Via Transportation Inc (VIA) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Spark Energy Inc. second-quarter 2016 earnings conference call. My name is Chelsea and I will be your operator for today.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes, and this call will be posted on Spark Energy Inc.'s website. I would now like to turn the call over to Mr. Andy Davis, Head of Investor Relations for Spark Energy, Inc. Please go ahead.

Thank you, and good morning. Welcome to Spark Energy Inc.'s second-quarter 2016 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 us today from Management, is our President and CEO, Nathan Kroeker; and our CFO, Robert Lane.

Please note that today's discussion contains 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 statements 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 as 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 reconciliation to the most directly comparable GAAP measures, please refer to yesterday's earnings release.

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

Thanks, Andy. I would like to welcome our shareholders and analysts to Spark's second-quarter 2016 earnings call.

Spark produced record financial results for our second quarter, which we will speak about in a moment. I will also give an update on our M&A activity, which included closing the Provider Power transaction earlier this month. Before I do that, however, I would like to publicly welcome our new Chief Financial Officer, Robert Lane, to today's call. Rob has a wealth of M&A integration and capital markets experience, and we're very excited to have him join us following his recent promotion to CFO. He will provide details on our financial results and then we will conclude the call with questions from our analysts.

Coming off the heels of our record-setting first quarter, we continued to overperform with another set of record results for the second quarter. We earned $11.5 million in adjusted EBITDA and $29.1 million of retail gross margin in the second quarter, which represents a 111% and 18% increase over the same results for the second quarter of last year. We experienced increased volumes in our natural gas and electricity segments, primarily as a result of our Censtar and Oasis acquisitions last year. The more notable driver to us was the continued enhancement of our unit margins, driven by the current low-commodity environment and our supply and sales groups working to optimize our contracts and our supply costs. While the second quarter is usually less robust relative to the first and fourth quarters, our team was able to take advantage of opportunities in the market and minimize many of the seasonal effects of the spring season, and this trend is continuing into the third quarter.

We are very pleased to see the results of our hard work on customer retention beginning to pay off. Attrition for the second quarter improved to 4.0%, a 7% improvement from the first quarter and a 23% improvement from the second quarter of last year. Our overall customer book remained relatively flat for both the three and six months ended June 30. This was the result of a number of factors, including an increased focus on sales quality and higher value customers, a revamped retention and win-back strategy, and leveraging multiple brands within the same states. As a result, our RCE count for the second quarter is 409,000, while our customer acquisition costs were very low at $2.8 million, as our average cost of acquiring and RCE is down approximately 35% from the second quarter of last year. I would like to point out that this RCE count does not include the contribution from our joint venture in Japan, which began enrolling customers on April 1 of this year.

Turning to M&A, we closed on the acquisition of the Provider Power companies on August 1. This gives Spark three new well-recognized regional brands, 121,000 additional electricity RCEs, and nine new markets to Spark, bringing our total market count to 75. This also puts Spark into two new states, Maine and New Hampshire. The Provider integration effort is currently underway and we have already successfully and seamlessly integrated our supply, accounting, and treasury functions.

We expect a major energy transaction to be completed in the coming weeks. As investors will recall, on May 3 of this year, we entered into a purchase agreement with our affiliate, National Gas & Electric, which is wholly owned by our sponsor for the acquisition of Major Energy. We have received all of the necessary regulatory approvals, and while our retail co-affiliate has been working closely with management of Major to integrate the back-office operations, using the best systems and practices from both Major and Retailco. We intend to continue to leverage Major's management team's retail energy expertise and knowledge, in addition to their 210,000 RCEs and strong market position in the Northeast POR markets, to further enhance the efficient and profitable business model they have built.

Assuming a timely close to the Major Energy acquisition, we expect to end the third quarter with nearly 750,000 RCEs -- nearly double our RCE count as of the end of the second quarter. Going forward, we expect these two acquisitions will add approximately $30 million in adjusted EBITDA, and that is before operational and sales synergies. I want you to think about where we were at the time of our IPO in terms of our adjusted EBITDA and the growth that we've achieved in just two years. I think it is quite an achievement.

As has been the case with the Major Energy transaction, we plan to work closely with our sponsors to a continue acquiring companies going forward. NG&E continues to seek out potential acquisition targets, and we will work closely with both Spark and Retail during the due diligence and negotiations phase. Our sponsor and founder, Keith Maxwell, expects to continue funding NG&E's acquisitions, in part through the conversion and sale of Class A common stock.

