and includes Ground-mount, Rooftop and Carport solutions. We focus on risk-managed quality, high service solutions. We don't sell on price. We're very much focused at the quality end of the market, gross margins slightly lower, but the money margins tend to be generally higher because the projects are generally larger. And then charging, which is a peripheral service line at the moment, the one which we see growing. So the EV adoption and charging infrastructure market has had a bit of a bumpy ride over the last 18 months, largely because the take-up has been a little bit sporadic. And I think that most customers are wanting to dip their toe in the water when they think about charging solutions. So we tend to see this as an additional service to the reduction of generation services, but one which we see going to scale in the future. Go to the next slide, please. So let's think about our market. There are a number of very strong drivers. I think the ones which are worth focusing on right now are the fact that we've under a new government, got a much more accelerated and focused strategy around Net Zero. The previous government was fatigued around what they've been doing, didn't have the energy and the impetus that was desperately needed, but in particularly the public sector. We're seeing already quite favorable Red tape restrictions being lifted, and I think that is helping decision makers get to a project decision quite quickly now, whereas it used to take 6 to 12 months with huge amounts of Red tape around the compliance of procurement. So invigorated energy, thinking about raise to Net Zero, we've got 6 years for which to achieve some very ambitious goals in the public sector. And I think that has really come to the forefront of the public sector. So we see that as being a really major pivot for growth acceleration. I think whilst the government is looking to increase plants in some areas, there is a scarcity of capital generally across both commercial and public sector. And I think that the ability to better provide turnkey capital-free solutions is a real enabler now as we think about adopting Energy as a Service for decarbonization solutions. Another driver for us is the fact we solidified a really strong brand, particularly in the public sector where companies, I think, have a lot of execution rather our customers have a lot of execution risks when they think about different schemes. So to have a provider that can do a turnkey solution, build a relationship and stagger different initiatives through different transition projects from energy reduction to generation to charging and in the future for energy storage, we think, is one of our key attributes. Solar is clearly driving the majority of our growth aspirations. It's a hugely addressable market. There is very favorable economics, but you're investing in yourself or whether you're doing a fund a solution, the numbers will work very well and very positively to develop service solutions for Rooftop schemes or Ground-mount schemes. A volatile energy market is always good for the energy transition space. And I think the reason I say that is because what solar does is it provides stability and security of supply. So if you think around 1/3 of the energy consumption of our customers, can be derisked by coming off grid is effectively locking in a price for 10 years on that 1/3 that was previously purchased by the credit it's not going to be purchased by Rooftop or Ground-mount solar. So just touching on the size of our addressable market. We commissioned our own independent research because we were keen to understand the data points around adoption, addressable market for both education, health care and other parts of the public sector. And we were very pleasantly surprised, in this report that we [indiscernible] was also validated by one of our third-party partners who also commissioned a similar report, which were kind enough to share with us. And we can see 65% remaining addressable market in education for energy efficiency lighting solutions. That in itself is a GBP 2 billion opportunity for us. And this is not a 3- or 4-year window. This is a decade opportunity. Yes, we believe the next few years going to be accelerated but the long tail, we have every reason to believe will last for many years to come past the 2030 deadline. In NHS, there is still 50% of the built infrastructure still with old version of lighting and in [indiscernible] lighting. This is under a mandate to transition fast not only because [indiscernible] have now been banned, but also because of the drive for lower cost, more efficient, highly compliant, more suitable lighting sessions. So the [indiscernible] market for us is very, very strong. But what is also important is that the competitive landscape is also very favorable for us now that we've established a significant size in the market. So given that we don't focus on the SME market, which is low barrier to entry, raise to low margins, an electrical contractor can procure hardware from the distributors or from the wholesalers and use their own label to install solar or EV charging force small-scale SME solutions of 10,000 to 50,000, we're very much in the high-quality, high service, GBP 250 to GBP 5 million project size, and so projects like that, our customers want trend record, their open ability. They want businesses with a strong balance sheet and they want so many of these compliant boxes ticked, which the smaller lower barrier to entry service providers can't offer. So we see this as being a good barrier to entry for our own proposition, and we see this is also an enabler for rapid growth. So when I think about the transition highlights, just touching on some of the things we've done in specific terms. We've built a scalable operating model. We have 2 parts of the business. We have a development platform, which is responsible for originating opportunities, assessing, qualifying and generating an investment-grade solution, an investment-grade proposition in the form of an investment-grade proposal for the customer. That takes time, it takes resources, it takes data and it takes knowledge and skill sets. In order for development to be scalable, profitable and work at high margin and to operate at a leadership position in the market. That process has to be automated, it has to be systemized and they have to use technology. And we've invested quite heavily in our own proprietary app to enhance that automation. And within that whole development model, we've also invested in our operations in the CRM platform. On the contracting side, which is the EPC part of our business, that stands for Engineering, Procurement and Contracting Construction. We're very much around optimizing margins and making our process efficient in order that our project margins can be controlled from a QS perspective, delivered on time and high-quality service. So we've invested in our management team. We've upscaled our technical solutions team and in particular, to facilitate the rapid growth from solar this time last year, which we're talking about a 500% organic year-on-year growth. We've had to set ourselves up for scale in the future. So we really -- we've been very thoughtful about what are the drivers, what are the barriers to entry and what are the differentiations in our operating model outside of our proposition that can make this a really high scale, highly valuable and sustainable growth business. As part and parcel of that whole grid structure, we've also fully integrated and invested in our finance ERP system which is integrated within our operations CRM platform as well. Crispin will talk a little about the investment we've made there, but it's been a significant investment and one which I think will stand us in good stead for the future. Obviously, the disposal of our division has transformed our balance sheet. We've previously updated investors on the phenomenal facility we have in NatWest and that relationship is going from strength to strength. And then in the background, while all this has been going on, as I mentioned, the market has gone through a period of recovery, and we believe we've seen the recovery represent our strongest 2 quarters of new opportunities coming through to investment proposal state, which we think will now start giving us the momentum for H2 and beyond next year. I'll pass it over to Crispin to the next couple of slides, and then I'll come back to the outlook and the future growth drivers.

