Via Transportation Inc (VIA) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Spark Energy, Inc. First Quarter 2017 Earnings Conference Call. My name is Grace, and I'll be the operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes, and this call is to be posted on Spark Energy's website. I would now like to turn the conference over to Mr. Christian Hettick with Spark Energy, Inc. Please go ahead.

Good morning, and welcome to Spark Energy, Inc.'s First Quarter 2017 Earnings Call. This morning's call is being broadcast live over the phone and via webcast, which can be located under Events & Presentations in the Investor Relations section of our website at sparkenergy.com. With us today from management is our President and CEO, Nathan Kroeker; and our Vice President and 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 conditions. 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 today'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 today's earnings release.

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

Welcome to the call this morning, Christian. As some of you know, Andy Davis has transitioned out of his investor relations responsibilities and has taken on a full-time business development role to support our ongoing acquisition activity. Christian is now serving as the IR contact within Spark. And with that, I want to welcome our shareholders and analysts to Spark's First Quarter 2017 Earnings Call.

Spark has once again experienced a quarter never seen in our company's history, reaching all-time highs in adjusted EBITDA, retail gross margin and RCE count. In addition, it has been another successful quarter on the M&A front.

I will make a few opening remarks about our operating results and our 3 new acquisitions, and then I'll turn the call over to our CFO, Rob Lane, to provide some details on the financial results. We will then conclude with questions from our analysts.

We recorded $34.2 million in adjusted EBITDA in the quarter, a 62% increase over the first quarter of 2016 and the largest adjusted EBITDA we've achieved in any quarter in our history. Similarly, our retail gross margin reached $64.3 million for the first 3 months of 2017, an increase of 63% over last year.

Although there was some minor movement in our unit margins, the main driver of this activity was around volumes, which were up significantly year-over-year primarily as a result of the Major and Provider acquisitions that closed in the middle of 2016.

Our monthly attrition rate averaged 3.8% for the quarter, which is a 12% improvement over our full year 2016 attrition rate of 4.3%. This improvement in retention is in large part because we continue to refine our pricing and product selection, our customer service and our ongoing sales quality efforts.

Turning to M&A. On April 1, we closed on our acquisition of Perigee Energy, a company with 19,000 RCEs and also exercised an option to acquire an additional 41,000 RCEs from a third party in connection with this acquisition. These transactions, which we first discussed on our last call, add the state of Delaware to our existing footprint, and we expect these transactions to be immediately accretive to adjusted EBITDA.

And today, we are announcing the signing of a purchase-and-sale agreement to acquire the Verde Energy Companies. Verde is a strong renewable energy brand serving approximately 145,000 RCEs with renewable electricity or carbon neutral natural gas products in 40 utility service territories across 8 states. Verde has developed a unique sales channel that we are excited to expand across our other brands, and we expect to see improvements in our overall organic sales efforts as a result.

Upon closing, Verde will add 2 new utility service territories to Spark's footprint as well as a seasoned and dynamic team of industry professionals that we look forward to welcoming into the Spark family. We expect to close Verde in the second half of '17, subject to obtaining regulatory approvals.

Spark will pay total consideration of $65 million plus working capital, consisting of $45 million in cash at closing and a $20 million seller's note payable over 18 months. There's an additional earnout that is subject to Verde's ability to achieve defined performance metrics. We expect to close the Verde acquisition in the second half of 2017, utilizing a combination of cash on hand, along with additional borrowings under our existing credit facilities. Upon closing, this deal will be serving -- pardon me, upon closing this deal, we will be serving almost 1 million RCEs in 93 utility service territories across 19 states.

At this point, we are reaffirming our guidance for 2017 in the range of $110 million to $120 million in adjusted EBITDA. If you assume the midpoint of this range, it is more than 3x what our adjusted EBITDA was in 2015. And I want to highlight that this does not include the pending Verde acquisition or any of the other new acquisitions we are currently working on.

It has been a great quarter, and we expect much of this good news to continue as we get into the second quarter. I want to take this opportunity to thank all of our employees who have helped to triple the size of this business since our IPO and make this company the success story that it is.

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

Good morning. As Nathan mentioned, we are extremely pleased with our first quarter results. During the quarter, we achieved $34.2 million in adjusted EBITDA, an increase of 62% over last year's first quarter of $21.1 million.

While the primary driver of these increases was last year's acquisitions of Major and Provider, we continue to optimize our unit margins and maintain a low-cost, highly scalable operating structure.

