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 to everyone who's joined this morning. So I'd like to start with a summary of our results. We're excited to report that our fourth year of consecutive growth for the business, where we've delivered a record GBP 25.1 million. This demonstrates strong organic growth within the underlying heart of the business. And when you look at the adjusted EBITDA pre-PLC costs of GBP 3.1 million, you're starting to see how the business is gearing itself to increased profitability and cash generation, which John will talk to a bit later. We've obviously addressed our net debt position, and we've obviously addressed a number of cash issues, which John will talk to you later. But underlying everything we've delivered in the last 12 months, I want to focus really on the performance of the second half because what the second half performance shows us is delivering just over GBP 19 million and GBP 2.6 million of EBITDA and that tells us that we've now got a business that we can drive growth and performance up to a GBP 40 million run rate without increasing cost. And as we start increasing our revenues now, the gearing on our profitability really starts to scale, and that's what's really exciting about our business model. We've built an organically growing solar business almost from scratch less than 2.5 years ago. We've won some seriously large and complex solar projects within the health care and further education sector. These are incredibly hard contracts to win. And having delivered these projects, we've now got incredibly useful case studies from which we can grow other revenue streams from. So really pleased with the progress that we've delivered in the solar market. It's a competitive marketplace. We sell on service and quality. So we're really excited that we've -- we'll come out of the year with some fantastic case studies from which we can grow the business. We've diversified our client base. We are no longer a heavily focused education business. We're strengthening our position in education and clearly growing into other interesting markets now within C&I and health care. Last year saw us sell a large part of our business. We've had to reinvest back into a lot of infrastructure. John will talk to you about that later. That's been painful. It's been costly. But as we sit here today, we've got a really robust digitized CRM system that's integrated throughout the business. We've got a very robust financial reporting system now within NetSuite. And we've built some great technology tools that complement the efficiencies from which we can grow the business. So I'm really pleased that we've come out of this year really strong, really lean, and I'll talk to you about the outlook shortly. For those that are new to eEnergy strategic story, I just want to refocus our core service messaging. So we have 4 key pillars of service offer to our clients. At the heart of our business is allowing our customers to reduce their energy costs through an as-a-service model where they're not reliant on deploying their own capital. This is usually focused for us on deploying LED retrofit lighting solutions with embedded controls and data analytics. This part of our business has been growing consistently at high gross margins, where we typically get 40% plus. It's a direct sales model business, which is moving into frameworks. That continues to grow and the market opportunity, as I'll talk to in a minute, is still very large for us. The second pillar, which is one of our growth pillars, is renewable generation, where we deliver 1 of 3 types of on-site private wire PV solutions, either rooftop, ground mount or carport solutions, where we focus on complexity, we focus on large projects and where typically we're generating a 30% gross margin. Obviously, a very large and growing market. We're carving ourselves out in a niche within the education and health care sectors, but increasingly in the commercial and industrial sectors as well. Underpinning those 2 core pillars is a finance solution, which is our, if you like, secret sauce to customers, which is an off balance sheet service agreement where customers can unlock savings and unlock cash flows without having to deploy their own balance sheet. This is increasingly important to customers who are budget constrained within the public sector. And our new facility and partnership with Redaptive is a really important inflection point for our business. As you know, we do have a facility with NatWest, which we've retained. That is a very exciting product. Nonetheless, it does require us to invest working capital. The Redaptive solution doesn't. It's much more cash generative, but the combination of the 2 allows us to really dominate this public sector now with fantastic firepower for much larger, more complex deals. We do have a small EV charging business. It's growing more slowly. It's an interesting sector. It's more of an ancillary service to customers that are taking the reduction of the generation product. Over time, we think it will grow, but we do see it as a supporting product offering versus a core pillar. The market opportunity remains extremely exciting to me. The net zero policies that the government have introduced are helping drive regulatory and funding support into the public sector. That is a supporting revenue line for us where customers do get grant budgets where we are simply a delivery partner. And so we've now started to work with a number of new channels who are within the grant receipt of funding and are using eEnergy as a delivery partner. So we do see that as an additional layer of revenue growth. We see a 65% addressable market, which gives us at least another 7 to 10 years of runway at the current trajectory within the schools market and slightly longer as we look into the higher education. So a very growing, but still niche -- but still large niche market in the education sector. 50% available market to address in the NHS, still a huge number of aged buildings that have not been upgraded. And with our new off balance sheet funding solutions, we think we can really tap into large multisite complex 7- to 8-figure deals within frameworks, tenders and direct engagement with these trusts. The demand for solar continues at a pace. This allows us to go into the commercial industrial sector, which has previously been not a core focus. So we're very much focused in around the real estate, either ownership or tenancy market. So working with the REITs, working with the large landlords, working to create innovative products for them to be able to monetize their valuations of their portfolios and deliver tenants, obviously, net zero solutions either with or without capital. We continue to push this differentiated model around no CapEx required and in an increasingly challenging economic market, this is becoming a big conversation point at Board level where the relentless pursuit of net zero targets doesn't slow down, we're able to offer them a solution. We've seen higher barriers to entry within our sector, in particular with the public sector now that's helping us compete with the very large players, and we're finding ourselves only one of the few players in the market that can actually offer these services that are compliant within frameworks and within the procurement rules that the public sector insists on. We do see some long-term drivers. Obviously, there's a race to 2030 for, I guess, our economy as a whole. The public sector probably more focused on the 2030 deadline than the commercial sector. We do see data-driven solutions as being an increasing demand. But I would say that the overriding driver for our customers is a single partner that's compliant, that's of high quality that can provide a turnkey solution. And we've seen a bit of consolidation in the market where we've seen a few of our smaller competitors go to the wayside or merge and become slightly bigger companies, and we see this as now an opportunity for eEnergy to grow even further. When you look at our diversified client base, we're still just under 60% education, but the 16% health care is from a 0 position a year ago. So that shows huge growth. And we're starting to see some interesting growth in C&I now. So 1/3 of our business within the -- which is broadly the solar business has come from C&I. So we're starting to get a wider, broader mix, which is helping even