I do want to comment a little further on our organic growth. As noted earlier, we focused the first half of the year on maintaining our existing RCE count while we built the Company primarily through acquisitions. This was reflected in our relatively flat RCE count, as well as our lower CAC spend. As we move into the second half of the year, we intend to increase that CAC spend as we renew our organic growth across our new and legacy businesses, leveraging our brands across all markets.

So, after a better-than-anticipated first half of the year, the acquisition of Provider Power, the pending acquisition of Major Energy and early indications of our operating performance since the close of the second quarter, it's time to update our guidance. Our new guidance range for full-year 2016 adjusted EBITDA is $75 million to $82 million, which is up approximately 70% at the midpoint from our prior guidance of $44 million to $48 million. Approximately 25% of the increase in our guidance is related to overperformance of our legacy businesses, while approximately 75% of the increase is attributed to the partial-year contributions from both Provider and Major.

With sales, marketing, and our back-office hitting on all cylinders, it continues to be an exciting and rewarding time to be a part of the Spark Energy story. Thanks for your attention, and with that, I will now turn the call over to Rob for his financial review.

Good morning, and thank you, Nathan, for that warm welcome.

The second quarter was indeed a terrific one. We realized $11.5 million of adjusted EBITDA, compared to $5.4 million for the same period last year, an increase of 111%. Despite continued mild weather in the second quarter, our power and natural gas volumes were up over last year's levels, driven by our Oasis and Censtar acquisitions. In addition, we continued to realize enhanced unit margins by optimizing our supply cost in this low commodity-price environment. Retail gross margin for the quarter was $29.1 million, compared to $24.7 million last year, an increase of 18%.

On the G&A side, expenses were up approximately $2.5 million over the last year, primarily due to increased billing and other variable costs associated with the increased RCEs. These increased costs were offset by an estimated $1.2 million in savings due to our master services agreement with Retailco. We expect the benefits of the Retailco relationship to grow as we continue to integrate our acquisitions into the Retailco and Spark platforms.

During the quarter, we maintained a relatively flat customer portfolio, finishing the quarter with 409,000 RCEs on $2.8 million of customer acquisition spend. The optimized spend result was achieved due to our declining attrition rate of 4%, combined with our improved volume-based commission structure with our third-party vendors. As Nathan mentioned, despite this lower CAC spend, our net ECEs are down just 1%. We expect our RCE count of our legacy businesses to increase into the third and fourth quarters, as we are ramping up our CAC spend for the end of the year.

Interest expense rose moderately to $619,000 from $234,000 a year ago, although interest expense was down moderately from the first quarter of this year. Investors should expect interest expense to increase again into the third and fourth quarters as a result of a modest debt increase we expect to incur with the Provider and Major transactions, as well as the increased working capital required to operate these businesses.

Income tax expense for the quarter was $4.7 million versus $458,000 for the second quarter in 2015, and $1 million for the first quarter in 2016. The rise in income tax was due to a number of factors, including our strong operating financial results, the increase in the number of Series A shares relative to total shares outstanding, and a decrease in our total cash outlay for customer acquisitions, which investors will recall, was fully deductible for income tax repurchases in the period incurred.

While we focus as our Management team more on retail gross margin and adjusted EBITDA, we understand that investors examine a number of other metrics that we consider secondary indicators of our performance. Net income for the quarter was $10.7 million compared to $4 million for the second quarter last year, an increase of 166%, while earnings per diluted share increased from $0.05 to $0.30. When considering income tax expense and net income calculations through the remainder of the year, investors should take into account the planned increase in customer acquisition outlays, our full ownerships of the Major Energy and Provider companies, and our pro forma capital structure in share mix.

In June, we amended our credit agreement to add two additional banks to our syndicate and increased the working capital facility from $60 million to $82.5 million. We also amended our credit facility last week in conjunction with the closing of the Provider Power transaction and the anticipated close of the Major Energy acquisition. On June 14, we paid a quarterly cash dividend for the first quarter of $0.3625 cents per share. More recently, on July 20, we announced that our second-quarter dividend of $0.3625 per share will be paid on September 13, 2016. As we've stated in the past, we expect to pay this quarterly dividend on a go-forward basis.

In summary, the big takeaways from this quarter are that we are seeing high unit margins; we are bringing down attrition rates; and our two acquisitions with 330,000 RCEs this quarter will significantly boost cash flows in the second half of 2016.

Back to you, Nathan.

Thanks, Rob.

So just to wrap up, we have had a great first half of the year in terms of profitability, sales quality, and attrition improvements. We are very excited to welcome Provider Power to the Spark family, and we look forward to welcoming Major Energy in the coming weeks.

