Via Transportation Inc (VIA) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Spark Energy Incorporated fourth-quarter 2014 earnings conference call. My name is Karen and I will be your operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session instructions will be given at that time. As a reminder, this conference is being recorded for replay purposes, and this call will be posted on Spark Energy Incorporated's website.

I would now like to turn the conference over to Mr. Andy Davis, head of Investor Relations for Spark Energy Incorporated. Please go ahead.

Good morning and welcome to Spark Energy Incorporated's fourth-quarter 2014 earnings call. This morning's call is being broadcast live over the phone and via webcast, which can be located under events and presentations in the Investor Relations section of our website at www.sparkenergy.com.

With this today from management is our President and CEO, Nathan Kroeker; and our CFO, Georganne Hodges.

Please note that the today's discussion may contain forward-looking statements which are based on assumptions that we believe to be reasonable as of this date. Management may make forward-looking statements concerning future expectations, projections of our operations, economic performance, and financial condition. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements.

Although we believe that the expectations reflected in such forward-looking statement are reasonable, we give no assurance that such expectations will be realized. We urge everyone to review the Safe Harbor statement provided in yesterday's earnings release, as well is the risk factors contained in our SEC filings. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.

During this morning's call, we will refer to both GAAP and non-GAAP financial measures of the Company's operating and financial results. For information regarding our non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures, please refer to yesterday's earnings release.

With that, I will turn the call over to Nathan Kroeker, our President and Chief Executive Officer.

Thank you, Andy. I would like to welcome our shareholders and analysts to Spark Energy's fourth-quarter 2014 conference call. I will make some opening remarks about our operating results and the opportunities ahead. And then our Chief Financial Officer, Georganne Hodges, will provide some detail on the financial results. We will then conclude with questions from our analysts.

As you know, 2014 was a milestone year for Spark Energy as we made the transition from a private company to a public company, closing our IPO on August 1 of last year. We continued to see strong customer growth in the year, as we increased our net customer count 51%, ending 2014 with approximately 318,000 customers. We spent $26.2 million to acquire customers organically, including $5.8 million in the fourth quarter.

As we mentioned last quarter, with the headroom that resulted from last winter's Polar Vortex, we continue to see opportunities to ad customers in the Northeast. And the increased New England sales rates we saw in Q3 have continued through Q4. In addition, our renewed focus on small commercial sales resulted in contracted commercial margin increasing by 89% quarter-over-quarter.

We have continued our initiative to expand our green products in 2014, offering renewable electricity in every one of our electricity markets, and launching carbon-neutral natural gas products in many of our gas markets. And we are happy to tell you that over 68% of our 2014 organic sales were on green products.

In December, we completed two tuck-in acquisitions totaling approximately 13,400 electricity customers in Connecticut. We are very pleased to see that these deals have exceeded our profitability expectations over the first several months. We continue to pursue M&A opportunities in the market to complement our organic growth.

As you likely know, we are hearing a lot of discussion around solar energy across our industry these days. Our initial approach on solar has been to observe early market movers in order to benefit from their lessons learned as we formulate our strategy. As a logical progression of this approach, we have recently begun co-marketing solar products in the Southwest and Northeast regions through our partnership with industry leader SunPower.

Like the rest of the industry, we were challenged in the first quarter of 2014 by the Polar Vortex, which affected a large portion of the country, especially the Northeast and the Midwest. This extreme weather event produced increased supply costs across both our electric and natural gas segments, which resulted in higher bills and ultimately translated into higher attrition and bad debt in the affected markets. While we saw higher supply costs, some of this was mitigated by our asset optimization team's ability to capture additional margin, utilizing the allocated natural gas assets we are managing in the Northeast.

In early 2014, we made the decision to enter the Southern California gas market, as we saw the potential for rapid growth in a relatively new market. As we mentioned on our third-quarter earnings call, this market entry turned out to be a big disappointment for us. We spent $9.8 million on customer acquisitions in Southern California during 2014, only to realize higher attrition and bad debt than we had anticipated.

We believe that this was largely due to the fact that unlike other residential markets we operate in, this is a dual-bill market which created confusion as customers did not fully understand our role relative to their local utility. While we made a number of changes to the campaign in order to improve the economics and the consumer understanding throughout the second half of the year, we ultimately made the decision to stop all new customer acquisitions in Southern California.

We have also shifted to more aggressive collections efforts, including a more rapid termination process, in order to mitigate our losses. As a result of this change, you will see a number of impacts to our financial metrics, including higher attrition and bad debt, and accelerated amortization of our customer acquisition costs.