out the seasonality. One of the key points really we were focused in on how can we start to drive H1 to deliver more consistent results than the historic strong bias towards H2. In terms of route to market, we've built a business historically from a direct sales model basis. And that's been one of our strengths but also it's been a very challenging, I guess, route to market because most of our competitors deployed a different strategy, which was to build their businesses based on frameworks and tenders. And if you go back a year to our strategic presentation, we set out our strategy as being one to deliver a complement to our direct sales model where we would build out frameworks and build out partner channels to help move into health care and help move into different revenue streams. That is being very successful, and we have been approved now on 5 public frameworks for education, NHS, and that's starting to yield really strong results. And if I look at my pipeline now, in particular for solar, over 50% is starting to come through from frameworks and from third-party indirect channels. So our strategy is working. Our direct sales model still grows at 15%, 20% organic growth. That is now a regionally based focused team, not just selling to education, but talking to channels, talking to NHS, talking to frameworks. So we've got efficiencies of scale in our direct sales model. We've complemented that with frameworks and indirect sales channels. And we've demonstrated a successful conversion of those projects over -- particularly over the last 6 months into H1 of FY '25, and we expect that to deliver strong results in FY -- in the full year of this year, '25 in full. Just to summarize on where I think the key successes can be highlighted for the last 12 months. GBP 25 million plus revenue is a strong performance based on what was a very disruptive first half of the year. The sale of the Energy Management business was a distraction for the business. We did have to rebuild a lot of our infrastructure. So to deliver GBP 25 million organic sales in a market, which was challenging and in an environment where we had to rebuild a lot of our infrastructure, I think, demonstrates a strong performance from the team. We've invested quite a lot in technology. We've been quietly building an extremely exciting proprietary platform, which allows our own internal users, but also potentially future third-party licensed users to use our platform to survey buildings and go to automated specification and proposal delivery. It is creating huge scalability in our business, increased accuracy and also is giving us the opportunity to drive increased profitability. But more importantly, our customers can get a proposal within 48 to 72 hours having had a survey, and that's something our competitors just can't do. So it allows us to move at pace, it allows us to shorten our sales window, it's increasing conversion and is very much a proprietary piece of technology that over the last 5 years, we probably invested over GBP 600,000, GBP 700,000 in total when you go back to when we started investing in 2019 into this particular strategy. We've now launched the final version, and this is really unlocking a huge amount of opportunity for us. We've invested quite a lot into our platforms this year. NetSuite was a huge challenge in FY '23 and '24, and John will talk to that later. We've invested heavily into a new sales force platform that is more integrated within a project management focus across the business. The facility we have with Redaptive is at the very beginning of a very exciting journey as we start to think about not just the core business that we are looking to do with them but also collaborative pitches and tenders that we expect to go into sort of, if you like, bat with Redaptive when we think about some 8-figure multisite strategic opportunities that previously perhaps we wouldn't have been big enough to go and tackle. Together with Redaptive, we're starting to look at very large strategic partnership deals and very large strategic investment opportunities for projects. We've talked about the frameworks. These are going to be a big part of our FY '25-'26 strategy. Health care is starting to deliver a huge amount of results, we've talked about the contract win and the other NHS projects that sit behind that. Our other key new revenue line, which has been building quietly in the background is our O&M business. So operations and maintenance contracts for solar solutions is a huge opportunity in the market. We've been building SolarLife for the last 7 months quietly in the background. We've now got a small portfolio where we've got recurring revenues starting to build up. And those GBP 80,000 to GBP 90,000 worth of recurring revenues stretch out to nearly GBP 800,000 worth of forward order book of recurring and reoccurring maintenance contracts. We think that can build. We think that's a high-margin business. We think it's a fragmented sector. We're not limited just to our own projects, which we can sign operations and maintenance contracts for, but also for legacy projects with other asset owners where we can compete with a higher quality, more efficient service using technology, and we think this could be a really exciting revenue stream that we'll start to report on a bit more closely. The business is now set for growth in terms of profitability. We talked a little bit about how our operations model allows us to gear now from a profitability perspective, where we see the ability to grow our business up to GBP 40 million with very limited additional, if any, additional operating cost. So we think that's an exciting place to be. We've got great expectations for the way that then generates the cash, which John will talk to. And within that context, the work that John has done with his new finance team has really allowed us to get much more visibility on project profitability, on cash generation for each project. And we've got such transparent visibility now, we're able to manage the business in a much more efficient way. I'll just touch on pipeline. We think about our business in 2 ways. We think about our business as a development platform and as an EPC, which is engineering, procurement, construction. The pipeline platform development piece is all around routes to market, ability to secure and acquire customers, sales conversion rates, health of that pipeline and the long tail that we think we can predict and forecast. So within our pipeline, there's a few metrics that I think investors should sort of point to. One is we have an historic high conversion rate of investment-grade proposals within the education sector of north of 50%. We've got a really predictable direct sales model, which is driven by our routes to market, and that is generating on average somewhere between GBP 3 million and GBP 4 million of investment-grade proposals every month. And that's just within the direct sales model, just within education, and that's been consistent now for the last 3 years and continues to be supported, and we're actually seeing slight improvements in those conversion rates and slight shortening of the sales cycle. In addition to that, we've now got huge growth coming through from the tenders frameworks and partnership channels. So when we think about our pipeline growth of 71% over the last 18 months, that's giving us visibility beyond 12 months now. We think about that investment-grade proposal as our real asset value of opportunity because that's where we forecast from. And when we think about the heads of terms that we signed with solar contracts, which is not at the point we can recognize revenue, but at the point where we've got customers locked into a contractual commitment subject to a dependency, which is usually a grid connection or planning consent, we've actually got visibility out for 9 months on our pipeline where we expect a 95% conversion rate from those heads of terms. So strong growth in pipeline, predictable forecasting now, not reliant on direct sales, but supplemented from our channels, starting to see longer-term forecasting capabilities into FY '26 now. I'll hand over to John. I'd just like to take this opportunity to thank John for all his hard work over the last 9 months. It's been a really challenging period, but we've come out in a position where I think we've got a real platform for growth. So John, over to you.

