Via Transportation Inc (VIA) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Spark Energy, Inc. Third Quarter 2016 Earnings Conference Call. My name is Tia and I will be your operator for today.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes, and this conference 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.

Good morning and welcome to Spark Energy, Inc.'s third 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 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 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 reconciliations 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. First of all, welcome to Spark's third quarter 2016 earnings call. We had an outstanding third quarter where we saw Spark produced record financial results causing us to raise our 2016 adjusted EBITDA guidance from a range of $75 million to $82 million to a range of $80 million to $85 million as we are seeing these strong results continue through the fourth quarter.

These represents full year 2016 adjusted EBITDA being up over 120% year-over-year. Additionally, in the third quarter, we saw organic growth in our legacy business and we closed on Provider Power and Major Energy, two sizeable transactions that brought our RCE count to just over 750,000. That's right over three quarters of million customers and if you remember less than two years ago, our customer count was 318,000. After I walk through a few highlights for the quarter, I'll turn the call over to our CFO, Rob Lane, to provide some detail on the financial results. We will then conclude with questions from our analysts.

After two record setting quarters to start 2016, we continue to overperform with another set of record results for the third quarter. We generated $20.3 million of adjusted EBITDA and $45.2 million of retail gross margin in the third quarter, which represents 263% and 69% increase over the same results for the third quarter of last year.

We experience increased volumes in our electricity and natural gas segments primarily as a result of our Major and Provider acquisition this quarter. We continue to see enhancement of our unit margins driven by the continued low-commodity environment and our in-house supply and portfolio management groups working to optimize our supply costs, as well as our retail pricing.

As you will recall, the summer cooling season generally means higher commodity costs, so our third quarter results are usually weaker than the first and fourth quarters of the calendar year, so we are exceptionally happy with these third quarter results.

Our hard work on customer retention continues to pay off as attrition for the third quarter improved to 3.8%, which is a 5% improvement from last quarter and a 24% improvement from the third quarter of 2015. On the last call, I mentioned our intent to increase customer acquisition spending as we move into the second half of the year and to renew our organic growth across both our new and our legacy businesses.

We have already seen initial success in this effort as we invested $5.9 million in organic customer acquisitions across our legacy businesses of Spark, Oasis and CenStar in the third quarter. And this is not including an additional $2.3 million that we invested in Provider and Major. And we saw a strong organic growth of approximately 10,000 RCEs across our three legacy businesses in the quarter.

With our two acquisitions in the quarter our RCE count increase from 409,000 at June 30 to 753,000 at the end of the third quarter, an increase of over 84%. With Major and Provider, we now have a stable of well-known brands that we can use to maximize our retention and win back efforts across the various markets.

I would like to point out that our RCE count does not include the contribution from our joint venture in Japan, which began enrolling customers on April 1 of this year and to date has enrolled more than 30,000 customers.

Turning to M&A. I would like to give you an update on our two acquisitions, Provider Power and Major Energy. We closed Provider on August 1 and Major was closed as a dropdown from our affiliate National Gas & Electric on August 23. Although we have held these two acquisitions for a short time, we are very encouraged by the results we're seeing thus far. Both in terms of customer accounts as well as profitability.

Combined these acquisitions have given us access to two new states Maine and New Hampshire along with the District of Columbia and that includes 24 new utilities. From an integration perspective, everything is on track and we expect to continue realizing additional synergies going into 2017.

We have now completed two dropdown transactions and we plan on continuing to work with our sponsors to acquire additional companies going forward. NG&E remains diligent in seeking out potential acquisition targets and will work closely with Spark throughout the due diligence and the negotiation phases of any transaction. Our sponsor and founder Keith Maxwell, expects to continue in NG&E's acquisitions in part through the conversion and sale of Class A common stock.

