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

Good morning, ladies and gentlemen, and welcome to the eEnergy Group Plc investor presentation. [Operator Instructions] Before we begin, as usual, we would just 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, everybody. So we've got a trading update this morning, which reflects a very transformational year for the business. As you know, we disposed of our integrated energy management business last year. And as a result of that, we've been focused very much on transforming the Energy Services business into a scalable and very cash-generative business. And I'm pleased to say that we've seen huge revenue growth in the second half of the year. As you can see, we've hit GBP 27 million in the full year, partly reflected by the hugely growing business in the second half. So over GBP 20 million of revenues in the second half, delivering an EBITDA of GBP 2.4 million, which is a 12% margin. So very proud of the transition that we've seen moving away from an integrated business and seeing that revenue growth coming through, not just from lighting, but also from solar. So as we sit here today, we've got a very strong pipeline as a result of the momentum that we've been generating in the second half of the year. And we have a contracted order book in Q1 into the first half of the year of over GBP 7 million. Bear in mind that this time last year, we did GBP 6 million in the first half. We're now contracted with over GBP 7 million already. So we're expecting a very strong first quarter to follow on from what has been 2 very strong preceding quarters in Q3 and Q4. Some of the key investments that we made that John will talk through later in the presentation, around building new systems and platforms for a stand-alone energy services business. Obviously, as we were an integrated business, there was quite a lot of disruption, quite a lot of systems and architecture that had to be unwound that went with the energy management business, and we had to reinvest quite heavily into both technology platforms but also systems and processes that we were set out for a scalable business model going forward for energy services across most lighting, solar and EV. We reduced our cost base in the second half of last year, which John will talk through. And we've got a much more focus around cash generation now. So I'm really pleased with the progress we've made. We've seen a record pipeline being developed. And as you know, we have a 6-month sales cycle. So we're starting Q1 with an extremely strong pipeline as a result of the work we put in from June onwards. I think we've seen some really pivotal frameworks being initiated in the business, and we'll talk about that shortly, but notable wins are the NHS Commercial Solutions Sustainable Framework and a nearly GBP 1 million award for the University College Group. Macro tailwinds with us now with the new government, investing very heavily into the public sector, which is driving quite a lot of additional channel revenue into eEnergy. So yes, very pleased with the momentum in the business. It's all organic growth, and we're starting to see that investment we've made in the pipeline start to bring real profitability to the business. From a market perspective, as you know, we are very much an education business in Energy Services. And whilst that's an exciting sector, still a GBP 2 billion market, where 65% of the schools that are in the U.K. market across all the various subsectors of education remain untapped. We have pivoted and started to think about further education as a really key addressable market. So universities and colleges are now a very big part of our strategy, and we're starting to see GBP 1 million plus accounts starting to be developed within our pipeline that are having quite a big meaningful impact on our P&L because previous deal values were around GBP 150,000 mark where we're starting to see GBP 1 million accounts being won in the further education sector, it has a real big gearing effect on our P&L. So education is still a very big market for us, but further education is enhancing that and giving us a longer tail of opportunity. We did quite a lot of market research last year, independently to assess the addressable market. And so these figures are the result of looking at those markets very deeply. And 65% addressable market gives us a good 5 to 10 years' worth of available work in LED and 10 years and beyond in solar. So a lot of investors have mentioned over the years, have we got a limited time frame for the education market based on essentially niche market and us being so successful. We are successful in this space, but we've put less than 2% or 3% market penetration at the moment. We want to get 10% market penetration. And we believe now we've got a long enough tail to do that. The other key market opportunity for us is in the NHS, where we've seen a 50% addressable market available within lighting. And we think this is a GBP 5 billion market across the net zero initiatives that we operate in. So frameworks are a key part of this for us. We see this as being a big part of 2025, and we've got some exciting projects in the pipeline that we're developing, and I think we're going to start seeing those come to fruition in Q2 and Q3. I mentioned the government, the government's new initiatives in public sector are helping us enormously. There's a real rush to demonstrate, I think, to the U.K. public, but we are in an environment where the government is taking it very seriously. We're starting to see much more investment coming through for frameworks in this education and NHS space. So that's helping us. And we also think that the 10-year tenure that we've now got within Energy Services is giving us a real competitive advantage and creating a high barrier to entry. So we've seen a lot of small players disappear from the market, slight consolidation around the key players. And as we start to go up the deal value chain north of GBP 1 million mark, obviously, there is a much more credentials led tender process and the energy is now capable of tendering against some of the big infrastructure players that are in the market. Without question, our differentiated funding model is creating a point of differentiation generally in the market for us. Budgets are tight, public sector budgets have been limited, outside of some of the government grants, we still see huge, huge pressure in education, NHS and universities as a result of everything from national insurance increases and all of the various pressures that these businesses like universities are facing at the moment and the ESG agenda remains very, very priority. So for us being able to offer a 0 capital solution is becoming more and more important for these customers. Solar is surging in demand, which is as expected, we're starting to see the size of our solar projects increase in size and scope, which is also driving a huge amount of momentum within our business. When we look at the drivers for FY '25, we picked out a selection here. Obviously, there are a lot more than this. These are the main ones that we're most focused in on. We talked about government backing the investment environment around grants for certain LED projects in schools. That's helping us, and that's sort of a previously unbudgeted revenue channel for us. Capital-free solutions without a question is driving a huge amount of conversion in our pipeline. The ability to assess data in the process sets us apart from our competitors. We have a very data-driven, surveying and assessment process as part of our sales cycle. And that's really, really key as part of providing a fast track process from an opportunity opening up and closing that opportunity and then providing optimization of that data once we deliver the project. Customers now insist on a turnkey solution. They don't want to have to manage the project. They don't want to have to manage procurement. So a turnkey solution for us is, again, a very big differentiator. The adoption of solar, it's trading at 50% discount to grid energy. So anyone with daytime consumption and with roof space or available space for ground man, it's not a question of are they going to be doing so as a case of when, our job is to convince our customers that time is the biggest value driver in any project. So that's the real driver for us this year. And then the expansion into universities and NHS Trust, again, as I mentioned, a massive value driver. The GBP 1 million projects that we're now seeing come through and some multimillion pound projects have a strong inflection point on our P&L given the gearing effect. Routes to market. We've been talking a lot about bids and frameworks. That's not to dilute the impact of our direct sales strategy. We're double the size our sales team. We've adopted a regional approach to bring a more focused, I guess, account management strategy around the way we manage education in universities and health care. This is proving to be extremely successful and efficient, and we're starting to see that come into the same momentum now. Bids and frameworks. We're on 5 public sector frameworks now. That's up from 1 this time last year. We're expecting to be on 1 or 2 more in the next quarter as we've been planning. Those are critical for our success on multisite million pound plus projects. And then in solar, what we're doing is we're launching and leveraging our partner network, where we're working with partners who have influence over multi-site commercial industrial, whether that's landlords, whether that's industrial developers and/or portfolio managers of larger states. So the 3 key target areas for us, very focused, education, health care and C&I for solar are the routes to market for FY '25. I see this business as being in 2 parts. We're in part of developer and a development platform, and we're an EPC solutions business. The pipeline is essentially the heartbeat of our business. As you can see, we've increased our pipeline from GBP 258 million to GBP 375 million over the last 6 months. That demonstrates that huge momentum that we've seen within the period June to December. So a 45% year-on-year increase. 26% of that pipeline is an investment-grade proposal, that means that we've gone through the investment of assessing and delivering to key decision makers within our, if you like, key stakeholders of our prospects, that is a significant improvement on this time last year. Again, nearly 100% above where we were for lighting and more than that for solar. We have a historic 55% conversion rate of investment-grade proposals. Now whilst our budget is not to convert 50% of that GBP 98 million this year, that partly results in a longer tail of, I guess, sales cycle particularly for solar, but what is giving you is an indication of the long tail of value that we're building not just in 2025, but also in 2026. So that's the multisite customers where we've done perhaps lighting, and then we'll do solar 6 to 9 months afterwards or where we're going through a detailed and comprehensive appraisal of the solar development cycle. 33% of our customer contracts last year were from existing customers. That's a testament to delivering good quality service and effectively the opportunity with our customers that is changing in their profile that gives us a longer tail of revenue. So as we think about Q1, we've got a pipeline of weighted forecast is delivering confidence in our first half, GBP 7 million of which is contracted. This time last year, we were expecting to deliver GBP 3 million in the first quarter. We're looking to double that this year, and I think we'll do better than that in the second quarter. So you can start to see the momentum we're getting with our pipeline, but also the predictability and ability to more accurately forecast as well, which is helping us manage the business better. So I'll hand over to John to talk about the accounting and the work he's been doing and I'll pick up to talk about some of the outlook.

