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

Good morning, ladies and gentlemen, and welcome to the eEnergy Group Plc Half Year Results Investor Presentation. [Operator Instructions] Before we begin, as usual, we would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the executive management team from eEnergy Group Plc. Harvey, good morning, sir.

Good morning, and welcome to everybody. Following on from our trading update a few weeks ago, I'm pleased to give you a further update. It's been a very busy and productive 6 months. We've had a lot of change across the group, as we referred in our last update. The key message here is we've taken this opportunity to realign our group following the sale of the Energy Management division. We've restructured it in order to deliver a number of efficiencies. We've invested in a lot of technology, and we've been busy growing our pipeline. So some key highlights over the last few months being obviously, a major contract won with Spire Healthcare Group, one of our largest contracts ever secured to date. Solar revenue in the period up 34% and a very strong sales pipeline growth in that first half. So whilst the financials in the first half are disappointing, what they don't reflect is the progress and the momentum that the business has had in this period, which we're now seeing come through into Q3 and Q4, which I'd like to focus some time on this presentation. We've invested in some senior people hires. Nick Clark joined as our Chief Operating Officer, and we've appointed John Gahan as our new CFO, which I'll also talk about shortly. H2 started very strong. We've got sight of our record -- best ever record quarter for revenue, and we expect to deliver over GBP 9.2 million in the third quarter, which is a transformational quarter from a revenue growth perspective and from a profitability perspective. And what's also worth mentioning is that we've now got coverage of our Q4 forecast, where 60% of that forecast is already contracted. And I'll be talking through the bridge on how we are guiding for confidence to the end of the year. So just for those investors that are new to the story, a refined operating model, commercial model. I think the key focus here is to emphasize how our core service, which is the reduction pillar of our offering to customers, remains essentially a very strong core competency in our group. So this is where we are offering our customers energy reduction services, where for no capital down, they're able to transition their LED lighting or energy efficiency controls to deliver a significant saving and where they're able to unlock free cash flow in doing so, core focus being public sector. This part of the division is very profitable. It's a 38% to 40% gross margin business, and we're aiming to be targeting the business to north of 40% gross margins as we go into the future periods. This business has got a strong addressable market. We've got a leadership position in the education sector. As I talk about the market opportunity shortly, you'll see us pivoting into new verticals in the public space, which we think have huge areas for growth. The area where we've been investing a lot of time and a lot of resource is effectively building a solar business, the Renewables division within the Energy Services group, which has been organically growing from a standing start over the last 18 months and which has seen transformational growth in the last 6 to 9 months. So this is where we're offering, again, turnkey solutions for our customers to start generating their own on-site energy through a rooftop or ground solar solution and increasingly carport solutions, where we're able to offer them a capital-free solution using our NatWest facility and again, focused on the public sector, education being a core part of our market. Gross margins are lower. That's part of the dynamic of the solar sector. But again, a very, very strong growth part of our business and very complementary to our energy efficiency solutions. Both of these divisions have stand-alone operating teams, but they share a customer acquisition sales strategy team, they share a support team around finance, they share a support team around marketing. So we've got a lot of efficiencies in the way we run these 2 divisions. They are part and parcel of the same team, but they have different operational dynamics. Charging is still part of our strategy, but it's an opportunistically led strategy where our customers in reduction and generation are also requesting effectively a stepping stone into the charging infrastructure strategy. And we're picking up handfuls of chargers on each of our projects. We're not driving a charging strategy. It's much more of a supporting strategy around customers wanting to reduce or generate. And then I think our value proposition is always centered around that end-to-end finance solution. The NatWest facility and the NatWest product is a key component of our proposition to the public sector. Not only is it compliant, it's also incredibly competitively priced, and it is in a contract form which public sector are comfortable with engaging with. Data is a big part of everything we do, both in the capturing of data through our proprietary apps, which we use to assess projects with, something we're developing internally on a continuous basis that drives efficiencies, but also providing data to our customers post installation so that they can verify savings. I referenced in the last update, a lot of research we've been doing both through our partners and internally to assess the addressable market, in particular, in the education sector, but also reaching out into the health care sector. This is a, still, very, very large addressable market where 65% of the education sector remains addressable for lighting, and that is a GBP 2 billion market opportunity alone. So there is not a short tail of opportunity left in the race to net zero. We think this is a 10-year total transition for the education sector. Clearly, the next 5 years are going to be the bulk of the addressable market for companies like ourselves to capture. And 50% of the NHS still has to transition to LED lighting. So for lighting alone, we see the opportunity to be very big. And I think the decision internally is to double down on our energy efficiency lighting solutions. Given its high-margin profile in the business, we think that there is a huge opportunity to capture more market share. And so we are doubling down on our efforts to really capture as much of that market share as we can over the next 5 years. Solar clearly is a bigger addressable market. There is less than 10% of the public sector that has transitioned to rooftop or ground solar. And so we think that this is a longer-term larger tail of an opportunity in the market. And I think that the opportunity for us at the energy at the moment is to capture that service proposition, high-quality service reputation, where you've got a lot of the smaller players competing at the lower end and