As I mentioned at the beginning of my comments, we have increased our 2016 adjusted EBITDA guidance from a range of $75 million to $82 million to a range of $80 million to $85 million. This increase is due to our over performance in the third quarter coupled with our fourth quarter trajectory. As you can see, we have more than doubled our adjusted EBITDA year-over-year through a combination of strategic M&A as well as continued focused on sales quality and consistent organic growth. I could not be more pleased of how our team has worked together to deliver break through results.

Thanks for your attention. And with that, I will now turn the call over to Rob for his financial review.

Thank you, Nathan, and good morning, everyone. We are extremely pleased with the results of the third quarter. As Nathan mentioned, we produced $20.3 million of adjusted EBITDA in the quarter compared to $5.6 million for the same period last year, an incredible increase of 263%. While much of this was attributable to the acquisitions with Major and Provider, we continue to realize enhanced unit margins, so the optimization of our supply costs and portfolio management, as well as tremendous efforts by our customer service team to dramatically lower our bad debt.

Retail gross margin for the quarter was $45.2 million contributed $26.7 million last year, an increase of 69%. On the G&A side, expenses were up approximately $2.5 million over last year, primarily due to increased billing and other variable cost associated with a larger RCE portfolio.

In addition to our M&A activity, we've spent $8.2 million to acquire customers during the quarter of which $5.9 million was related to our legacy business. This resulted in us adding a net 10,000 RCEs after replacing for attrition. Together with the acquisitions of Provider and Major, we were able to increase our RCE count, 84% over the quarter to 753,000. This is primarily due to the two acquisitions, but as Nathan mentioned, we also continue to grow our customer portfolio organically.

As signaled last quarter, interest expense rose from $800,000 to $1.3 million. This is a result of the modest debt increase we experienced due to our acquisitions coupled with increased working capital requirements as a result of having new collateral posting requirements.

Income tax expense for the quarter was $1.1 million versus $600,000 for the third quarter of 2015 and $4.7 million for the second quarter of 2016. The year-over-year rise in income tax was primarily due to our strong operating results.

As a management team, we focused more on a non-GAAP measures of adjusted EBITDA and retail gross margin, both of which were adjusted to remove the non-cash effects of our supply hedges. We understand that investors may also look at metrics that we consider secondary indicators of our performance including net income which was $6.8 million for the quarter, an increase of $5.9 million from the third quarter last year. And earnings per diluted share, which decreased from $0.31 to a negative $0.04. Again, the primary driver of the change in net income was Major and Provider, offset by the effects of mark-to-market accounting.

Investors should note that our results for the three and nine months ended September 30, 2016 include the recast of the major earnings back to April '15, as a result of NG&E's prior ownership. That requires that we present these financials as if we own Major from the time NG&E acquired it. Our guidance is inclusive of the recast adjusted EBITDA.

On September 13, we paid quarterly cash dividends for the second quarter of $36.25 per share. More recently on October 27, we announced our third quarter dividend of $36.25 per share will be paid on October 14, 2016. As we stated in the past, we expect to pay this quarterly dividend on a go forward basis.

I would like to take a moment to thank our back office teams both at Spark and at Provider and Major for their incredible efforts in working together to integrate the company's in such a short-term period. We look forward to continuing to build on these relationships in the coming months.

That's all I have. Nathan?

Thanks, Rob. So just to recap, we continue to see strong organic growth in the quarter driven by our continued focus on sales quality and improvements in attrition and we are very pleased with how the integrations of Provider and Major are progressing. We continue to work closely with NG&E to identify additional acquisitions, and in the meantime, we are also focused on continuing to drive cost out of the business.

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

Thank you. (Operator Instructions) And our first question comes from the line of Carter Driscoll from FBR. Your line is open.

Congratulations on a very strong quarter. All right. Maybe we could just talk about how Major and Provider -- and/or Provider are performing, maybe a little bit more specificity to your expectations, if you can compare and contrast the positives and if at all any negatives? And then I have a couple of follow-ups. Thank you.