Thanks, Harvey. Right, so if you could turn for next slide, please. So as Harvey has outlined the H1 results were challenging. These were impacted by constrained balance sheet prior to the completion of the sale of the Energy Management division during Q1. And also a challenging market condition as a result of a reduction in energy prices at the same time as an increase in the cost of finance. The core revenue for the Energy Services business of GBP 6.2 million was therefore down from GBP 11 million on a like-for-like basis in the previous year with an adjusted EBITDA loss of GBP 2.1 million for the group, down from a profit of GBP 0.5 million on a like-for-like basis. The operating cash flow for the period reflects this with strong cash generation expected in H2, mirroring the forecast earnings profile for the year. Following the disposal of energy management, we have taken the opportunity to conduct a full review of the group's balance sheet. Following this review, we are expecting to take an exceptional charge of up to GBP 2.5 million at the half year and further detail on this will be provided in the interim accounts. As Harvey mentioned, we've been pleased to see a strengthening in the market during the period. Political certainty given to decision-makers following the U.K. elections has further supported this. The business has strong momentum coming into H1, and the Board is maintaining full year revenue guidance. Thank you. So the H2 forecast is underpinned by a robust contracted forward order book coming into the period, which covers 44% of forecast H2 LED revenues as at the date of the trading update. And that's consistent with our target to maintain at least a 3-month contracted forward order book. 75% of the forecast H2 Solar revenues were also contracted. And as you'd expect, contracted revenues have further increased in the last few weeks since the trading update. We have good coverage on new business requirements for H2 following the record pipeline growth in H1, Harvey has already mentioned. And I'm pleased to say that the management actions during H1 are delivering improving margins for both LED and Solar. We expect this trend to continue through H2 and beyond. Whilst the H2 revenue forecast represents a step-up from H1, the robust forward order book and strong pipeline allows the Board to maintain the full year revenue guidance of GBP 25 million to GBP 26 million. Thanks, Harvey.

