Eenergy Group PLC

LSE:EAAS

Earnings Call Analysis

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to the eEnergy Group plc Interim Results Investor Presentation. [Operator Instructions]. And I would now like to hand you over to the executive management team from eEnergy Group plc, Harvey and Crispin. Good morning.

[Harvey Sinclair, executive]

Good morning. Thank you. So I'm pleased to report another good set of strong results, which demonstrates really good continued organic growth across the business. This has been following a period of successful integration and new product launches.

Revenue is up 50% to GBP 33.2 million. Adjusted EBITDA is up 55% to GBP 4.7 million, and we've achieved PBT of GBP 1.1 million from a previous loss of GBP 2.2 million. Encouragingly, there is now 90% visibility of revenues for the full period to FY '23 to December and we've got the foundations in place to deliver full year trading expectations. We've got a really large qualified pipeline that's come as a result of really strong sales activity over the last 12 months. We've now got these high levels of contracted revenues locked in, which you've not seen before. We've got really increasing engagement across our existing customers who are now looking to consume different services that we've launched across multiple parts of the business. And I'm pleased to say that we're now profitable, and our operating cash flows are improving.

That said, we are very focused on net cash generation. And whilst we're not quite where we want to be, we've seen real improvement in the EBITDA to cash ratios, and we've got a very clear plan trajectory to meet these targets over the coming months and that's something Crispin is going to talk in a bit more detail about later. As we think about our growth, in particular, around solar, with increasingly large project wins on the horizon as demonstrated by our recent wins this week, the Board are considering and reviewing a number of strategic options to strengthen our balance sheet to enable this growth to continue.

Just to recap on our customer proposition and revenue model, which I've discussed before. We have two divisions: We have Energy Management, and we have Energy Services. The Energy Management division is very much a supply side procurement platform where we are increasingly starting to deliver net zero consulting solutions to our customers and we're able to give them access to the lowest cost clean energy to that level. And it's very much a platform play. We've got differentiated technology in this space in a competitive market where we stand out very clearly from our peers. This is a business where we've got strong visibility on our revenues, and we've got very strong and high gross margins at 78%.

We've got 400 customers in this division, and we're exceeding 85% renewal rate. So it's a lot of time over the last 12 months post integration centering around our customers, centering around the launch of an upgraded unified platform where we have a one ecosystem where all of our customers are able to manage their entire energy portfolios and where we're giving them full transparency on the nature of their contracts, the nature of their pricing, and the way in which they're able to manage access to power and gas over their 3-year horizon. So strong, sticky customer base and where we have increasing renewal rates. So we're increasing our renewal rates over the period from where we were this time last year, and we're starting to see more and more product innovation coming through this platform.

The growth in this area is going to come from the consulting division within Energy Management, which provides advisory consulting services around energy compliance and reporting, but also net zero strategies. And it's very much a tip of the spear around organizations right now thinking about energy wastage, thinking about compliance around reporting. So a really clear plan within this division and some exciting new hires across the business. We've hired the ex-head of Schneider, who now runs all commercial activity in our international division and he's got a proven track record of building out consulting revenues for businesses in the sector.

Our Measure division actually sits across both companies. It's more closely in line with Energy Management now. As we start to launch and sell a product, which is a subscription product, allowing our customers at zero cost, they have access to data within their buildings to give them a really granular visible view of where they're consuming and therefore wasting energy across their portfolios. Really differentiated, it's one of only a few platforms in the U.K., very much part of that platform play within the Energy Access division. And I think this is going to be a real strong growth line for the business because in the education sector and multisite retail hospitality and property subsectors, there is a real need and a real gap for customers to be able to tackle a zero-cost solutions once they've got visible energy data.

Strong gross margins targeting 50%, revenues recognized on installation, we've got full support from panel of funding partners that have underwritten the technology. So we're able now to fund off-balance sheet solutions, whereas a year ago, we were trialing this product, and we were holding these meters on our own balance sheet. It was a cash strain over the last year. And we're now able to have a cash positive product as we've been underwritten by a panel of high-quality funding partners. So really very exciting part of our strategy going forward.

We then have our Reduce section, which is all around how do we help customers reduce their energy consumption. This was the core business that was launched back in 2013. We've done over 1,500 projects now across lighting controls. 78% of that sits within the education sector. Strong growth, consistently high margins of 35% to 40% despite inflationary price pressures, we've been able to maintain in instances, increase that margin. Increasing demand, no loss of appetite across any of our public sector divisions that need our service. And increasingly, we have started to see a much larger project where one customer now has 10, 15 or 20 projects where 2 years ago, that was very much a one project, one customer business.