Good morning, everybody. So I just want to talk about the accounting adjustments first before we talk about FY '24. So obviously, with the new CFO in place, I joined in October 2024, it's right that did a detailed balance sheet review. And effectively, the accounting adjustments are designed to shift the revenue and cost into the right period. So we ended in December 2023 with a significant accrued revenue balance of about GBP 7.6 million. And having looked at that balance in detail and looking at the -- and looked at the gross margin on the business that we've done in the first half, it was clear to me that the revenue recognition policy needed a little bit of tightening up, which is effectively what we've done in 2024. And we've gone back and restated 2023. So effectively, there's GBP 2.8 million of revenue and a circa GBP 1.4 million of gross profit, which comes out of '23 into 2024, and that's where the revenue and those costs should sit. We've also taken opportunity to review the balance sheet in detail, and there's a further GBP 2 million noncash adjustment. These are all noncash adjustments. So a further GBP 2 million reclassification to remove the historic project accounting balances from the December 2023 balance sheet. So in total, that's GBP 4.8 million of revenue adjustment into 2023 and the gross profit is reduced by GBP 3.4 million. And for 2024, effectively, as I said, GBP 2.8 million of the revenue from '23 moves into 2024, which is where it should sit, and GBP 1.4 million of the gross profit moved from '23 to 2024 as well. We've also taken the opportunity to write off legacy debtors related to the Energy Management business. As we know, the Energy Management business was sold in February 2024, some of the legacy debtors that were sat within that business are unrecoverable. And I think it's appropriate that we make an adjustment back in 2023 and write those debtors off as an exceptional charge effectively below the EBITDA line. Overall, I've introduced a much more disciplined approach around revenue recognition and project accounting, and I'll talk about that in a little bit more in a second. And of course, all the accounting adjustments are subject to audit. So let's move on to the 2024 results. Results were in line with market expectations, both within the 10% threshold. So revenue increased by GBP 14.4 million to GBP 27.1 million and adjusted EBITDA increased by GBP 4 million to GBP 0.4 million, so both in line with market. H2 2024 was particularly strong. This is all organic growth. There is no M&A in these numbers. It's all organic growth. Revenue was up over 100% to GBP 21.1 million in the second half, with adjusted EBITDA in H2 of GBP 2.4 million, giving us an EBITDA margin of circa 12%, that's moving in the right direction towards our target of sort of 15% to 20% EBITDA margin, which we think is achievable. So in total, there were GBP 4.2 million of exceptional charges in FY 2024. The cash cost of those exceptionals is circa 3.6%. And actually, if we look back over the course of 2024, extracting ourselves from the energy management business, which was highly integrated, with Energy Services took significantly longer and cost more than we initially expected. We also had significant deal costs around the disposal of the business and also the subsequent restructuring where we've invested money into developing our own technology. And obviously, in the second half of the year, we made the decision to close Ireland, which resulted in some exceptional costs coming through. So I guess the key message for investors for 2025 is we are not expecting exceptional charges in 2025. That's the key message. So we closed the end of the year with GBP 2.3 million of net cash prior year comparative with GBP 7.3 million of net debt. And effectively, post June of 2024 this year, we've invested GBP 1.1 million in NatWest funded deals, that money will then turn into additional cash for us over the next 7 to 10 years of circa GBP 1.7 million. We've also invested around GBP 0.4 million in eEnergy platforms and system improvements around Salesforce, NetSuite and some of our -- an in-house app which we developed around helping our LED business. And we've also, towards the latter part of H2, made some significant fixed cost reductions such that we expect to be cash positive in the first half of 2025, which is typically the weaker half of our 2 trading periods. So one of the things that I focused on since joining eEnergy is to really take a really close look at the operations and controls in the business and to try and get the finance team working much more closely with the LED and the solar -- solar businesses. And effectively, we've made significant investment in NetSuite to help enhance our accounting information around gross margin, around net cash, around net working capital all by project and to try and join our finance with the operational teams to make sure that we're maximizing all of the opportunities across the business. So there's a big focus now much, much more focused, I would say, on cash flow and gross margin, which we're looking at, sort of week-to-week in regular meetings and dialogues using the accounting information to try and drive and make meaningful decisions, data-driven decisions, which will enhance the operational performance of the business. We're also looking at all the vendor contractual terms. Obviously, as our business scales. We need support from vendors around being able to meet our needs as we go forward. And we're looking at credit terms and also pricing very carefully to make sure we're getting the best value for money, and make maximizing any cost efficiencies there for us. I think our overall objective for me and my team this year is very much focused on improving our profitability and cash flow. That's absolutely where we need to be focused. And we've already made great inroads with that already, and I look forward to reporting on that at the half year. Thank you.

