Spark Power Group Inc
TSX:SPG
Earnings Call Analysis
Summary
Q3-2023
In Q3 2023, Spark Power Group experienced an 11% drop in revenue year-over-year, attributed to a strategic shift towards higher-margin service work that has taken longer to show returns, particularly in Canada. This transition led to Q3 revenue of $63.1 million compared to $70.9 million the previous year. The U.S. high-voltage segment saw growth, but Canadian low-voltage segments and renewables faced declines. Gross profit margins dipped slightly from 27.7% to 25.7%. Adjusted EBITDA fell to $5.6 million from $9.5 million. Despite reducing SG&A expenses, the company's free cash flow is not at full potential. Moreover, a private equity firm, American Pacific Group, is set to take the company private around December 5, providing a stronger capital structure for Spark Power's strategic growth. Meanwhile, the company's working capital management aims to improve cash conversion, amid an outstanding arbitration agreement waiver related to credit facility covenants breach.
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Good day and welcome to the Spark Power Group Investor Call and Webcast. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Chief Financial Officer, Richard Perri, the floor is yours.
Good morning. Welcome to our 2023 third quarter conference call. I'm joined today by Spark Power's President and CEO, Richard Jackson. Rich will begin the morning with remarks on Q3 business highlights, a progress update on key strategic initiatives and the going private transaction. I will follow with a financial review of the third quarter, and then we will open the call for Q&A. Before we commence the review, I would remind you that our presentation contains certain forward-looking statements that are based on current expectations and are subject to a number of uncertainties and risks, and actual results may differ materially. Further information identifying risks, uncertainties and assumptions and additional information on certain non-IFRS measures referred to in this call can be found in disclosure documents filed by the company with the securities regulatory authorities and available on SEDAR+.
Further, these forward-looking statements are made as of the date of this call. Except as expressly required by applicable law, Spark Power assumes no obligation to publicly update or revise any forward-looking statements, whether a result of new information, future events or otherwise.
I will now turn the call over to Spark's President and CEO, Rich Jackson, for his opening comments.
Thanks, Richard. Good morning, everyone, and thank you for joining us. In Q3, we have continued to build out our go-to-market plan to support the Let's Grow Better 3-year strategy as we build on the positive momentum in our U.S. business with growing backlog and revenue trends, the traction on our new go-to-market planning, our Canadian business is taking longer to convert into new business. With that, we continue to invest in growing our sales channel and developing the new systems and technologies that will streamline our operations, enhance efficiency and support future growth of the company.
As discussed in our press release, Spark continues to be challenged with our ability to convert our operating performance into free cash flow. While improvements have been made to reducing working capital needs, the expected margin improvements have not been fully realized in our operating performance. While I am happy with the level of my team's focus on margin improvements and overall cash conversion cycle, I believe we have not fully entered into a period where the company is at full potential on free cash flow performance. We have much work to do here.
In Q3, we entered into an arrangement agreement with American Pacific Group, a reputable private equity firm who will take Spark Power through a going private transaction. We expect this transaction to close on or around December 5. We are excited about this transaction as it will provide Spark with the robust capital structure necessary to sustain our long-term growth trajectory, which is ultimately linked to our strategic vision. As always, I want to thank all of our stakeholders for their ongoing support and trust in Smart Power. With APG's expertise, patience and support, we aim to accelerate our growth in the right markets with the right services with the right customers. Through our efforts, we plan to innovate our industry and create lasting value for our customers and stakeholders. Together, we will navigate new opportunities, overcome challenges and build a stronger, more resilient future for our organization. This partnership marks a significant milestone, and I am confident that our shared vision and commitment will lead to remarkable achievements.
I will now turn the call over to Richard to share our Q3 financial results.
In the third quarter, we saw tempered revenue growth due to the more gradual ramp-up of our new go-to-market strategy, combined with challenging prior period comparatives, which included a higher mix of large project work. Despite lower volumes, we remain operationally focused on delivering consistent gross margin realization and managing costs. With regard to working capital, we continue to execute our plans to improve cash conversion and reduce days sales outstanding for both accounts receivable and contract assets.