Sure. Let's take them one at a time. So if you look at Provider, Provider has a 125,000 customers give or take that are all coming up for renewal in the fourth quarter of 2016. The team has been working very diligently to execute on those renewals, we had anticipated losing a percentage of those customers upon that renewal process. I'm very pleased to admit that we are losing significantly less customers to attrition during those renewals than what we had anticipated and what this results in is us rolling into 2017 with a very healthy book of customers up in Maine and New Hampshire with some very robust unit margins on them. So, I would say on that one, definitely ahead of what we had expected in terms of customer accounting profitability rolling into next year.

For Major, Major again we're seeing strong profitability better than we had anticipated, volumes are little bit less than what we had anticipated, but I think that's very short term in nature and we're seeing increased customer acquisitions, we're seeing a lot of growth in that space coming online particularly on the commercial side of that business and the unit margins are very strong and the overall profitability is better than we had expected. So, very pleased with those two businesses.

One of the things that we're working on early into next year is taking over all of the supply function for Major, which is a significant synergy to us and will result in us adding several million dollars to the bottom line when we step into that position.

Okay, thank you for that color. Can you talk -- you've had some very increases in you margin, can you talk about the challenges and/or expectations for your margins going forward and it's still a very flat line and with a forward curve that is almost mimicking the yield curve. How you continue to eek out or improve margins or maintain margins, what's your expectations are maybe between natural gas and electricity? And then one last one from me.

Okay. So, if you look at this quarter, we're around $27 on the power side, $3.40 give or take on the gas side. Given the low commodity environment, we expect those margins to continue for several more quarters. As the commodity curve comes back up in'18, '19, there could be a little bit of pressure on those, but our long term view is that it's $25 plus on power, $3 plus on gas and that really is a function of two things, it's our supply team doing a phenomenal job of optimizing the supply costs as well as our portfolio management group, really doing a good great job of customer segmentation and trying to find ways to enhance unit margins without increasing attrition thereby increasing the overall lifetime value of every customer relationship.

Okay. And then last one from me, obviously, I think as you pointed out, the appropriate metric to gauge your operating performance is adjusted EBITDA backing out those -- the non-cash impact on mark-to-market and other things that don't really imply on a onetime basis. But at the end of the day, sometimes people look at the bottom line and it looks like it wasn't as productive a quarter. Could you talk about the composition of EPS in context of the acquisitions, and what people -- maybe investors don't necessarily understand about how that it can impact the bottom line, I think that would be helpful -- it's a complex financial model you have sometimes with the relationship with Keith. So I think that would be helpful to people and myself included.

Yes, sure. Carter, this is Rob. I'm happy to take that. So in general, we have three main drivers that are going to make our net income potentially behave a little bit different than say our adjusted EBITDA after you account for our interest and our cash taxes. The first is a difference between the amortization of our customer acquisition cost and our actual spend and we cover that a little bit last quarter, that really wasn't too bit of the difference this time around.

The second is the effects of marking our hedges to market, and the third would be the effects in minority interest. So this quarter the main effect was in fact that non-cash charge for a derivatives loss of close to $9 million. Again, a non-cash charge, it's something that is going to work itself out, it's really just sort of timing difference that has to do with the underlying commodities and then the minority interest itself.

So as I had said in the prepared comments, Major has been under common control with NG&E since April 15 and we've captured Major's financial performance in our consolidated earnings since that date through the acquisition that we did on August 23. So all these prior earnings then that's out again in the minority interest expense line, so this leads to what this quarter was a larger minority interest than we would typically see as a percentage of our total earnings. So both of those things together sort of brought down our net income just a little bit, but when you're getting down to that level just a little bit can mean pretty big magnitude of numbers on an EPS basis.

In addition, when we look at the dilutive effects of converting the convertible notes, that's a slight increases expense and a higher share count both of which gave us a more dilutive EPS on a fully diluted basis. So we expect that the effects of the recast itself will not really affect our fourth quarter EPS, but the actual versus amortized customer spend and the movement of the commodities underlying our hedges actually will, and again this is just one more reason why we as the management team tend to focus more on adjusted EBITDA, retail gross margin and our RCE count.