Thanks. So just to wrap up, as we think about moving forward, yes, it looks like a big stretch to -- we go from GBP 6 million in H1 to GBP 19 million in H2 and the cynic would say, is that possible? Is that deliverable. I believe it is. I'm feeling very confident that it is. Clearly, we've got dimensions around end of the year, but we've been meticulous in our planning. And as Crispin said, we've got plenty of coverage in our pipeline for the small slice of revenues we don't yet have covered, but the majority of which we do. So I think I'm focused on making sure our operations team to deliver a high-quality solution with Nick around the contracts we've got already looked in. I think as I -- look, outside of H2, I'm thinking much about how do we achieve strong growth year-on-year going forward. I'm excited about this race to 2030. I like the fact we've got a leadership position in the public sector now. I think healthcare is going to play a major part in our strategy going forward. And I think the one thing that probably have touched on in the presentation yet is year-to-date on our journey on -- we've been very much a direct sales business. We've originated our projects directly with our customers. We take them through its investment-grade proposal, and we've had a very strong 50% conversion met. Our competitors have all done it very differently. They've all driven their growth almost without exception through the framework structure and through channel partnership referral channel deals. We've, in the last 6 months, invested very, very heavily around a framework strategy and we expect now to be in a position where we can compete head-to-head within frameworks. We've already onboarded in the region of 8 to 9 frameworks where we are going head to head with all of our other competitors. We believe that, that layering on top of the extremely successful direct sales channel is going to give us the pivot for significant growth going forward partly enables us to go after the 7,8-figure deals. Also partly allows us to pivot into healthcare, more rapidly. It's taken us a long time to, I guess, be compliant and to be in a position where we have the right to win these larger projects. And I think the securing of the Spire contract, which is going well incidentally, has been part of that journey. So super excited about what we can deliver in healthcare, particularly after such a strong few months of delivery around the healthcare sector, which we're operating with Spire. So we've got a strong platform. We've got a strong delivery plus we're focused on quality and service, and we are well positioned, unlike our competitors, and been able to offer third-party financing solutions in a very slick and compliant way. Is not simply a case of arranging asset financing. That doesn't work within the public sector. We've spent years perfecting the slick and seem as off balance sheet solution navigates through procurement, compliance, lean accounting hurdles. And I think that, that, combined with our project technology on getting investment-grade proposals fast to customers without the need to hire lots more people is going to be an inflection point for our growth going forward. So yes, sitting here, I'm excited about the future, looking forward to getting back in touch in September to talk about our interims.

Thanks, Harvey. Thanks, Crispin. We will now move on to some questions. I think we have a number in there. Let me just have a look. Okay, what do the existing trials that you mentioned earlier look like? Are they predominantly in Solar lighting? And how do you expect those to transition?

I'm not sure I understand the question. When you say trials?

Well I think when you talked previously about -- when you win a contract, they probably would have been in a trial prior to winning that contract.

No, I see. Okay, fine. So in two-part that answer. So education, what we tend to see is a long tail of customers with many numerous projects under their portfolios. A year ago, a large multisite 20 school trust would probably have wanted our organization to do 1 or 2 trials first before they award a significant multi-site contract. What we're finding actually is that it's no longer the case. Based on the credentials and historic delivery capabilities we've had, we are going straight to award of multisite contracts. We're not announcing those into the market because they're within our day-to-day business wins, and they don't [ fetch ] more than 5%, 10% of the revenue number. I think there's a trigger that Spire triggered, but these other contracts, which are anything between GBP 500 and GBP 1 million don't trigger. But in the background, what we're seeing is an increase of our average order value, successful winning of much large projects without having to go through a trial. That said, on Solar, some do want us to do 1 or 2 projects first before they start thinking about other rollouts, lesser than it used to be. Look, I don't think we have -- what we certainly don't have, and I think this may answer the question, what we don't have is a situation where we do a trial and don't get the next price. So if we do enter a trial, 9 times out 10, if not more than that, we get the full rollout afterwards.

In terms of the disposal of the EM division, has there been a tangible shift in the mindset of the team post that disposal? And one assumes they're feeling pretty optimistic about the outlook?"