Retail gross margin for the quarter was $64.3 million compared to $39.6 million last year, an increase of 63%. On the G&A side, expenses were up $7 million over last year to $24.4 million, primarily due to variable costs associated with a larger customer base. Once again, a low bad debt expense facilitated in part by bringing our collections efforts in-house last year was a positive driver year-over-year.

We spent $7.7 million to acquire customers during the quarter. This resulted in us growing organically by a net 15,000 RCEs after replacing for attrition. Our RCE count of 789,000 at the end of the quarter represents an increase of 90% over our position at this time last year, a result not only of our M&A activity but also strong organic growth.

Interest expense for the quarter rose from $750,000 to $3.4 million, primarily because of $2.6 million of noncash interest charges. A quick glance at the balance sheet and liquidity table in our press release shows a low bad debt -- sorry, a low debt level that has increased even further in the current quarter.

Income tax expense for the quarter increased to $2.4 million as compared to $1 million for the first quarter of 2016, primarily due to our strong operating financial results and the increased percentage of Class A common shares relative to our Class B shares.

Our net income for the quarter was $11.4 million or $0.31 per fully diluted share compared to $15.7 million and $0.68 per fully diluted share for the first quarter of 2016. The decrease in net income, especially compared to the record retail gross margin, is primarily driven by noncash mark-to-market accounting associated with the hedges we put in place to lock in margins on our current -- on our retail contracts.

When commodity prices fall, all other things being equal, we expect to experience a noncash mark-to-market loss and ultimately does not change the actual cash we expect to receive on those fixed price contracts. As we've indicated previously, we do not believe that net income or EPS are meaningful metrics to use in evaluating our performance.

Again, we backed the noncash effects out of our adjusted EBITDA and retail gross margin calculations, which we believe are the most accurate indicators of the performance of our business. On March 16, we paid a quarterly cash dividend for the first quarter of 2016 of $0.3625 per share. On April 19, we announced that our first quarter dividend of $0.3625 per share will be paid on June 14.

As we've stated in the past, we expect to pay this quarterly dividend on a go-forward basis. We also announced that, in accordance with the terms of our Series A preferred stock, the initial cash dividend for the period from the date of issuance through June 30 of approximately $0.73 per share will be paid on July 15.

That's all I have. Back to you, Nathan.

Thanks, Rob. In summary, we're continuing to build on the phenomenal customer and financial growth we delivered in 2016. As discussed, we are starting 2017 strong with 3 more accretive acquisitions, ongoing organic growth, along with more M&A targets identified in the pipeline. All of this aligns to a clear line of sight to 1 million RCEs for the Spark family of brands in the very near future. When we look at the growth of our customer book, along with our continued strong unit margins and efficient cost structure, we're very excited about the rest of the year.

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

(Operator Instructions) And your first question comes from Carter Driscoll from FBR.

First question, if you -- you maintain the guidance obviously that's x the Verde acquisition. Could you talk about if you were able to close early on and say -- or say, by the end of 3Q, what your customer acquisition cost assumption might be for 2017? And/or if you could address kind of the competitive bidding environment. We've seen a little bit of activity, but want to get your assessment of whether it's putting any pressure, upward pressure on the multiples you might have to pay for some of the other activity you're talking about potentially coming down the pipe this year or next?

Alright. Thanks, Carter. 2 questions there, the first one, really on customer acquisition costs. I mean, we're reaffirming our guidance that still assumes that we're going to spend somewhere between $27 million and $33 million to acquire customers organically. And I think your second part of that was if Verde closes at the beginning of the third quarter, what does that do to customer acquisition costs? I mean, we would anticipate that Verde would replenish its own attrition and also realize single-digit organic growth on that additional 145,000 RCEs, and their CAC cost is in line with ours. So I don't have the number in front of me, but you can do the math with those inputs. Second part of your question then was the competitive bidding process. I think we've signaled on several of the prior calls, a lot of the deals that we look at are situations that we've become aware of through our relationships in the industry or unique circumstances. They tend to be bilateral negotiations. I know, in many cases, these companies have had conversations with other potential buyers. But when we get into these processes, they tend to be pretty much a bilateral negotiation. We're not seeing a lot of competition out there right now on some of these deals.

Excellent, okay. And then you talked about some other potential activity. Is there any color you can give on the scope of some of the other companies that you're speaking with, whether you have them under LOI or not, just in terms of potential size, maybe relative?