Thank you. Thanks, John. So when we think about the outlook, we've got huge confidence in our pipeline. We've got a record contracted forward order book in Q1. That demonstrates the work we've done in H2, but also underpins the strong market demand. Positive EBITDA for H1 and although the first half is usually slower than the second half we think we can start to smooth out those 2 periods, in particular driven by the less seasonal impact on solar. Strategic focus on the broader higher education and health care markets, partly driven by frameworks. This is going to drive significant value opportunities for us. The efficiencies that John has talked about around our operating model very much gross margin focused, cash generative focus on all projects, thinking about the way in which we work with our various supply chain partners so that we can scale the business without effectively sucking up net working capital is a really big part of the strategy going forward, which we are confident we can do. I think the profitability of the business, the EBITDA margin enhancement is something we've got to key objectives focused in and around. The -- team are very much focused on how can we drive EBITDA efficiencies in the business. And we've got a debt-free balance sheet. So we've got a strong financial business, and we've got a strong pipeline to drive profitability in FY '25. So in summary, record H2, I think the EBITDA that's coming out of Q3 and Q4 shows what's possible in this business. We see that maintaining momentum. The market generally is finally getting its act together with regard to net zero focus as we raised towards 2030. The new government is helping that. And I think also aging infrastructure is also helping in a big way. This start to be a significant focus. We're the leader in our sector, so for education, without doubt, we are known as the leading brand. That's starting to infiltrate into college and universities, to put that into context, we've got 1 university we're working with that has over 200 buildings. The total opportunity for that is a 3-year opportunity in excess of 8 figures. So if we can really drive momentum in the further education market with the universities, I think there's an opportunity for us to really drive our profitability in a big way of these large projects. Strong start to '25, quicker out of the mark this year. Usually, the first week of January is very slow. This year, we felt a lot of momentum very quickly. The off-balance sheet funding again, is a massive, massive advantage to our business. We're starting to think about new partners. We're starting to think about how we can expand on our NatWest facility with other strategic funding partners that can help us, in particular, with the commercial. As you know, NatWest is a public sector facility. We're working with our new partners around C&I funding for larger multi-site projects that are not in the public sector. And our investment in the operating platform is starting to bring efficiency. So what that means is we can scale the business without increasing materially our headcount cost. So I think what Q3 and Q4 showed was that we have got a run rate business of GBP 40 million, given that we did over GBP 20 million in H2, that run rate business was able to deliver over GBP 2.4 million of EBITDA in that period. That does suggest that, that cost base is quite capable of delivering a GBP 40 million without any further increase in costs, and we've got a GBP 5 million-plus EBITDA business run rate. So the potential there for scale is huge and the potential for gearing in our P&L is really quite exciting. And that concludes our presentation today. So yes, happy to open up to questions, and thanks for your time.