In addition, our focused effort on cleaning up the non-paying customers in this market will result in overall customer count decline in Q1 of 2015.

Being a dual-bill market, the market structure in Southern California is different from any of the other residential markets in which we operate, and we learned a hard lesson there. That said, Southern California does represent a very large target market, and we are continuing to look for an alternative way to gain market share in this region, anticipating that future marketing activities may include partnerships and adjacent products.

While we were very disappointed with Southern California, we are very encouraged by what we are seeing across the rest of our business. When you exclude Southern California, we grew customer count by 26% in 2014, and we continue to have strong unit margins across the business. While our organic growth is funded by our existing cash sources, we continue to see opportunities in the M&A space, as evidenced by our recent announcement of another tuck-in acquisition of 33,500 PG&E customers.

I want to highlight that unlike Southern California, we've had a growing and successful business in Northern California since entering that market in 2006, and we are very excited to grow that business with this acquisition.

In addition to tuck-ins, we are also seeing opportunities to acquire larger businesses in the industry. In order to take advantage of these opportunities, we are developing a framework with NuDevco Partners Holdings LLC -- which is owned by our founder -- that will enable us to utilize NuDevco's balance sheet to acquire and consolidate energy retailers that we may otherwise not have the ability to do.

We are finalizing this framework with one specific target, which NuDevco plans to acquire; and, similar to an MLP structure, could then offer to us with certain guaranteed earnings protections and debt financing in the form of convertible subordinated debt. We believe this framework can be replicated for subsequent transactions, and we are in various stages of due diligence with several additional potential targets. Any transaction with NuDevco would be subject to the review and approval of a special committee of our independent directors.

On December 15, we paid a prorated quarterly cash dividend for the third quarter. This dividend represented our targeted quarterly dividend of $0.3625 per share prorated from the date of closing of our IPO on August 1 to September 30. On March 16, we paid a quarterly cash dividend for the fourth quarter of $0.3625 per share.

We had previously indicated that we expect to continue to pay this quarterly dividend on a go-forward basis. And we expect 2015 adjusted EBITDA to exceed our planned 2015 dividends and all required distributions and tax payments. Based on the results we are seeing in the first few months of the year, favorably impacted by weather and the initial results of our December tuck-in acquisitions, we are reaffirming this high level-guidance. And I also want to let you know that management does not anticipate any changes to this dividend policy in 2015.

Thanks for your attention. And with that, I will now turn the call over to Georganne Hodges, our Chief Financial Officer, for her financial review. Georganne?

Thanks, Nathan. Our 2014 adjusted EBITDA was well below our historical run rate, due to our extensive investment in organic customer growth, coupled with our disappointing Southern California market entry.

For the year ended December 31, 2014, adjusted EBITDA was $11.3 million compared to $33.5 million for 2013. This $22 million decrease is primarily attributable to increased customer acquisition spending of $18 million, as well as increased general and administrative costs of $11 million which I will discuss in a moment. The decrease was partially offset by better-than-expected results from our asset optimization activities where we were able to capitalize on physical back-to-back gas arbitrage opportunities in the Northeast during the Polar Vortex last winter.

For the quarter, our adjusted EBITDA was $5 million compared to $10.7 million last year. While our retail gross margin increased, the Southern California bad debt led to an overall decrease of $5.7 million. For the year, retail gross margin was $76.9 million compared to $81.7 million in 2013. This $4.8 million decrease resulted from lower volumes in both of our commodities as a result of increased attrition in our commercial customer base in the Northeast after the Polar Vortex.

G&A expenses for the year were $45.9 million compared to $35 million in 2013. This increase is due to an increased bad debt expense of $7.1 million, a majority of which was in Southern California, as well as increased billing and other variable costs associated with our larger customer portfolio. We also experienced higher costs as a result of being a public company. Spending on customer acquisition increased 217% to $26.2 million for the year as we added approximately 283,000 new customers.

We had a net loss of $4.3 million for the year, which was negatively impacted by two non-cash items. First, we accelerated amortization of our capitalized customer acquisition costs in Southern California by $6.5 million to better reflect future expected value from that investment. And secondly, the unrealized value of our hedge portfolio decreased by $15 million. Because this hedge portfolio was comprised of future supply which has been sold to customers at fixed prices, this change should have no impact on our future gross margin. However, these two items had a significant impact on our fourth-quarter EPS, which was negative $0.37. The accelerated amortization reduced EPS by $0.43, while the change in value of our hedge portfolio reduced EPS by $0.73.