I will now provide an overview of the key financial results for the quarter. In Q3 2023, revenue from continuing operations was $63.1 million as compared to $70.9 million in Q3 2022, representing a decrease of 11% year-over-year. The year-over-year change reflects the intentional focus on our go-to-market strategy to pursue higher-margin service work and prior period comparatives that include large project work in the Technical Services segment. In our Technical Services segment, revenue this quarter was $39.6 million, a decrease of 11.5% year-over-year. This consists of growth in our U.S. high-voltage segment, offset by lower volumes in Western Canada low voltage and prior year comparatives, which included a significantly higher large project mix. In our Renewables segment, revenue in Q3 was $23.4 million and down 9.4% over prior year. We continue to capitalize on strong solar demand in both the U.S. and Canada markets with growth of 31% in the quarter over prior year. This was offset by lower volumes in our [indiscernible] segment as a result of larger projects in the prior year comparatives, combined with a deceleration of U.S. wind growth as a result of an intentional shift to higher-margin solar work. Gross profit margins from continuing operations, excluding depreciation and amortization, were 25.7% in Q3 2023 as compared to 27.7% in Q3 2022. The decrease from prior year is primarily due to lower volumes and a shift in renewables mix.
Selling, general and administration expenses from continuing operations, excluding depreciation and amortization, were $10.9 million in Q3 2023, down $1.3 million or 10.6% from Q3 2022, reflecting the benefits of initiatives implemented in the business through 2022, partially offset by investments in our sales and marketing channels. Adjusted EBITDA from continuing operations was $5.6 million or 8.9% of revenue in Q3 2023, excluding foreign exchange gains of $0.4 million in the quarter. This compares to adjusted EBITDA of $9.5 million or 13.3% of revenue in Q3 2022.
The year-over-year change reflects lower volumes due to large projects in the prior year, partially offset by lower SG&A costs. Cash flow from continuing operations was $2.7 million in the quarter compared to $6.9 million in Q3 2022 tied to lower earnings, partially offset by a reduction in net working capital. In the quarter, the company resolved a long-standing customer dispute to arbitration proceedings. The impact was a net write-down of accounts receivable of $3.2 million, net of cash settlement proceeds and credit loss reserve. Capital expenditures in the quarter were $0.9 million as compared to $4.5 million in Q3 2022. The material decrease relates to the recording of the development costs of our new ERP system in the prior year comparatives.
In the quarter, there were no debt repayments and the company paid principal payments of $2.6 million for vehicle and premises lease liabilities. As a result, bank indebtedness remained relatively unchanged as compared to prior quarter. As of September 30, 2023, the company was in breach of the financial covenants in effect pursuant to its credit facility. Subsequent to September 30, 2023, the company obtained a waiver from its lender for the third quarter covenant breach subject to the successful completion of the going private transaction by December 14, 2023, in accordance with the terms of the arrangement agreement announced on October 13, 2023.
In closing, despite a year-over-year decrease in revenue from continuing operations, our strategic focus on higher-margin service work remains a key priority for the company. The intentional shift in our go-to-market strategy is taking hold in the U.S. market and will serve as a cornerstone for our future success. We are excited about the next step in our growth journey, and we will continue to execute our strategic plan to create value for all stakeholders. I would like to acknowledge all Spark employees for their continued hard work and commitment to providing the highest level of support to our customers each and every day. This concludes our prepared remarks.
I will now turn the call over to our operator for questions. Operator, please go ahead.
Certainly. The floor is now open for questions. [Operator Instructions] There are no questions in queue at this time.
I would now like to turn the floor back over to Richard Jackson for any closing remarks.
Thank you. I want to emphasize Richard Perri's comments around our employees. I want to thank them at this time for their incredible perseverance as we continue to navigate the business through the last 18 months as we integrate our companies and work through the execution of our new go-to-market strategy. And I also want to thank our shareholders and all stakeholders for their continued patience and their ongoing support of us and our company as we again, navigate through the changes in the business. We're excited about the future of the company. We're excited about the opportunity that lies ahead, and I look forward to getting over that hurdle. Thanks.
Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.