[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 all be accessed via your invested dashboard. Harvey, John, as you can see that we have received a number of questions from investors, 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 just hand over to you to chair the Q&A with the team. And if I pick up from you at the end, that would be great.

To start with, we've had several questions around the contingency payments for the sale of energy management business. Are you able to give any indication on both the initial and second potential installments? Or due to it being mentioned in the trading update is your view that nothing will be received?

So let me answer that one. We don't know at this stage how much the deferred consideration will be. We had initially envisaged it would be circa GBP 8 million to GBP 10 million. However, we have assumed it will be circa GBP 5.5 million is our current thinking, but we won't know the final answer until January 2026 when the final measurement period has been completed.

We've had a few questions around the framework. The first one is how much revenue is expected from the frameworks?

Okay. So it's hard to predict. In our budget for this year, we've only budgeted for a couple of million to come from frameworks. I think we can already see that being deliverable from the pipeline we've got. The upside potential is huge. Many of our frameworks are closed. And therefore, we see bids and tenders coming through them to a select number of framework participants. So we expect those frameworks to get busy in the year. They come to the table with projects that are ready to go. So long as we are seeing the ability to bid for those frameworks within the first 6 to 9 months of this year, we've got the potential to deliver and recognize that revenue. So potentially a huge number, but budgeted GBP 2 million for this year.

Someone's asked why you're being so successful with the frameworks? And in terms of framework, typically, how long between the bid and acceptance of the bids? When do you expect to start to get some bids accepted? And will you inform the market of each successful bid?