As of December 31, we had $33 million drawn on our $70 million credit facility. Additionally, we had $10.7 million of letters of credit outstanding, leaving $26.3 million available on our facility. I can tell you that as of today, after paying our March dividend, our loan balance has been reduced to $24 million, driven by strong winter receipts.

That concludes my prepared remarks. I will now turn it back to Nathan.

Thanks, Georganne. When we step back and look at the underlying business, we are very pleased with the strong organic growth, the unit margins, and the profitability that we have seen outside of Southern California. And while we anticipate continued organic growth and tuck-in acquisitions, we are also very excited about working with NuDevco to finalize the framework that will allow us to acquire larger businesses to take advantage of the consolidation opportunities we are seeing in the marketplace.

We will now open up the line for questions from our analysts.

Operator?

Thank you. (Operator Instructions). Jay Dobson, Wunderlich Securities.

Good afternoon. Sorry, good morning, no matter where I am. Nathan, it is Jay Dobson. I was hoping you could talk a little bit more about the NuDevco structure for acquisitions, and a little more specifically how it would work.

I want to start by just highlighting that our founder still owns nearly 80% of our stock. And he is continuing to work with us to identify ways to grow this business by leveraging his balance sheet. With that said, we are still exploring a couple of different structures. The one thing I will say that in all the structures we are looking at, they include debt financing at the Spark Energy level.

And that debt financing would be subordinated to the revolvers you have? Or just talk about the subordination of that debt, and then how the transfer or drop-down would occur, understanding that this is still probably penciled in, not in ink.

Yes, to your point, Jay, we are still in the early stages of developing that structure. But yes, it is contemplated that it would be subordinated debt to our revolver.

Got you. And this would be something you would use for all acquisitions going forward, or just some, or some above a certain size?

I think it is some above a certain size. It does add a little bit of complexity. So if there's small tuck-in acquisitions, we would absolutely continue to do those ourselves. But on larger deals, we think this is going to be very helpful.

Got you. And then a quick one for Georganne. I am sorry I got distracted; she might have covered this in your prepared comments. But of the SG&A that was related to being a public company, what do you see that as the run rate going forward? So as we are modeling out 2015, how much of that should we leave in the model, and assume will be ongoing?

I would say, at this point, it is fluctuating. It was a little higher in the initial year than we think it is going to be on an ongoing basis; but somewhere probably right north of $2 million, $2.5 million, something like that.

Okay, great.

A lot of that relates to it. It really is a very different audit that we undergo as a public company. So a lot of it has to do with the audit and the like.

Great. That's perfect. Thank you very much for the time.

Selman Akyol, Stifel.

Thank you. A quick question. First of all, can I get customer accounts at the end of the quarter, by electric and natural gas?

Andy Davis?

The breakdown of electric and gas -- have we disclosed that?

Selman, it is roughly 50-50 at the end of the year.

Okay. And then you alluded to the comments that you expect those customer accounts to decline, going into the first quarter. When do you see that stabilizing, ex-acquisition?

So they will decline -- be split into two pieces. We are going to lose a lot of Southern California customers in the first quarter. But when you strip that out, we anticipate the rest of our business growing on an organic basis in the first quarter. And then on an overall basis, we expect to be returning to growth in the second quarter.

Okay. And then in terms of the $6.5 million in the charge you took for bad debt this quarter, was that mainly related to California?

$6.5 million -- you are talking about the impairment of the so-called customer acquisition costs, or its value?

Yes, I apologize. Yes, you are correct.

The impairment?

Yes.

Yes. It was entirely SoCal. Yes, it was entirely SoCal, that impairment.

Okay. I guess that does it for me. I'm good. Thanks.

Thank you. Our next --.

Selman, I have got some clarity for you on these customer accounts. At 12-31, on power, it was 145,000. Gas was about 173,000. But as I highlighted, some of those gas customers are going to roll off in Q1, which is where I was getting to about a 50-50 number.

Got you. Thank you very much.

Dave Parker, Robert W. Baird.

Good morning. Most of my questions have been asked. But back to the $6.5 million of the -- I assume those were other than impairment. Did that come through in the depreciation and amortization line, so you accelerated the amortization of customer acquisition costs? Is that the way to think of that?

That is exactly right, Dave. So I think, as you know, in our adjusted EBITDA metric, which is our cash proxy, we expense customer acquisition costs immediately, so in the year they are incurred.

Right.

But for accounting purposes, to better match value from a customer with those acquisition costs, they are actually capitalized and amortized over two years.

What happened in this case is, as Nathan said, we spent a total of $9.8 million acquiring customers in Southern California. Some of it had been amortized off by year-end. And then the $6.5 million was taking it -- basically took that down to a very nominal number that is left today that represents the expected future value from those customers.