Thank you, Harvey. Good morning, everybody. So as the new CFO, I commenced a detailed balance sheet review just to understand top to bottom, every line of the balance sheet. And what I saw was quite a complex balance sheet that had built up over a number of years, driven by a significant amount of M&A in the business. Unfortunately, having looked carefully at some of the project accounting, I discovered that actually some of the revenue for 2023 and 2022 was overstated. And as a result of that, we ended up doing some prior year adjustments. So these are legacy issues. They have been dealt with, and we have adjusted the prior year results to put the revenue and costs back into the period in which they originally arose. This has been quite a detailed and lengthy process and has consumed a significant amount of my time and my team's time to try and restate the balance sheet. To put it in context, net assets at December 2023 were originally reported of GBP 23.8 million. We've reduced those net assets by GBP 12.5 million, so 53% through prior adjustments. So net assets restated to GBP 11.3 million. So it gives you a sort of sense of the total scale of the activities that we've been working on. Control is now in place to ensure the overstatements never happen again. They principally relate to project accounting issues. But I think when we look at the other sort of root causes, we can see that the M&A activities over a number of years, the fact that we introduced NetSuite and replaced 0 with NetSuite in the back end of 2023. So we've got all of the projects being accounted for over 2 accounting systems. That's obviously driven some difficulties in terms of continuity of information from one system to another. I also think that we had a lot of contractors working in the business back in 2023, and that's not been particularly helpful in terms of setting it up from an operational focus to really be able to understand on an individual project basis the exact revenues, the exact cash flows. Anyway, control is now in place to make sure that never happens again. We've fixed it. So focus now is obviously cash generation. And what we see now is the cash generation is very, very closely tracking the profit generation. Obviously, historically, there was a gap between the revenue and profit being reported and the cash coming through. But we do detailed reviews now every month. My team work really closely with the operations team to make sure that we understand the cash -- net cash position and the net working capital position on every single project. So there's a significant amount of focus on improving gross margin. So we're closely involved now on all quotations that go to customers. And we're obviously looking at the net working capital by project. The way we like to think about it is that every project should be net cash positive from beginning to the end of the project. And you'll see that in our first half cash flows where we are cash flow positive for the first time actually for Energy Services business in the first half of this year. So I've also strengthened controls. I've got a new accounting -- a new team and strengthen the controls and make sure we're clear on who's responsible for what. And we've really tried to deliver some major improvements in the reporting to bring clarity and focus to what it is that we are -- what it is that we're looking at each month to make sure that we can continue to make improvements in the cash flow. So the Energy Management division delivered cash of GBP 25 million back in February 2024. This is really important for the group, and that cash was used to substantially repay all of the group debt. Net cash at the end of February 2024 was around GBP 8 million. Cash at the end of June had reduced slightly to GBP 6 million and then by the end of last year, it was down to GBP 2.3 million. As I said, we expect to be cash positive. We are -- we will be cash positive. I looked at what was in the accounts last night. We will be cash positive for the first half of this year, which basically means we've stemmed the cash losses, which is really good news, and we're now poised to be significantly more cash generative in the second half of this year. So focus for the rest of the second half of this year. We've taken some steps to reduce the cost base slightly, which will help improve our operational gearing, lowering our breakeven point and help us improve the profitability in the second half. We're working really closely with all the operational teams. So project by project, where can we seek to improve margins around sort of making sure we're capturing all the variation revenue and any variation costs and working closely with the -- with our vendors, in conjunction with the operational teams to make sure we really control every single cost that's going through this business. So we're a project-based business. We obviously -- we supply fixed price contracts to our customers. We need to make sure that we're controlling those costs through proper management of the vendors with a detailed sort of purchase order system to make sure that only costs which are approved actually end up being booked. So focus will be to continue working with the sales and operational teams. And my team have got a very outward-looking focus now. So it's very, very much, much more operationally driven than perhaps historically, the focus has been in finance. So thank you very much to my team for helping me over the last 9 months to restate the numbers. In summary, the balance sheet is now clean. We're cash generative for the first half and excited about the opportunities for H2. Thank you, Harvey.