where the larger projects, the multisite projects require a more credible quality-led service offering, and that's where we're positioning ourselves. Again, the capital-free solution being our differentiator because as budgets are constrained, the opportunity for the public sector to transition is much greater if they don't have to deploy capital. And in the long term, if you like, macro environment, what's driving our business opportunity? It's definitely a more favorable regime at the government level. I think regulation and red tape has been softened. We've already seen it in the last couple of months, where there's been an increasing number of frameworks open up within the NHS for net zero solutions. And we're starting to see an increased momentum, as we come out of the summer, of, I guess, projects that were on hold starting to be accelerated again because I think there is quite a lot of internal pressure within the public sector to gain momentum over the next 3 to 5 years to meet their net zero goals. Definitely a need for end-to-end solutions. Volatile energy prices are now becoming a theme for our customers, where I think in this nondomestic B2B space and particularly for the larger users, there is no longer this hope that -- or potentially naive thought that there's going to be a decline in energy prices. I think people have started to accept that there is a sustained position in energy, which they have to face into. And there's just a more growing demand for cutting costs within their infrastructure to turnkey decarbonization solutions are starting to become back on the agenda, which is good for our business model. What I want to focus on is, I guess, a focus around the routes to market. Our business historically has always been led around a direct route to market through a direct sales team using our routes to market, using our various marketing channels to drive customer acquisition and then rolling out those customer opportunities through our sales cycle. I think that's quite different to a lot of our competitors, who have largely historically worked on framework agreements, framework agreements being either closed or open. So if you have a closed framework, it means you've got to apply to be a part of that framework and then you've got the right to bid and tender within the life cycle of that framework, which is typically 3 to 5 years. And then open frameworks where you've got the ability to compete for bids in an open environment. We spent the last 9 months building out, I guess, our position on closed frameworks, which we've been successful on. We've now got, I think, 6 frameworks we're appointed on, and we're part of a platform now where we can bid with the various components and compliance necessary within the public sector, a number of other frameworks as well. So particularly in the NHS, which are new frameworks for us, we believe that this is going to open up hugely attractive route to market. And we think that the framework strategy will now complement our direct route to market significantly for growth into '25 and '26. Average order values, we're hoping, will start to increase as those frameworks that we're bidding for reach into the sort of 7-figure territory. And we're quite confident now that we've got a proposition that will score highly on those bid criteria. We've also built an indirect partnership framework of channel partners where these are B2B service providers offering complementary services to energy services solutions. So they have a right to play in those discussions. And these partners then take a commission for introducing eEnergy as a complementary energy reduction or energy generation partner. So for example, it might be that we're working with energy consultants, [ FM ] providers, [ M&E ] contractors, who are all already entrenched with a customer and who now want to open up additional services and they need a delivery partner where eEnergy has started to play in that game. So for example, Redaptive, who is a large energy services player in the States, has started to look to offer its European customers who are part of a, if you like, a strategy that's been implemented in the U.S. They want a strategy for their European projects, for their European rollout customers, and we've now got the ability to start working with them to deliver net zero solutions using their existing customer base. So quite exciting to build a 3-pronged strategy out to the market. We're confident this will be an inflection point for our growth. And the pipeline that we've been building suggests that FY '25, we'll start seeing the benefits of that. Within all of this, we've had to build and invest quite a lot of infrastructure around frameworks, tendering and procurement in the public sector. And I think that investment is going to start paying off in a big way in FY '25. In terms of transformational highlights, I think just to summarize, we've invested quite a lot in our systems and infrastructure. So as part of the energy management exit, we had a number of systems that we needed to rebuild. So for example, our CRM platform, we had to rebuild from scratch because the existing CRM platform went with the Energy Management division. That's given us the advantage of rebuilding our workflows and processes to be more fit for purpose with the business that we now have, and that's starting to really drive efficiency in the sales cycles and also in our customer management projects post contract signing. We've developed further our proprietary survey and [ data ] app, which was built around the lighting proposition. That's now been advanced, which allows us to get to site data faster and automation of proposals faster. That then can reduce our sales cycle, which can increase our conversion rate. We know from, I guess, the data that we see with customers that the faster we move assessment of an opportunity through to proposal, the greater the conversion rate. So that's been a big focus over the last 6 months. And we've also invested, as I previously mentioned, around software platforms for frameworks. We've built a solar team from scratch, and that's facilitated what will be a 500% year-on-year growth, if you like, performance. And that team has been headhunted from competitors. These were people that weren't looking to move. We've now got a very experienced solar team from ground up through to the management function of that team. And we're -- we believe we've got a best-in-class capable management team to drive that business through future growth. Finance has had a huge investment. We spent the last 18 months building out an ERP system that's now integrated with our CRM system. And that's starting to play much more, I guess, much more value into the group as we start to get more visibility on financial information. So I think that's been time well spent, investment well spent, and we'll start to see dividends for investors going forward as a result of that scalability. I'll hand over to Crispin now, and then I'll dive back in afterwards.