So starting to see scale, the division has doubled in size in the last 12 months. We expect to see significant growth coming through again. We're going deeper into education, local authorities, further education, higher education, deeper penetration into multi-cabin trust sector started to penetrate into universities and also starting to reach out into private health care with some big wins in that sector this year and also starting albeit small within the building sector NHS trusts.

Finally, the Connect, which is a new organically launched division a year ago, both solar onsite EV solutions, so solar as a service, whether that's from a third-party operating leases or power purchase agreements. We now have a suite of products that allow our customers to fund these projects off balance sheet. And some customers do choose to pay to their capital solutions. So solar being the big part of this little emerging product range, but really being switching the ground when we're starting to talk to customers about their connectivity for the transition to EV.

And we've got slightly more modest margins because of the nature of solar solutions but we're confident the 25% to 30% gross margins can be met. And as evidenced by some recent big contract wins, a lot of these projects have high values and we're quite excited about the growth prospects over the next 12 months.

Continued strong growth drivers across the market and despite exceptionally high energy prices this time last year coming off to recent levels. Those recent levels are still consistently higher than the trend over the last decade. So what's happened in the majority of our organization that we talk to is a mindset change where there is no longer behind-the-scenes strategy on decarbonization. It's very much on the main board agenda for every organization you speak to, whether that's a midsized customer, who has a GBP 0.25 million spend or a large customer that has GBP 10 million to GBP 100 million spend on energy in the year. We're seeing that compliance regulation is pricing much harder.

The need for decarbonization has been triggered through financial pains a year ago and is very much part of their budgeting cycle now to think about how committed both decarbonization but also how can cash flow be released from energy projects without deploying capital. And that's very much where our innovative as a service solution hits home very hard because most of the customers we talk to, whether they're private or public sector, our balance sheet constrained, do have other budgetary pressures.

And even if they do have capital available for projects, we'd much rather focus on revenue generating or essential infrastructure upgrades than, if you like, additional energy efficiency or energy renewable sections, which is why funded solutions off balance sheet are so attractive. And this enables them to accelerate and release cash flow at the same time. So we're always thinking about how do we make going green profitable for a customer rather than just meeting their obligations to be carbonized.

I think a very big part of the eEnergy story is around an integrated proposition. So in Energy Services, it's about having one trusted partner that can take them on identification of energy wastage, reduction in demand and now starting to get them off-grade thinking about how they can save 30% on self-funded PD solutions and starting the journey on to the EV trajectory.

Technology is a really big part of our strategy, it always has been. We see ourselves as highly differentiated across all parts of our business now, whether that's from the Unified platform into the Energy Management division. Differentiated smart submetering platform we have in the data insights software, that's highly differentiated or whether it's through the internal tools that we're developing in Energy Services. A number of years ago, we invested a lot of money into building tools that would enable us to get data from sites quickly and accurately to provide automated solutions via a digital platform that can be trusted by our customers faster than our competitors.

And it's very much one of our key strengths when we're seeing multisite customers is the ability to get an accurate data and where the energy saving opportunities are and automated solutions that are driven by the app that avoids a lot of manual and costly processes. So that does help us achieve scale is one of the leaders that I think will drive cash generation into our business as we become leaner in our operating model in Energy Services, which as you'll see through today's presentation, it's very much now our key focus.

We think of ourselves as trying to get a big share of our wallet from -- big share of the wallet from our customers by diversifying revenue streams across those portfolio customers and that's really started to come through now as we start seeing customers wanting to move to on-site generation from perhaps a lighting or energy reduction plan. So those 1,000-plus customers that we've won over the last 5 years are highly engaged in contracts, now talking to us about solar and EV. And that's in addition to the continued and growing new business pipeline, which we have a very sale model for.

I'll hand over to Chris then to talk through the financial highlights, and then we'll talk through some of the outlook opportunities shortly.

[Crispin Goldsmith, executive]

Thanks, Harvey. I'm pleased to report another period of significant growth across the group. Revenue of GBP 33.2 million was up 50% on the 12-month period to June 2022, and that drove adjusted EBITDA growth of 55% to GBP 4.7 million. Our exceptional costs were significantly down on the comparable period, which included the costs related to the acquisition and integration of the utility team. And that enabled us to report a profit before tax of GBP 1.1 million, which was a marked turnaround on the GBP 2.2 million loss before tax for FY '22.