So clearly, material project wins get captured in a reach or in RNS. So yes. I think the cycle for solar deals is quite different to the cycle of LED deals. So with an LED deal, multi-site GBP 1 million plus project, we can be at assessment phase and fully recognizing our revenue within 60 to 90 days. So we can quite easily see 90-day turnaround of revenue outside of our budget even in October. So we've got 9, 10 months worth of opportunity coming through the business. With solar, the sales cycle and the development cycle are longer. So we would need to see opportunities coming through to us by June in order to be able to feel confident we can recognize that revenue through -- into December year-end. I think the -- the success formula for frameworks getting on them and winning them is, again, different according to the sector. So in education, it's credibility. It is supply chain and pricing. So I think one of the reasons we're being extremely successful is because we've got 10 years of experience, over 0.75 million luminaires installed across 1,200 sites gives us quite a head start on our competitors. I think our price point in our supply chain means we're extremely competitive. And we've invested quite heavily in the accreditations and compliance around the various scoring mechanisms that make winning a framework successful.

Next, a couple of questions around the funding. And first on NatWest. What sort of IRR do you expect on the 1.1 of NatWest funded deals? And what rate do you pay for funding?

So I'm not going to disclose the rate we pay because it's sensitive in the market. What I can say is that we retained 20% of our revenue into our projects. So we are leaving behind a retained interest in the project alongside NatWest. So instead of cashing out our margin in cash on day 1, we leave behind 20% of our revenue. And that revenue then obviously accrues value over the course of the term of the contract. So as John indicated, GBP 1.1 million investment will end up yielding a GBP 1.7 million to GBP 1.8 million return to investors over the term of the contract, which we collect quarterly. So -- it's a small but nonetheless important reocurring or recurring revenue stream that we're building. And so hopefully, that answers the question.

The other one was about providing a bit more detail on the funding available to clients. So obviously, you're aware of the NatWest facility. But they noted in a previous presentation about Siemens is another source of finance. And if you could expand on that at all.

Yes. So as we've stated, NatWest is a public sector facility is designed to be very much focused around our 3 technologies in health care, public sector and also local government NHS. So outside of that, obviously, we have independent stores, we have universities and we also have all of the C&I projects for solar. So what we have is a panel currently of 2 or 3 retained funders that have underwritten our contract form over the last 7 years. So Siemens is one of them. There were others, which I won't mention because of the competitive nature of what we do. However, we are in talks with a strategic partner that we think could bring a lot more than just funding to our business, and we hope that we will be able to pull together a broader project funding offer that covers more than just public sector as we start to really scale our solar business.

On the note of strategic partners, there's been a question around what the thinking behind appointing John Hornby, the CEO of Luceco to the Board and just about Luceco's competitiveness with eEnergy?

Yes, it's a good question. And that's an easy one to answer. Luceco are an incredibly well-respected and large supply chain partner in the technology space and energy services, in particular around LED, but also around other component parts, but also EV. That relationship is getting stronger by the quarter. We're getting improvement in our pricing points regularly. It is a strategic partnership where we are obviously both mutually bound by our confidentiality around pipeline. So we don't ever have a worry that our pipeline of projects could be in any way circumvented by Luceco. That's just simply not in the spirit or contractual nature of our deal. John's fantastic non-exec. He's been with us now for nearly a year and has been a huge contributor in Board meetings, and he runs a public company himself. He provides good governance. And whilst there is obviously an interest in progressing mutual sides of our partnership, he also brings a sense of independents as well. So I think it's a great partnership, one that I'm investing in and one that's yielding strong results.

Looking towards the cash aspect. Can you provide more detail around the cash balance and where the funds from the EM sale have been deployed? And is the business now cash generative?

So let me answer that one. So at the time of sale, the Energy Management business back in February, all of the group's external debt was repaid, all of it. And in the second half of this year, cash has gone backwards slightly as we've invested, as I said, in some of the systems, and we've continued with some of the exceptional items, which obviously we won't be carrying on in 2025. Cash at the end of the year stood at GBP 2.3 million. There is no debt in the business as we sit here today, and that's excluding sort of a relatively small sort of right-of-use asset IFRS 16 liability. So yes, positive net cash, and we're expecting to be cash positive in the first half of 2025, yes.

And just about the exceptional items as well that you mentioned. And if there's any further details that can be provided around them?

So we'll provide a more detailed breakdown in the annual report of exactly what we spent on each of the items. But obviously, there was a significant amount of restructuring over the course of the year to extract the Energy Management business from the Energy Services business. I think it's fair to say that the businesses were much more sort of closely aligned with some of the legal entities and therefore, extracting the assets and liabilities in relation to business that's been sold and also dealing with all the sort of legacy issues around trying to rebuild Salesforce data, rebuild NetSuite data, et cetera, et cetera. There were some considerable costs associated with the sale of that business. Yes. So more details provided in the annual report.