Via Transportation Inc (VIA) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Spark Energy, Inc. Fourth Quarter 2017 Earnings Conference Call. My name is Bridget and I will be operator for today. (Operator Instructions) As a reminder, this conference call 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 conference over to Mr. Christian Hettick with Spark Energy, Inc. Please go ahead.

Good morning, and welcome to Spark Energy, Inc.'s Fourth 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 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.

We would also like to invite you to check our website regularly because we use it to disclose material nonpublic information and to comply with our obligations under Regulation FD. That web address is ir.sparkenergy.com.

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

Thank you, Christian. I want to welcome our shareholders and analysts to today's earnings call. Spark achieved another adjusted EBITDA record in 2017 with $102.9 million despite weather challenges, including the mild summer, followed by Hurricane Harvey, and then a surprise winter storm that hit the Northeast and Midwest during the holidays. 2017 topped last year's results by 26% and is the third straight year of double-digit adjusted EBITDA growth since our IPO in 2014. By any metric, our growth, both organically and through M&A, has been phenomenal, and we think these opportunities will continue.

During our call today, I will discuss a few of the drivers of our financial results for the year and discuss the strategic moves that we listed in our press release last night. Then I will turn the call over to our CFO, Rob Lane, who will provide details on the financials.

We recorded full year adjusted EBITDA of $103 million compared to $82 million for 2016. This was due to additional volumes and margin from our Verde and Perigee acquisitions, as well as a full year of the Major and Provider acquisitions. For the fourth quarter, adjusted EBITDA of $28.9 million compared to $24.8 million for the prior year, this was mainly driven by the increased volume from having a larger customer base.

Retail gross margin followed a similar trajectory, with full year retail gross margin up 23% year-over-year at $224.5 million for '17 compared to $182.4 million for '16 and fourth quarter results of $66.2 million compared to $58.8 million in the prior year. We ended the year with over 1 million RCEs, an increase of 35% year-over-year, while monthly attrition for '17 held steady year-over-year at 4.3%.

2017 was an extraordinary year for Spark. We closed 3 acquisitions, highlighted by our purchase of Verde Energy, which closed on July 1. In the fourth quarter, we launch a number of internal initiatives designed to drive additional costs out of the business. We've already begun to realize some of these savings in the first quarter of this year. Our international joint venture in Japan achieved profitability ahead of schedule, and we'll touch on that briefly as well.

We saw employees come together to not only help each other during Hurricane Harvey, but to serve our customers during trying times without interruption. And we replaced our credit facility with a larger, more flexible facility and welcomed several new lenders into our syndicate group.

As we look forward, there are a number of exciting developments that we are happy to share with you today. On the acquisition front, Spark has already closed on one acquisition this month, which is a retail electric provider, serving both electricity and natural gas customers in 7 states in the Northeast and Midwest. We have also agreed to purchase a book of customers from our affiliate National Gas & Electric. In total, we will pay approximately $18 million in cash consideration, plus some working capital on the third-party deal. These 2 acquisitions should add 80,000 RCEs, and both deals will be immediately accretive as we expect to generate at least $12 million in adjusted EBITDA from the transactions over the balance of 2018.

While we love the RCE growth, we're focusing even more on RCE quality in 2018. We continue to streamline our customer acquisition costs to focus on our highest-return sales channels.

I mentioned our internal initiatives a little earlier, these are mainly centered around integration, simplifying our structure and enhancing both our gross margin and our operating margin. As we announced on January 15, we terminated the Verde earnout and are aggressively working on its full integration into Spark, which we expect to be substantially complete in the second quarter.

Earlier this week, we agreed to reintegrate retail services, Retailco Services, back into Spark. As investors may recall, we first formed Retailco at the end of 2015 because we believed that there were significant cost reductions to be achieved through improvements in our systems and in how we served our customers. At the time, we estimated those annual G&A savings to be roughly $5 million, achievable over a 24-month period. Our majority shareholder, Keith Maxwell, formed Retailco, to which we moved our back-office operations in exchange for pricing that allowed us to realize those savings immediately. We felt that it was time to bring the Retailco employees and operations back into Spark now that these improvements have been fully achieved.

We have identified a number of additional synergies in the Retailco reintegration, including redundant management and third-party service provider costs that we believe will allow us to achieve as much as $2 million of additional run rate savings from this reintegration, while at the same time, simplifying the story that we communicate to our lenders and our investors.

As mentioned in the press release, Keith has agreed to facilitate this reintegration for no consideration, and our special committee has approved the transaction. We expect this reintegration to be complete in the coming weeks.

We also have a number of other internal initiatives that we have been working on. These include consolidating our brands in certain markets, automating some manual processes and working to consolidate our third-party relationships in certain areas to our strongest and most efficient partners. We believe that taken as a whole, all of these initiatives and integrations should help us achieve $20 million or more in annual run rate savings by the end of 2019.

Building on our success in Japan, we had mentioned on our last earnings call that we will be looking at additional international opportunities. We are currently working on 3 separate opportunities. In each of these, we would be investing in existing management teams and businesses that have local market experience, while working with them on enhancing product offerings, marketing and energy supply.

We also did a lot this year to enhance liquidity. We issued over $90 million of Series A preferred stock, including $50 million in the first quarter of 2018, and put together a new credit facility that has grown to $200 million of commitments. I want to thank our banks and our investment bankers for all of their hard work. We believe that we are well capitalized, and with the exception of a large acquisition, do not foresee needing any additional external capital from the public markets for the foreseeable future.