No, we've got a pipeline of acquisitions, as I alluded to in my comments, but nothing that we're prepared to speak about in detail today.

Okay. Last question. The number of RCEs you had ending the quarter, does that include the additional third-party acquisition that you acquired or is that exclusive? Because you -- I believe you acquired that in April.

So 789,000 RCEs does not include any RCEs related to Perigee or the additional third-party customers because those didn't start coming online until April. You're correct.

Okay. And then you obviously have sufficient capital on hand to do the Verde acquisition without potentially raising any new other than maybe upsizing the facility. If you were to look beyond that, do you feel comfortable you'd be able to generate internal cash to be able to do so? Just trying to get your thoughts about what you might think beyond Verde?

Look, we've got, as you pointed out, we've got plenty of cash to close on the Verde acquisition. We've got multiple sources for how we would fund the next acquisition, whether it be on an upsized credit facility. We've got our subordinated debt. We've got the preferred that we launched back in March. We've got 3 or 4 different options in terms of how we would finance these, and we're just going to optimize that capital structure at the appropriate time.

And our next question comes from Mike Gyure with Janney.

Can you talk a little bit about the Verde acquisition? I guess, kind of the diversification, I guess, new products and kind of the new geographies that you're entering into with that acquisition?

Sure, Mike. So Verde is gas and electricity. It's in 8 different states. They overlap significantly with our current footprint. They do bring us 2 new utility service territories. Verde has a very strong renewable energy brand. 100% of their customers are on renewable products, whether it be renewable electricity or carbon neutral natural gas, so a lot of brand value out there in terms of that. One of the things that is unique to Verde, which is very attractive to us, is they have developed a proprietary sales channel that's unique to them. And it actually allows us to go and access a segment of customers or a certain demographic of customers that we previously have not been very successful at accessing. And we intend to expand that sales channel across all of our brands and the rest of our footprint. So that's one of the things that was very attractive to us about this particular business.

And our next question comes from Sophie Karp with Guggenheim.

Could you maybe talk a little bit about the customer -- margins that the customers that you already have versus the rest of your portfolio book? I understand these are mostly green customers, right? So from the margin standpoint, how do they compare to the general mix?

Look. Well, I think, I mean, it's fairly common knowledge that green products or renewable products tend to generate higher unit margins. What I would tell you, that is the case here. We're seeing very strong unit margins in the Verde book, slightly higher than what we've had historically. And I think they've got to prove in themselves over a number of years they're able to realize those margins in all sorts of economic situations, all sorts of commodity price environments. So we're very excited about that.

And what about the contract duration on the Verde book? Could you comment on that a little bit?

It’s a mix. It's similar to our business. It's a mix of fixed and variable type contracts. It would be similar to our existing book.

And our next question comes from Dan Fidell from U.S. Capital Advisors.

Nice job with the quarter and obviously, the latest deal. Just wanted to ask a quick question. You had mentioned in the release about your expectations for about a $25 million incremental lift to adjusted EBITDA. Can you talk a little bit about how you see that rolling in? I think you had mentioned in the release that, that does include synergies as part of the deal. How should we be thinking about that lift as we look forward?

So we're going to have some integration costs in the first couple of months. Once we get through that integration period, we believe the run rate for this business after synergies is $25 million. So in terms of how much of that rolls into the balance of '17 is really dependent on the timing around our regulatory approvals and the closing of the transaction. So because of that, we're not updating our guidance today. We don't control the timing of those approvals.

And we have a follow-up question from Carter Driscoll from FBR.

Could you address the -- or contrast the earnout that you have for Verde with Major or just talk about the structure and how that's arranged? And then maybe could you provide any incremental update on your activities in Japan?

Sure. So the earnout on this deal is -- it's a lot simpler than the Major earnout. It has 2 primary components. One is an adjusted EBITDA component and then obviously, the sellers are incentivized to maximize adjusted EBITDA. But it also has RCE count threshold in it. So they cannot harvest the business in order to maximize adjusted EBITDA. So they're really incentivized to grow the business modestly and then maximize adjusted EBITDA over an 18-month period. Does that answer your first question?

It does.

The business in Japan, we've passed the 50,000 customer mark. We had -- we're right on track in terms of the pace of growth in terms of customer count. We're well ahead of budget, both in terms of gross margin as well as net income. But we don't provide a lot of details on that in our financials at this point in time.

Thank you. And I'm not showing any further questions at this moment. I would like to turn the call back to Nathan Kroeker for any further remarks.

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

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