Thank you. Thanks, John. Great. So I think in terms of post-period highlights, as we look into the first half of H1 this year, strategic partnership with Redaptive is obviously a key thing we've spoken about. The SolarLife O&M revenues, there have been 2 key, if you like, strategic internal pillars of growth that we wanted to focus in on this year. They've delivered to budget. We're working with these 2, if you like, revenue lines very closely, and we're very excited about how those two can grow and scale the business. We talked about the app. Just a small screenshot here of the visualization of what it does. We do think that there is the potential to create an as-a-service licensing model here for both the energy efficiency market but also the [ further ] market for other partners, and we're exploring that over the next 2 or 3 months. In terms of the outlook, confident that we're going to be delivering in line with the guidance. I think as we look at the first half of this year, we're significantly up year-on-year to the first half of FY '24. That's good underlying organic growth. So I'm really excited that we're going to see the business perform in line with expectations. And I think the cash generation from these projects will start to really come through now under John's leadership. We sit as a leader in our sector. We are the #1 brand in the education sector. We're starting to build a really strong brand within higher education sector. We're really excited about the strong start we've had for FY '25. We can see visibility within our solar pipeline as we look at our heads of terms that we've signed. That has grown significantly. We've got, broadly speaking, a GBP 14 million number for the solar business this year. And I think that we can already see a dotted line to GBP 12 million already on heads of terms that have been signed. So we've got a really strong visibility on our solar projects there, a lot from existing customers, a lot of rollout opportunities and some which are new and exciting sort of single-site projects. The accounting systems that we've overhauled have really helped integrate the business more closely internally. So we've now got an integrated finance function with operations, and that's starting to add value at the client end as well as at the back end. So I think the outlook for our business now organically is very strong. That concludes our presentation today. I'm happy to open up the session now for some Q&A.