Yes. So they can be transparent. It was a tough transition from a cultural team building perspective. We spent 3 years building a strong team, an integrated team, obviously getting rid of half the business in a fairly tight sort of, if you like, period is challenging for a business at our size. We were fortunate enough to have the business located largely in Coventry. So we were fortunate enough to sort of see it physically in one location exit the business, but we still have a number of people that work out of our London offices. I would say that morale has certainly never been higher in our business than it is today. We've had the opportunity to hire a group of new both technical and senior leadership people in the business that have helped accelerate the morale. I think we did lose a few people underway, I think that's inevitable. And I think as a result of that change, we've been able to solidify new culture and new sense of purpose for our strategy. So wasn't disruptive for about a 3-month period. And I think by the time we got to June of this year, I feel that was settling down quite nicely, and I feel pretty content now. We've got very strong, really -- very strong morale of the business. We've got a new Chief People Officer who has done a huge amount of work with our leadership training, performance, coaching platform as well with our people, and that's starting to pay dividends as well.

That probably leaves quite nicely on to why is the role of COO being created? And can you give us some background on Nick Clark, please?

Yes, it's a good question. So I worked with Nick next 12 years ago and I was an investor in a lighting efficiency business, Nick actually was part of the initial -- I guess, the initial setup team of the energy when we started in 2014, but weren't quite big enough to sustain such a heavy hitter so it went on to run Sylvania, large amount of manufacturing business, and then lastly Aurora. So he comes from a projects background, commercially focused individual, strong leadership. And I think what I was looking for was someone who could very project-focused, someone who is very much process focused around optimizing our projects business. And as I say, we have a development business and we have a contracting EPC business. And he's very easy for businesses like us to have leaky project margin. So you end up not getting the margin that you expect on the project because the controls aren't there because the processes aren't there. So previously, we had an MD of energy services, and we had an MD of Energy Management. With this new structure, it was a very much clear gap in our operational requirements. But that operational gap needs much more than just hands-on operations where we're integrated developing business that develops projects and that has operational capacity. So I needed someone who have commercial skills and awareness of projects, but also he was a good team leader and someone I had a relationship with. So that's the sort of background. Nick is being with us really in a part-time capacity for 6 months, but full time now for 3 months.

Thank you. So obviously, there are a few questions around the 40 million facility. Are you exploring a similar facility for private sector customers? Would that work? Is it applicable?

It's a brilliant question, I liked that one. So absolutely, yes, because I see that the growth in solar will not just be limited to the public sector. On the flip side, we won't be pursuing strong project growth in the commercial sector for lighting, but we will be pursuing very strong project growth in commercial industrial. And this year, when we think about our GBP 11 million, GBP 12 million of revenue that we'll get from Solar and possibly more than that. I suspect 70%, 80% of that this year will come from commercial industrial projects, okay, because it just so happened that they were the and Spire is a commercial project, even though it's healthcare. And so as part of that, we have been working very closely with a very important strategic partner, which I'm hoping to start talking about in the coming weeks and months, we just funded our first deal in the private space, who's a big international player, has perfected the Energy-as-a-Service business model in America. And we've been forming close relationships with both from a -- can we create a product that services the funding needs of commercial and industrial projects but also can we be a recyclical development partner and delivery partner them in the European markets. So yes, definitely on my radar to secure something similar to what NatWest have got for the public sector because I think then we've got a full house in terms of funding positions.

And for the uninitiated that may be joining this call, can you if possible, give a brief overview as to how that facility benefits the consumer, the customer, shall we say?

Yes, at a super high level, what we do not sell is asset financing for third-party technical products. And what we do is we wrap up a service solution in the form of a monthly or quarterly service payment that the customer pays, which is used to pay -- is paid rather from the savings we unlock from the projects we invest in. So if we end up identifying a particular customer, for example, can save GBP 100,000 a year from upgrading their lighting infrastructure. The monthly payments might total GBP 70,000 in the year, and that'll be left GBP 30,000 surplus. So what we always do is design capital-free cash flow positive solutions to the customer where from day 1, month 1, they're unlocking carbon and being cash flow positive in their P&L. And it's structured as a service agreement with performance obligations and with the ability to monitor and track savings at the same time.

You mentioned the charging division earlier in the presentation and said that at present, it's almost an add-on service when you have additional contracts. I mean do you see a point where that will change? And what point of timeframe?