Thanks, Harvey. So as Harvey has referenced, the first half has been a period of restructuring and separation as well as being impacted by -- at the start of the period by the balance sheet constraints ahead of the disposal of the Energy Management division. That's reflected in the results of the business for the period. So core revenue of GBP 6 million, down from GBP 11 million in the comparative period. So that's on a like-for-like basis, the continuing business, only with the contribution from Energy Management stripped out. That led to an adjusted EBITDA loss of GBP 2 million, which was down from GBP 0.5 million contribution profit in the previous period. We have seen good momentum coming through H1 building into Q2. and we've seen very strong sales in the period. So contract value signed in H1 as a whole of GBP 14.6 million, which was up from 11% -- sorry, up 11% from GBP 13.2 million for the same period last year. The investments we've made in the restructuring and separation have included implementation of new stand-alone IT and accounting systems as well as the establishment of the NatWest facility, and that's reflected in the operating cash flows reported for H1. Another key area of focus for H1 has been pricing and supply chain. That's included NatWest, and that's helped to drive strong margin improvement through the period. So whilst gross margins were down for H1, 19.2% for the period versus 32.5% for the comparative period, we've seen strong recovery through Q2 and into H2 from that -- those management actions. We're seeing LED now consistently outperforming the target of 38%, Harvey referenced earlier, and solar recovering towards the target range. And we're expecting that to -- or we're targeting that to deliver a circa 50% improvement in percentage terms in the blended gross margin percentage for H2. That includes, as I said, the benefit of NatWest. We've got a panel on the right-hand side just to summarize that and recap that again. If you look down to the bottom part of the panel, just very quickly, for every GBP 1 million of cash we draw from NatWest, that comes with a corresponding effective GBP 150,000 cash investment from energy. And that gives a GBP 300,000-plus share of future cash flows over the life of the contract. So that's typically 7 to 10 years for the customer receivable. And that also gives us GBP 100,000 additional margin, which is reflected or reflective of the improved pricing we get on this facility versus our other funders. The exceptional costs for the period reflect the restructuring and separation investments we've referenced previously. They also reflect a review and simplification of the group structure. A number of energy management entities and holding structures were retained as part of the transaction to keep that transaction as clean as possible. And so there's a simplification process on that front. And it also includes the transaction accounting itself. Thanks. Harvey? Sorry, actually, just to touch on this slide, the recaps on some of those key highlights, but also on the right-hand side, that strong GBP 15 million of forward order book coming into H2, which is reflected of the good period of sales we had through the second half of the period.