Perfect. Harvey, John, if I may just jump back in there. [Operator Instructions] But 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 investor dashboard. Guys, as you can see, 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 Simon, sir, at this point, if I may hand over to you to chair the Q&A with the team. And if I look to pick up from you at the end, that would be great. Thank you.

Thanks, Jake. For the continuing side of the business, what are the current market forecast for financial KPIs in the current year in terms of revenue, profit after tax, et cetera?

So Canaccord note currently shows GBP 28 million for 2025 and GBP 30.8 million for 2026, generating GBP 3.2 million of EBITDA -- adjusted EBITDA this year of GBP 4 million next year.

What proportion of the ongoing business is subject to tender? And what proportion of your previous tenders have you won by either volume or value?

So I'll tackle that. So when we look at FY '25, we actually have quite a low percentage, sub-20% of expectation of revenue from tenders. And that's our internal target, which is 10% higher than the market guidance target. So all the tender results that we win is upside in H2. I think we expect to win no less than 25% of the tenders that we submit, and we have probably an internal target of winning 1 in 3. So that's just a broad initial response to what I think is a moving market that we're hoping to improve on.

Thank you. Accounting question. Is the capital invested alongside the NatWest facility held in the accounts of cost plus accrued interest? Or has this been discounted?

So I've revised the SPV accounting this year. The way it works now is effectively we recognize the revenue on the sale of the project. We take the net revenue on day 1, effectively where the project is delivered. And then over time, we take the interest income to the P&L over time, and we take the interest cost to the P&L over time. So those 2 match off in the SPV. What is different with Redaptive compared to the NatWest facility is that with Redaptive, they provide 100% of the funding by the time we complete the project. So compared to NatWest where we effectively would have -- the company would have 20% of the net revenue, we would be investing in a long-term debt, which then turns into cash over time. So Redaptive is much, much better for us. The interest rate on NatWest is more competitive. However, given the cash investment required, we obviously favor the Redaptive funding because there's no cash input or investment from the company in any of the projects going forward. So that's one of the reasons why we'll be more cash generative in 2025 as a result of that facility.

Thanks, John. Post the restructuring, how will you know that it's actually working? What KPIs are you using to measure the performance of the finance team?