Possibly. I think the charging space is in 2 parts. You've got your rapid chargers, which are GBP 50,000 to GBP 100,000 expensive units sitting on service junctions, like petrol stations or McDonald's or in hotel junctions on the motivate sections. These are 10-minute charges for people who are on the move. Then you've got the AC units, which are anywhere between 3 and 7 hours to charge your car, which are workplace charging, which are to 5 to 10 grand a unit versus 50 to 100 grand a unit. So then varies -- the market is very, very bipolar in terms of you've got the 2 extremes. On the rapid charging, you've got a utilization model where the people who are investing in those charges are taking utilization risk. So they're pushing in effectively at toll bridge, they're paying to upfront, hoping that the charger will be used. That is a particular infrastructure type of investor that's needed for that. So taking [ Steve-O ],for example, which is one of the U.K.'s leading club developers for rapids, they -- there's hundreds of millions of pounds into charges over the last 7 years. The majority of the market, however, is AC, which is expensive plugs essentially untapped for people wanting to park 3 to 7 hours, okay, or overnight. Now that market is confused because you've got landlords, not really wanting to invest a huge amount of capital into their infrastructure on behalf of tenants because they don't get a return from it. And you've got tenants who are trying to figure out whether they're charging their stuff. And are they monetizing their customers for charging? Or is it simply a service, either way, it's not a cash generation energy transition. It's an infrastructure, it's a necessity. So landlords are all [indiscernible]. I've got to do it, but when do I do it? The uptake has been slower for charges than I think a lot of people anticipated because a lot of people who own a car are charging at home at night. So it's a very confused market. And the margins are not particularly strong, 20%, 25% margin because your average electrician can install a plug for an EV, right? It's pretty simple, it's not complex. Where we were finding our customers paying a challenge was you take a school, they've got 200 teachers, these big independent schools or secondary schools have got 50 to 200 teachers. To put in 10 charges, it suddenly GBP 100,000 investment. So what we were finding is maybe only 2 or 3 teachers turned up this year with an electric vehicle, and then they need a couple. So we were doing very elaborate and expensive infrastructure upgrade proposals hitting with anywhere between GBP 100,000 and GBP 500,000 proposal value, it not being cash generative because it was an infrastructure investment and the clients then was saying, I'll take 3 well, take 4 and it being at GBP 15,000, GBP 3,000 margin reward for us. That time and investment was so much better spent on GBP 1 million Solar project, it's going to drive [ GBP 250,000 ] profit for us. So what I'm trying to encourage our commercial team to do is always include 2 charges on a proposal, let's get our customers on board with a proposal with a couple of charges get them using it. And then with there, we got a foot in the door to when they do 1, 5, 10, 15, 20. But I think it would be quite dangerous for us to have a customer acquisition strategy, so focused on our charging right now. And I don't think investors have got the appetite for us as a business as much as we could to start owning a bunch of rapids in hospitals and education facilities, which may or may not deliver an 8%, 9%, 10%, 11% IRR on their investment. And I don't think that's the business we're in at the moment when we've got so much other exciting, really profitable business we're in.

Yes. And I suppose a follow-on question from that, which I think you probably already answered. Around acquisitions. Obviously, the balance sheet is in very good shape now. Do you foresee making acquisitions [indiscernible]? I'm sure you're getting asked that question a lot enough, see it might be in charging but...

There's a slightly flicker response to that is -- if our investors get behind us and ramp our share price [indiscernible] we'll be doing tons of acquisitions that will be earnings enhancing that, it's a shame because being on -- means really we should be thinking about M&A. And that's the reason really -- one of the sole reasons to be our name, okay, which is to have the ability to utilize your cap structure in such a way that you can have earnings enhancing acquisitions quite quickly. Now there are lots of interesting acquisition opportunities out there that we could and probably should be doing, but we're not going to be doing until we've got ourselves established as a strong growth, high margin and cash generative business. I would like to be doing both, I've turned around and said to our team, we're putting M&A on hold. And I've also turned away lots of interesting acquisition opportunities because I don't think we should be taking that risk at this point in time. But at the moment, I think our share price reflects true value, which could be anytime soon, I hope. Then yes, I think I could convince a lot of interesting vendors to take paper in our start and we can have a more vertically integrated M&A story around Solar and thinking about different service propositions that could bolt on to what we're doing without being any distractions. But, yes, we'll see.