I'm pleased with the continued significant momentum in Energy Services, in particular, with GBP 26.4 million of TCV signed in the period, which was up 76% from the GBP 15 million in FY '22 and a high level of repeat business within that.

The strong momentum in eSolar, as Harvey has talked about, in particular, with 29 megawatts under signed contracts or signed heads of terms at the 30th of June 2023. That pipeline has built up over several months. So it has long lead times and this pipeline is now mature, converting into revenue in the current period and also giving us visibility on revenues into FY '24. We expect solar to be a key driver of growth for the business going forward. We've got a demonstrable track record of revenue and earnings growth since coming to market, including through an intensive integration period. We're continuing to deliver strong organic growth across both parts of the business, and we've got clear momentum for the rest of FY '23 and beyond. Strong execution across both parts of the business delivered 50% revenue growth. I'm pleased with the 5% organic growth posted by Energy Management off the back of a period of intense effects and integration and challenging market conditions with unprecedented volatility in energy prices.

We've invested in the service delivery platform to ensure a best-in-class customer experience through the life of the relationship, and that should maintain and enhance our high retention rates and future revenues. We've seen particularly high growth of 87% in Energy Services, reflecting execution of cross-sell strategy, continued favorable market conditions, which support [Technical Difficulty]. And we've got sustained momentum in new business wins, giving a strong foundation for continued growth.

The strong revenue growth and the benefits of operational gearing drove 55% adjusted EBITDA growth, with an EBITDA margin up 40 basis points from the prior year. We've maintained product gross margins despite inflationary pressures and reinvested those profits into sales, market and delivery to drive long-term growth. We continue to see the benefits of that investment. We have seen a significant increase in working capital that reflects a stronger balance sheet, but it led to a funding requirement for the business in the period than the last year. The growth in working capital was primarily driven by GBP 6.2 million increase in accrued revenue, which represents contracted future cash receipts for the business. That partly reflects the organic growth in both Energy Services and Energy Management and has been accentuated by longer lead times on solar projects and the interest we retain in completed funded projects, which deliver a recurring contracted cash flow to the business over the contract life.

The GBP 1.8 million pay down of legacy liabilities represents a major step forward for the business and the strengthening of the balance sheet. We did a good job negotiating the contingent consideration relating to the utility team acquisition. We managed to agree the final settlement well below the amount provided in the balance sheet, which enabled the release that you see here. And the payment we did make was largely settled to noncash. GBP 1.1 million increase in other net working capital largely relates to noncash remapping of balance sheet line items as part of our new ERP implementation.

Whilst the position stabilized during the period, improved working capital management and cash generation [Technical Difficulty]. This is stabilizing net debt after significant cash burn in previous periods. This is notable looking at the second half of the period, which delivered a cash inflow from operating activities of GBP 0.7 million compared to GBP 2 million outflow for the first half. This reduced net debt increase in that second half period to GBP 0.4 million after paying GBP 0.9 million to clear the historical HMRC overdue amounts. The increase in net debt was down from circa GBP 3 million plus increases in each of the previous 6-month periods. However, cash generation remains below target levels. And as I've said, is a key focus for management. On that, we've made good progress already on Energy Management. We've improved contract terms negotiated with energy suppliers. And we've got a growing contracted cash flows from customer contracts signed in previous periods. That's put the business on an improving trajectory with cash conversion increasing from 34% for the 12-month period to March 23, 2023, to 63% for the 12 months. And we have a clear path for further improvement targeted 75% operating cash conversion in FY '24. We're now targeting migrating energy services from 50% operating cash conversion to a target of 75% for FY '23.

Off-balance sheet funding solutions support that. We now have funding in place -- funding solutions in place for all of our product set and new facilities to fund My ZeERO and solar now drawing down. At the same time, we're focusing on improving operating margins in that part of the business, which will further improve cash conversion. We have commenced the process to refine the group's corporate debt facilities ahead of the scheduled repayment dates in early 2024. We're engaging with interested parties and have initial support.

As we stand today, we have visibility on 90% of full year or full period revenue expectations. We have a robust near-term pipeline to support the remaining new business wins. And the key focus for management is to deliver on that growth in a way which is more cash generative.