Thanks. I just want to sort of dwell for a second on the opportunity we have with NatWest and how those numbers that Crispin just referenced work in practice. So with previous funders where we were drawing GBP 1 million, let's say, for example, on a single project or a collection of projects, we would have cashed out all of our interest in that project and made our cash margin alongside our profit margin at the point of completion. What we're now doing with NatWest with improved finance rates is that we're leaving behind some carried interest in that project, and we're effectively investing that GBP 150,000 that would otherwise be a cash margin on that GBP 1 million, which turns into GBP 300,000 over the life of the contract. So there is a corresponding future improvement in our cash deferred income line, which we'll start to see as we go through our reporting cycle. So the more we invest and the more we close with NatWest, the stronger that forward order cash flow will be. We think it's a fantastic opportunity to build mid- to long-term value in the group. And we think that's going to drive significant shareholder value. Happy to pick up some questions towards the end on this, as I'm sure you may have some. But look, year to go, frankly, a disappointing H1 on many fronts, but a very strong underlying strategy that's delivering results for H2. We've got a really big H2 requirement, as you can see, north of GBP 20 million revenues versus sort of GBP 6 million in the first half. When we break it down, you can see here the bridge. Q3, as we talked about, we've got line of sight on circa GBP 9.2 million-plus revenue. That's a record quarter for us by some margin. And then the remaining Q4 to-go number, which is north of GBP 10 million, 60% of that is locked-in contracted projects either already started or about to start. The remaining GBP 3 million to GBP 4 million is a mixture of advanced legals for solar that we are landing either with existing customers or with new projects that are just going through the final planning [ D&O ] connection-type issues. And the remainder of that block will be a run rate of LED lighting projects that we're expecting to close in the normal course of business. Obviously, the risks here are more around timing. Clearly, Q4, winter months, slightly more challenging in the summer months to install construction projects on roofs than perhaps we've been out of in the summer. But we have experienced team who are planning these projects with that in mind, and so we are still maintaining that we are going to hit our guidance on revenue for the period. So lots to do and clearly demonstrate an underlying run rate for this business that we're capable of doing. And hopefully, we can maintain as we go into FY '25. Just as a summary, I think 4 key points here. Market opportunity is huge. Right to play in this market is absolutely first class for energy now. We've established a leadership position in education. We've got credibility now in health care. We're starting to expand into further education in universities and colleges, very strong pipeline, historically proven conversion rates and frameworks that will drive that market opportunity forward. Competition, I think, is starting to become less of a concern for eEnergy. We've got higher barriers to entry, in particular in solar. And I think also barriers to entry within the framework environment and also within the education environment plays to our advantage. The financing function and the bedding down of our NatWest facility is absolutely core to our proposition and provides another barrier to entry to our competitors. And then I think the operational improvements we've made around team and around the platform gives us the opportunity to start focusing now on EBITDA improvements as we start going into the FY '25 period. And that's really where I'll be focusing a lot of my efforts, which is around optimization of our P&L with John, who's our new CFO, thinking about how we can use those efficiencies to start driving a more of a geared P&L to profitability. And that concludes our presentation today.

Perfect. Harvey, Crispin, if I may just jump back in there, thank you very much indeed for your presentation this morning. [Operator Instructions] I'd just like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be all accessed via your investor dashboard. Guys, as you can see there, we have received a number of questions throughout your presentation this morning, and thank you to all of those on the call for taking the time to submit their questions. But Katie, at this point, if I may hand over to you just to chair the Q&A with the team. And if I pick up from you at the end, that would be great. Thank you.

Thanks very much, Jake. We've had several questions. There's a couple of questions just around the kind of GBP 8 million to GBP 10 million contingency of the sale. If you could kind of go into any more detail around that or provide an update.

Crispin, do you want to address that, please?

Yes, sure. So the two performance periods on which that is measured, the first ends today, so the period to end of September this year and then to end of September next year. Under the terms of the agreement, the buyer Flogas, has 3 months to pull together their accounting for the period and notify us of what that looks like. And then there's a sort of normal period of review and challenge to go through before we sort of settle on a final kind of answer. So we will have -- by the end of the calendar year, we should have the initial view through from Flogas on what that first period looks like, which we would expect to kind of settle and agree on fairly quickly shortly thereafter.

Thank you, Crispin. Another question is just about the relationship with Luceco. And how that's working out?

Yes, look, really good. Obviously, Jon Hornby is on our Board. We've built a strong relationship with Luceco, and we are very pleased with the service we get, the quality of the product is excellent. We've got obviously preferred terms regarding both price and delivery capability. So I would say it's going from strength to strength, and we are looking to invest heavily in that relationship, going forward.

Thank you very much, Harvey. Someone just asked a question around the frameworks and just maybe slightly more clarity on -- well, the question was, when do you realistically anticipate the first framework win? But maybe just a little bit more information around that.

Sure. So there's going to be two types of framework wins. There's going to be the frameworks which are called direct awards. These are customers that we've originated ourselves. So for example, there might be an NHS large project that we've originated through our own [ route ] to market, which we then use a framework to be able to, I guess, seek a closure of that contract in our favor. And that's probably going to be in Q4. So we hope to win our first direct award within either a large further education, multisite or an NHS contract before the end of the year. For tenders, which are client opportunities originated through the framework, which we bid on; so they're not originated by the business. Again, I'd like to think we could get at least one under the belt before the end of the year, but it might be that doesn't happen until the first quarter.