And Carter, it's Nathan. If I could just chime in from a commercial perspective. Rob has done a great job of laying out the accounting implications, but we really look at fixed price retail contracts turnaround in the wholesale market locking the supply, we're managing a target unit margin and locking that in overtime. If the gas price or power price falls and I have a negative mark-to-market, I'm not worried about that negative mark-to-market, I'm focusing on the leading indicator which is that customer attrition number, I'm not seeing customer attrition increase because of that drop in commodity prices.

So for me, the fact that commodity curve has fallen is actually a really good thing going into 2017 and 2018 because it allows me to continue to realize strong unit margins on all of our renewals, all of our variable customers as well as any new organic sales campaigns that we may launch. So although it's a negative hit in the short-term on the mark-to-market, it is non-cash and I think it actually sets us up for a stronger '17 and '18.

That's very helpful. And then maybe just -- squeeze in a last one if I may. There has been a little bit of movement in the yearly contentious behavior between the energy retailers, the New York State. Could you just update us on kind of where the latest stance is? I know there's injunction on the low income order. Just give us your expectations in the timing, potential resolution and why the impact is relatively muted on your own financials.

Yes. I mean we saw a big victory with the resetting order a few months ago, another one on the low income injunction. We're continuing to work very closely with the commission to come up with a set of rule changes that we think will be good for the retailers in the market, but also good for the commission and ultimately drive out the bad actors. So I don't have -- I can't tell you what the timing of that is, I think it's longer term, I don't think it's imminent, and I will tell you that we're working very proactively with the commission in order to come up something that works well for everybody.

Thank you. And our next question comes from the line of Brian Russo from Ladenburg Thalmann. Your line is open.

Maybe you could just give us a little more insight into the unit margins in the third quarter '16 versus '15. It looks like electric unit margins are up slightly, where gas unit margins are down more significantly. I was just wondering if you can give us some more insight into drivers of both?

So electricity unit margins, $26 up to $27, that's us just continuing to optimize the portfolio, more normal course of business. If you look at the natural gas margins, keep in mind in the third quarter of '15, we had a significant amount of Southern California margins in the gas book. As we -- we had very high unit margins in Southern California to offset and we ended up giving a lot of it back in bad debt. But that book is largely rolled off as we have discontinued any sales and marketing efforts over there. So those really high margin Southern California Gas customers are largely gone and we're back down to a more normal unit margin on the natural gas side.

Okay, understood. And is there any read through with the fact that -- and you mentioned earlier that third quarter is a seasonal low unit margin quarter, but it seems as if the unit margins have come down quite significantly in the third quarter versus the first half of '16?

Yes. That's normal cyclicality, that's just normal seasonality. So if you go look at the power curve, it typically tends to be higher in the summer, lower in the winter and we sell a lot of fixed price contracts.

Understood. Got it. And then --

And that's why I signaled that earlier, I mean, we generally have more profitability in Q1 and Q4, that's just a function of that underlying commodity curve shape in our business.

Right. Got it. And just can you talk a little bit about the SG&A run rate maybe on a total dollar amount or on an RCE level and maybe discuss kind of how you plan to extract merger synergies?

Well, the relationship that we've had with [Retail Co.] this year has resulted in a significant improvement in G&A year-to-date. We expect that to continue or potentially even improve. As we acquire new companies, we obviously take on a new G&A burden with those companies and then it takes us a few months in order to drive those costs down.

We've done some of that already on Major and Provider. Although, I will tell you that there is definitely more synergies to be realized going into 2017. And we're starting to see scale in the business, so on a per customer basis that G&A number will continue to trend down.

Thank you. And then what's driving the declining RCE attrition of 3.8% in 3Q '16 versus the 5% a year ago?