And with that, we will now open up the line for questions from our analysts. Operator?

Thank you.

(Operator Instructions)

Carter Driscoll, FBR Capital Markets.

Good morning, gentlemen. Congratulations on a very strong quarter, and obviously very strong guidance for 2016.

Thanks, Carter.

First question, just walk us through again, to combat some of the noise that is out there in the marketplace, I realize Major hasn't closed yet, but remind us again of the incrementally positive nature of each of these transactions, and the execution in terms of the price. Certainly, some noise out there about how they were transferred from natural gas to you guys. Just remind us again how accretive these were, and the terms of the transactions.

Sure. Let's go through them in order.

The first one, Provider Power, that was the third-party purchase. That was not a drop down from NG&E.

We paid $28 million upfront. The way we financed that, roughly half of that, or $14 million, was through a share issuance to NG&E. The other half of that was funded through a draw down on our acquisition facility.

There is an earnout on that deal, the earnout will be paid out in 2017, and we anticipate that being between $5 million and $9 million, and it's based on customer and revenue metrics. That business, as we talked about, add a couple new markets to us. We expect that business to contribute significantly to our adjusted EBITDA in the second half of this year.

If we shift to Major Energy, as you know, that is a related party transaction. We are paying $40 million upfront, and that was in the form of issuing a couple million shares to NG&E, and then we have also assumed liabilities and earnout obligations that total approximately $35 million to $40 million, and those are being paid out over the next three years. That business brings us eight new states, 15 new markets, that are generally adjacent to our existing footprint, so very complementary from that standpoint.

For all intents and purposes, that Major Energy acquisition was a back-to-back deal to the deal to the deal that NG&E cut with the sellers of that business. There is one little exception to that, I just want to highlight that, in order to incentivize NG&E to invest in growth and invest in the long-term health of that business over the several-month period that they owned it, they do have a small equity kicker of potentially up to 200,000 shares that would be paid out over three years, but I want to make sure that you understand that that is -- in order to earn those 200,000 shares, that business has to significantly outperform its projections. So, if we do issue those shares, it is an absolute home run for Spark.

Does that answer your question?

No, it does, it does. I think there is a lot of noise out there that it was not a back-to-back transaction. I just wanted people to get a clarified answer. I appreciate that.

The other piece of that, and some of the noise is back-to-back and the price at which we issued the equity, you know, our special committee of our Board looked at -- first off they hired their own independent financial advisers. They looked at a number of different factors, but one of the factors that weighed pretty heavily on the share price that was used was just the weighted volume-weighted average share price at the time.

All right. I appreciate that. Maybe just shifting gears, obviously, the closing of maybe upcoming Major Energy transaction will incrementally add to some of your RCEs in New York State, and obviously there's been a high-profile court case, kind of overturning the reset order. Let's talk about your thoughts about potential impact, timing of the resolution, what form you think that resolution might have in New York, and if it were to turn negative, how you would potentially mitigate that.

Sure. So, as it relates to Major, one of the reasons we structured the earnout the way we did was to provide protections around that New York regulatory order. And if you look at the timing of the Major transaction, and how that New York issue played out, that was why it was structured the way it was, was to protect us on the downside in the event that the New York order had a material impact on the business.

If you look at what is really going on in New York, in late July, the court issued an order that vacated the first three clauses of that order. We see that as a huge win, both for Spark and for the industry. We are very, very happy about that.

I don't think the issue is dead. I think the commission is going to continue to want to make changes to the market.

And I will say that we are working very proactively with the commission, as are a number of the other retail providers in that market, to come up with a set of rules and changes that I think protect consumers, that are things that we had definitely work with in terms of continuing to manage our business, and things that ultimately will keep any of the bad actors out of the marketplace. So, we're collaborating with them at this point in order to come up with something that works for everybody.

Okay. So, if I kind of take, and just maybe just shifting gears, if I take the mid-point of your new guidance versus you prior guidance, and then associate, I think you said about a one-quarter of the improvement was due to organic improvements in your existing customer base separate from Provider and Major, that kind of points to somewhere around the, again, just using mid-point, maybe $54 million in EBITDA for your business this year. That $30 million you referenced, that is on an annual basis before cost synergies, is that correct?

Yes.

Okay. And what types of synergies do you think you might be able to eke out, single $1 million for each, and I'm assuming part of it by flowing it through your advanced relations with Retailco, leveraging against your very low cost structure, any type of frame, quantitatively, would be helpful.