Got you. And then my follow-up question is -- surprisingly often, your income statement for the year, D&A is up only about $6 million, which I assume most of that is attributed to the acceleration of the acquisition costs in California.

So despite the fact you spent a fair amount of money on customer acquisitions this year, well above what you did I thought in 2013, I am just trying to get a sense for what the run rate for D&A will be in 2015 and 2016, given the heightened acquisition cost acquisition cost level. Any color you can give me there?

Yes. You are right about that, because they are amortized over two years and there was significantly less spent in 2013. Some of the numbers that you saw in 2014 were a little bit lower than we can expect to see them in 2015. Can I get back to you on the actual number, though? Because I don't actually have that with me. But as you can imagine, over a period of time, those two numbers equal out if we start spending sort of the same amount on the portfolio, year after year.

Got you. Okay. All right, good. Feel free to get back with me with the numbers. That's fine. I was just kind of surprised of that when we were talking about the accelerated amortization there, so -- and what those levels end up being at, off of the income statement.

Last, on the M&A activity -- and by the way, kudos on recent pickups of customers -- what are you seeing as far as size? I assume that, given NuDevco is looking at a way to be able to help finance some of these opportunities, you are seeing something north of the 30,000, 40,000 customer acquisition opportunities. What does the environment for M&A kind of look like?

Dave, in terms of what we are seeing and what we have an appetite for, it is everything from the small tuck-ins that we announced in Q4 all the way up to businesses that have RCE counts that would be similar to our own. So it is a broad range of opportunities out there.

And what -- when you look at just the overall market dynamic, Nathan, kind of give us a sense for why the M&A opportunities that are accelerating or picking up, or are continuing to be favorable for you.

A couple of things, Dave. One, I think this industry has a lot of new entrants in it, all the time. And you always have companies that are coming in, growing a book of customers, and then looking to sell it and get out and go do it again. So there's a lot of smaller players that are out in the market looking to sell their books for that reason.

The Polar Vortex last year put some strain on some of the smaller players, those that were not well-capitalized. So a lot of the opportunities are coming out of that. And then you have some folks that looked at that and said, they just don't have the stomach to do that again, and want to get out while they can. So it's typically one of those reasons.

Got you. And despite the fact that commodity has kind of come down and behaved, I guess, so to speak, over the last several quarters, is that turning the tide there at all that you've seen?

I do think we have a window of opportunity here, which is why we are moving fast to try to capture it. I can't tell you what the M&A environment is going to be two, three, years down the road, once people forget about the Polar Vortex.

Got you. But now, you will strike hard while the iron is hot, I guess.

Absolutely, yes.

And last but not least, as you kind of look at that -- with, I'm assuming, customer attrition and churn kind of accelerating with the Polar Vortex -- what has been your trend recently through this kind of winter, giving commodities have behaved?

You kind of asked me two questions in one there, Dave. If you look at our attrition numbers for 2014, and if you strip out Southern California, we had 4.8% across the rest of our business. And we feel that number is high. It is high because of the Polar Vortex, as you highlighted, and everybody in the industry experienced that.

But also it was high because we were in a period of very rapid growth in 2014, and we saw a fair bit of early tenured churn in the books. So when we get through that in the second half of this year, I would expect that to revert to more normal levels. And if you look at our historical churn rates, that is in the low- to mid-4% range.

Okay, good. Thank you. Last but not least, there's been a lot written and talked about with the solar marketing, and you are working with obviously one of the leaders. What does that product look like? And how do you expect that is going to develop over time, and the timing of that development?

Sure. So what we have done initially is we've signed a joint marketing agreement with SunPower which is a very low-capital-outlay way for us to get into that space. And we are cross-marketing solar products to our customers and our former customers, utilizing those relationships and our sales channels. We are content with that approach for right now.

And as I said on the call a moment ago, we are watching what others in this space are doing. I know some players are spending a lot of money trying to figure this one out. And this is one where we have chosen to be a fast follower, as opposed to a leader in this space. So we are excited about expanding that relationship and expanding our involvement, but I can't give you any definitive plans at this moment.

Right. And what you are currently marketing -- is it panels, or is it contracts? I mean, is it hardware, or is it just an access to solar power?

No, it is the installations of hardware.

It is -- okay, great. Perfect. Thank you very much. Appreciate that.

Thank you. And that concludes our question-and-answer session for today.

I would like to turn the conference back to Mr. Kroeker for closing comments.

Thanks again for participating in today's call. And we look forward to seeing many of you in the months ahead. Have a great day.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a good day.