A big driver of that is going to be the improvement in sales quality. And if you'll recall, we came out in, I remember, it was at the end of '15, early '16 and said that we were going to have renewed focus on sales quality. It resulted in our organic growth slowing down a little bit in the first half of '16, really starting to see that pay off now in terms of attrition rates going down, bad debt number is going down, average consumption per customer is going up and we're starting to see the organic growth. It took us a while, took us two quarters, but we're starting to see that organic growth increase again in the third quarter.

Should we -- is the 3% organic growth run rate you've kind of pointed to in prior periods, is that a good run rate to use?

I think we've been pretty consistent, we expect to grow kind of single-digit percentages on an annual basis, that's our focus right now. If we get opportunities to grow faster than that, we will. But again, our focus is really on making sure that every customer is a quality customer and doing it right.

Great. And then just lastly, it looks like the State of Nevada voters passed a ballot measure to open the state to a competitive retail electricity market, and I'm just curious if you have any thoughts on that, if that offers any opportunities for Spark?

We're monitoring that, but it's really too early to tell.

Thank you. And our next question comes from the line of Liam Burke from Wunderlich. Your line is open.

Nathan, on the -- you're showing some traction on the RCE growth, is there any difference between the marketing side on natural gas or electricity or is there any difference in those churn rates?

They're pretty consistent, across the Board. I mean it's -- in terms of marketing, we're using the same sales channels, we're doing dual fuel wherever we can, we generally lead with power, gas is a follow on. We're seeing more savings claims on power right now than we are on gas. So we're seeing more power sales than we are on gas, but we're always looking at both commodities and looking at how do we add quality customers, and again, it's really focusing on the life time value of every single customer relationship.

Okay. And then you talked about the electricity portfolio or supply function being optimized, are you in the same position on the natural gas side?

Yes, it's exactly the same. I've got a team of about 15 supply folks and five or six risk folks here in Houston and they're watching that every day and that's both gas and power.

Thank you. And our next question comes from the line of Mike Gyure from Janney. Your line is open.

Yes. Can you maybe talk a little bit, Nathan, about your portfolio, I guess the product mix and maybe the customer mix, the balance today maybe fixed versus variable and commercial versus residential and where you see that moving in 2017? Similar mix or as these renewals come up, if you're looking in certainly on the variable versus fixed side, any different coming out of the portfolio?

Sure. If you look at it, we're about 74% fix, 26% variable sitting here today. We're 73% electricity, 27% natural gas, all of this is in our latest investor presentation. And from a volume metric perspective 60%, 40% residential commercial. We like having that diversification in the book, we always want to have a mix on every one of those metrics.

The other important one to pay attention to and we haven't talked about it on this call is the fact that 70% of our revenues are in POR markets, so we don't carry any consumer credit risk on 70% of our revenues.

Where I would like to see us have a little more variable in the portfolio overtime, but that's really a function of our renewal strategy and we're going to continue to watch that. But that's probably the only one of those metrics where I'd like to see us trend in a little different direction. But again, it's really just focusing on how can we optimize that overtime.

Okay. And then maybe a follow-up on the, I guess, the balance between electric and gas. Do you have any feel, I think probably a year ago we were probably closer to 45%, [65%].

I think we were 60%, 40% a year ago.

Yes. Any thoughts of where you're looking in the future as far as acquisitions or it's just depending on what's out there?

It's opportunistic and the driver here is really Provider. Provider was a really good opportunity for us to go and buy a portfolio of very profitable electricity customers up in Maine and New Hampshire, that has played out extremely well. Provider didn't have any gas business at all, so that's the biggest reason why that mix has shifted and as we continue to realize our organic growth efforts or to look at M&A opportunities, we'll be looking at natural gas as well as electricity.

Thank you. At this time, I'm showing no further questions in the queue.

Well, thanks again everybody for participating in today's call, and we look forward to talking to each of you soon.

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