I'll now hand back to Harvey for the summary.

[Harvey Sinclair, executive]

Thank you. So we're in a very exciting market. And I think what we see now is that the brand that eEnergy has created is really well positioned in this fast-growing market. We've got a market-leading position in education, and we're starting to leverage that with multiple services to existing and new customers, and we're able to now leverage that into other public sectors, which I think will deliver huge growth and value to shareholders.

It's great to see that we're now profitable, and we're starting to see those underlying operating cash coming through. Margins are maintained. I think we have a stronger than ever focused on cash. We're now managing the business on cash priorities because we want to be able to show investors that we can be cash generative consistently and I think that's something that we are prioritizing over everything going forward. Our outlook is strong, that pipeline that we've built, given our sales cycle is sometimes between 6 and 12 months, is really, really, really gaining momentum. And I think that over the next 12 months, we'll see the last 12 months' worth of work and momentum coming through to revenue. The products continue to evolve. We have a fantastic tech team, which is developing innovation across both the smart metering platform and also our digital services outlook for Energy Management. And I think that solar is probably going to be the fastest growth part of the Energy Services division as customers now realize the value proposition that they can get from solar, whether that's through CapEx or through self-funded solutions. So the outlook, I feel is looking strong for eEnergy, and I think we've got a good team to deliver on that strategy.

[Operator]

Harvey, Crispin, if I may just jump back in there. Thank you very much indeed for your presentation this morning. [Operator Instructions] Harvey, Crispin, as you can see, we have received a number of questions throughout your presentation this morning. Thank you to all of those on the call for taking the time to submit their questions. But Katie, if I may just hand back to you just to share the Q&A session with the team, and then I'll pick up from you at the end.

[Unknown Attendee]

First question is that an investor said they noticed that the company is in the growth phase. But what's the possible consideration on the dividend for shareholders in the future?

[Harvey Sinclair, executive]

So at the moment, our #1 focus is to strengthen our balance sheet. I think once we've done that, we're starting to get more certainty about the building of our cash flows and the ability for us to scale and grow, that's of course something we can consider in the future. But for now, over the 12 months, I think it's all about building up a much more robust balance sheet for the business.

[Unknown Attendee]

There's a couple of questions on the payback on the loan. Are you on track on interest next year? And then additionally, are you looking at any further financing required or any come back for additional cash?

[Crispin Goldsmith, executive]

So I talked to the refinancing point in the slides. We're engaged with a number of interested parties and we're working to complete that refinancing ahead of the scheduled repayment dates in early 2024.

[Unknown Attendee]

There's a question around the share price and the valuation. And although you can't comment directly, do you have any thoughts about the valuation of the company being lower in comparison to the peers?

[Harvey Sinclair, executive]

Yes. It's always a difficult subject to address. I think what I would urge investors to do is to look at our care group. There are plenty of benchmarks where I think we should be fairly compared to, and I think, clearly, we have an aspiration to be seeing our valuation reflected on the same basis that some of our peers have been valued at. So yes, there's lots of comparables out there. And I think there are some good benchmarks from which we can aspire to be compared against.

[Unknown Attendee]

Next question is just about energy storage. And you've spoken about it in the past through heating water. But I was just questioning about batteries and future energy storage?

[Harvey Sinclair, executive]

Yes. Look, there is the strong interest from my team to explore new products and services. Battery is probably in the top 2 or 3 things we're looking at in the way that we can link it to on-site generation. We're also starting to think about corporate power purchase agreement and how we might build products across Energy Management that could offer customers across our portfolio, the ability to trade their surplus energy through to other sort of off-site customers. So that's big land agents or that's big property management businesses or whether it's large industrial portfolios or waste recycling companies that have got big sites to generate power, [ wholesale ] batteries is a big part of that.

I think what I would say, we've done a lot in the last two years. We moved from an M&A strategy to an organically -- organic focused strategy. We've launched two new products. I think we've got to bet those down first. We've got to deliver profitability and more importantly, cash generation from those and then we'll be absolutely well positioned to then explore beyond FY '24 other services to our customers around actual storage, which I think can be financed in the same way that our other products are delivered. And hopefully also by then, you'll see some economies of scale around paybacks and around financial modeling that isn't quite bankable at the moment. So I think a lot of financing partners can't quite see the reliability of actuary projections that they can with other energy products.