We are still working through quantifying exactly what those synergies are, but they will come in the form of lower cost to serve across platforms and systems, for sure.

Okay. And then just maybe a last question, you mentioned still, and keep looking to evaluate other types of opportunities, I'm assuming they're contiguous and adjacent to current territories, and then maybe some new territories. You talk about potentially some of those newer territories and maybe the magnitude of some of the potential opportunities relative to either Major or what you have done in the past?

We continue to work on a number of opportunities, nothing that we are ready to announce or publicize yet. But we are working closely with National on several different things.

They are all businesses of size, so if you look at Provider and Major, they are similar in size to those two businesses. And I think will be meaningful. In terms of their geographical footprint, they would be partially overlapping what we have, but also bringing us a few adjacent markets.

So again, very similar to Provider and Major in that standpoint. The biggest thing for us when you look at going out and doing another deal like that, it is becoming less and less about new markets in which to grow organically, and it's becoming more and more about cost synergies and being able to take out some of those fixed costs from those businesses.

And then just related to that point if I could squeeze one last one in, the competitive environment for bidding for those potential acquisitions, do you see any changes from the last, say, 90 days to 120 days?

I can't tell you that we are exclusive, but I will tell you there's not many bidders in the room. They feel like, for the most part, bilateral conversations.

Perfect. I will get back into the queue. I appreciate you answering all my questions.

Thank you.

Liam Burke, Wunderlich.

Thank you. Good morning, Nathan.

Hey, Liam.

Nathan, you saw a good churn -- significantly better churn rates, how much is that a function of lower competitive activity or is the competitive activity pretty much the same as you've moved forward here?

I don't think it's a change in the level of competitive activity. I mean, we are seeing just as many competitors out there, and it's still a very competitive business. I think the biggest improvement that we have seen is really a direct result of all of our focus on sales quality.

And a big driver of our attrition last year was customers that decided, 30, 60, 90 days after getting on flow with us that they changed their mind and wanted to get off. And by us putting a lot more focus on making sure that customers clearly understand what the product is, what the benefits are, what the terms of that product are, we are seeing a dramatic reduction in that attrition.

Okay. Now, if I look at the two acquisitions you have teed up there, do you see potential to move their churn rates from current, from their levels down to what you have been achieving recently?

I think there's a little opportunity on Major, I think Provider already has a very, very good churn rate, so I don't see as much opportunity on Provider. Provider had a lot of longer-term contracts. So, they were already pretty competitive on attrition.

Great. Thank you, Nathan.

Thank you.

Mike Gyure, Janney

Good morning. Can you guys talk a little bit about what you're planning on doing with the additional cash flow, specifically related to maybe this year and next year, if you're thinking about the distribution or reinvesting that into further acquisitions or spending it on, say, customer acquisition costs, organic growth, that kind of thing.

I don't anticipate increasing the distribution, so there's the answer to your first question. We obviously, we have an earnout that we will pay over the next three years on the Major acquisition, and any additional cash flows we expect to reinvest in the business. Some of that could be M&A, and some of that could be organic growth, and our focus going forward is really on a combination of the two of those.

Great. And then lastly, on the Retailco arrangement with the [SG&A] savings program, can you talk a little bit about kind of where you are in that program?

Sure. So, when we signed that agreement and it went effective on January 1 of this year, the way we structured the pricing mechanism is that it was going to result in a $5 million year-over-year cost savings relative to our 2015 run rate. Six months into the year, we are right on track with that.

And what Rob highlighted in his comments, where we've realized about $2.5 million worth of savings on that level of customers that we had at that point in time. Obviously, higher customer count adds additional G&A, so we are on track with the savings that we are seeing there, and I think just as important as the cost savings, is we are seeing improvements in just the overall back-office operations and quality. Mike Kuznar, the individual that we hired, has done a phenomenal job of focusing on tightening up our systems and our processes.

The call center is doing an extremely good job of handling customer inquiries as they come in. We get a lot of positive feedback in terms of customer satisfaction.

So, I mean, I am seeing improvements just operationally as well. We are very, very encouraged with how that relationship is going.

One of the other things that I do want to highlight is, we -- Retailco invested in additional resources to help us go after bad debt in collections. And what you will see when you look through our financials in the second quarter, we saw a significant improvement in terms of bad debt as they went after amounts that had previously been written off and were able to recover a significant amount of that. So, a lot of good things with that relationship, we're very encouraged by it.

Great. Thanks very much.

Thank you. And we have no further questions at this time.

All right. Thanks again for participating in today's call, and we look forward to talking to everybody soon.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.