[Unknown Attendee]

There's a question about half year forecast. But I know we only provide 12-month forecast. And so I think we can continue to the next question. Net debt growth is down but still positive. When do you expect net debt to decrease?

[Crispin Goldsmith, executive]

So we're forecasting to be cash generative in the current period. And then from FY '24, we're expecting a sort of normalized level of cash conversion and profit.

[Unknown Attendee]

Someone is just asking for a little bit of information about some of your main competitors, if you have their names. And what do you feel your competitive advantages over them?

[Harvey Sinclair, executive]

Sure. So we have a wide ecosystem of competition in both parts of that business. So it's more difficult [indiscernible] to a competitor that does exactly what we do as a group offering. But I think if we look to Energy Management, you would look at their competitive landscape in two areas: You would look at the supply side procurement businesses such as inspired as being a direct competitor on our supply side business. And then you would look at companies like Schneider, Accenture, as being direct competitors in the consulting net zero sustainability advisory space. We're definitely trying to build out products and services that differentiate us in the consulting space, and we're using technology and our product innovation to differentiate ourselves into the procurement space.

So our e-auction platform, for example, delivers a 3% to 5% price improvement on the open transparent pricing for market around gas and power when you compared to traditional broking and procurement methods. So for that reason, we're very differentiated in the supply side.

On the Energy Services marketplace, you've got a number of different types of competitors. You've got the delivery partners that focus on delivering projects, you've got project, you've got project funding and project finance modeling businesses that compete with the funding of different projects for different parts of the service sectors such as lighting, HVAC, Solar, and EV. We're different because we both develop model finance and maintain solutions for customers as a one-stop shop. We have a competitor or rather a peer group comparable in America called Redaptive who we follow quite closely. Redaptive a lot in Europe and the U.K. like we are -- they're a very comparable business.

On smart metering side, you've got one or two platforms, you've got [indiscernible], which was bought by Centrica a few years ago, which does exactly what My ZeERO does. So that's just an example of a few competitors in the space that investors might want to look at [indiscernible].

[Unknown Attendee]

I think the final question then is just someone commented about the need to explore strategic options to fund the growth in the solar pipeline when you've got a few funders already. And then just wondering if you can discuss any more about these options that you're looking at?

[Harvey Sinclair, executive]

Yes, look, at a very high level. One of the challenges of our growth is the move into much larger projects as evidenced by some of the recent client and just started to see deal values of and several million pounds started to come through. They're a very exciting opportunity. But as we start seeing contracts that are GBP 5 million, GBP 6 million, GBP 7 million of value, there is a consequence of that, of those client wins around cash [ generation ] early part of that project cycle to cash generation, and that cash generation cycle can be 3, 4, 5 months.

It's pretty clear for investors to see -- we've had a constrained balance sheet for some time, and we are working very hard organically and internally to improve that. So we've been discussing with strategic partners, investors around appetite to support this growth, thinking about strategic ideas around how we might improve our balance sheet. So we're looking at a number of different options. And so we don't want to rule out any of those options at the moment. But whatever we do explore, it's got to be value creation for shareholders, and we were very mindful around ensuring that we deliver a return when we deliver shareholder value. So we're just exploring options so that we can maintain our growth without stretching our existing balance sheet.

[Operator]

Katie, Harvey, Crispin, if I may just jump back in there. Thank you very much indeed for addressing all of those questions that came in from investors this morning. And of course, as usual, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended, just for you to review, to then add any additional responses, of course, where it's appropriate to do so, and we'll publish all those responses out on the Investor Meet Company platform.

And Harvey, perhaps before really just looking to redirect those offer poll to provide you their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments just to wrap up with, that would be great.

[Harvey Sinclair, executive]

Yes. I think three points I'd just like to start with. One, we're in a fantastic sector with huge growth prospects. We built a great brand. We've got a lot of traction within many of our market sectors. We're well positioned to check value from those sectors and deliver shareholder value from the work we've invested in to date. We're cash focused, very much cash focused around delivering increased operating cash flows. We've come through a period of huge integration disruption, which is now clearly behind us. We've developed a number of exciting products which are now to monetize, and we're confident that we've got a team that can deliver those. So hopefully, that's going to give great value to shareholders.

[Operator]

Harvey that's great. Thank you once again for updating investors this morning. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order of the management team to better understand your views and expectations. It's going take a few moments to complete, but I'm sure it will be greatly valued by the company.

On behalf of the management team of eEnergy Group plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good morning to you all.