Our board has elected not to provide quantitative guidance at this time for 2018. But as we look at how 2018 is shaping up, we believe results will be largely in line with 2017. January was impacted by the bomb cyclone that hit our Northeast and Midwest markets in late December and early January. During that time, we experienced higher-than-normal volumes and costs for that incremental load. That being said, this is not the first adverse weather event we've experienced in our 19-year history. Our long-term outlook continues to be a combination of organic growth and taking advantage of additional M&A opportunities whenever we find deals that are accretive to our shareholders. And if history repeats itself, we will see additional consolidation opportunities over the coming months as small retailers look for an exit opportunity.

One last thing before I turn the call over to Rob for his financial review. As we highlighted in our press release last night, our board has retained Morgan Stanley to evaluate strategic alternatives. Since the time of our IPO, our management team and board have been focused on ensuring that we are always making decisions to maximize long-term shareholder value. And we believe that the current stock price does not accurately reflect the growth we've achieved or the underlying value of the business. We will provide further updates on this as information becomes available. Rob?

Thank you, Nathan. Good morning, everyone. In the fourth quarter, we achieved $28.9 million in adjusted EBITDA, an increase of 16% compared to last year's fourth quarter of $24.8 million.

Retail gross margin for the quarter was $66.2 million compared with $58.8 million last year, an increase of 13%. Both of these increases were primarily due to the increased volumes from our Verde and Perigee transactions.

Full year adjusted EBITDA was $102.9 million compared to $81.9 million for 2016, an increase of 26%, while full year retail gross margin was $224.5 million compared to $182.4 million, an increase of 23%. This was due to the effect of Verde and Perigee, as well as full year contributions from both Provider and Major Energy.

Turning to G&A. Operating expenses increased 19% from last year to $101.1 million, primarily due to an increase in the number of customers we serve, increased commissions paid to a larger commercial book and an increase in bad debt.

As Nathan mentioned, we continue to drive additional operating synergies through a number of initiatives, including the early termination of the Verde earn-out and the reintegration of Retailco Services. We ended the year with over 1 million RCEs, again as a result of our Verde and Perigee acquisitions and our larger C&I book. For the year, we spent $25.9 million in customer acquisition costs compared to $24.9 million the prior year. Meanwhile, our monthly average customer attrition held steady year-over-year at 4.3%.

Interest expense for the year rose from $2.3 million to $11.1 million, primarily because of accretion of our earnout liabilities and sellers' note and greater utilization of our credit facility over the course of the year.

Other nonoperating income of $22.5 million included noncash income of $22.3 million related to the revaluation of the tax receivable liability as the result of the tax legislation passed in December 2017. Income tax expenses increased to $37.5 million as compared to $10.4 million for 2016. The biggest factor here was the noncash tax effects of the revaluation of the tax receivable liability, noncash taxes paid on our noncash derivative gains, an additional tax as a result of the strong financial performance.

Turning for a moment to the most recent tax legislation passed by the federal government, we expect the change to have a positive effect on our net income as well as our cash position going forward. Our estimation is that the new tax laws will cut our tax rate, as well as our tax-related distributions by roughly 35%, taking into account both the new federal rates and rules, as well as the state taxes we have to pay.

Our net income for the year was $76.3 million or $1.19 per fully diluted share, compared to $65.7 million and $1.11 per fully diluted share for 2016 on a split-adjusted basis. 2017 was positively affected by a $21.3 million mark-to-market gain, as well as a noncash after-tax income of $13.7 million from the revaluation of the tax receivable liability, while 2016 was positively affected by a $20.3 million mark-to-market gain. As we have reminded investors in the past, when commodity curves rise, all other things being equal, we experience a noncash mark-to-market gain that ultimately does not change the actual cash position we expect to receive on those fixed-price contracts.

Looking at our balance sheet, we now have total lender commitments of $200 million. We also recently raised an additional $50 million of Series A preferred stock in January, which we plan to use to help fund our acquisitions and international expansions.

Looking at our position at the end of the year, we had total liquidity of $67 million.

On December 14, we paid a quarterly cash dividend on our Class A Common Stock. And on January 15, we paid the quarterly cash dividend on our Series A preferred stock. On January 18, we announced our fourth quarter dividend of $0.18125 per share on our common stock to be paid on March 16, and fourth quarter dividend of $0.54688 per share of preferred stock to be paid on April 16.

As we've stated in the past, we expect these quarterly dividends to go forward -- on a go-forward basis. That's all I have. Back to you, Nathan.

Thanks, Rob. We're very proud of everyone here at Spark for helping us to break the $100 million adjusted EBITDA and 1 million RCE thresholds. As we look toward 2018 and beyond, we will continue to focus on growing both our top and bottom line through continued acquisitions, organic sales, integration and international expansion. We will now open up the line for questions from our analysts. Operator?

(Operator Instructions) Our first question comes from the line of Carter Driscoll with B. Riley FBR.

First question. Just trying to understand guidance, and I recognize a lot of moving factors this year. But let me posit this. So I would assume that it doesn't include any M&A, does it exclude the 2 announcements you made today? Obviously it probably excludes anything that you can announce. And then you talked about potentially a $20 million annualized cost savings. I would assume that maybe the bulk of that is pushed into 2019. Help me understand the different moving parts, and then maybe the interplay of commodity prices and how you've maybe adjusted your hedge book going forward for some of the exogenous events this year, if at all?

Okay, great question. Couple of things. We referenced the weather event in January. We believe that will have a negative impact on the first quarter. And then the 2 acquisitions, those are factored into our projections. But any incremental M&A that we anticipate doing as a result of the weather event is not factored in, whether it's international or domestic. And then the $20 million run rate cost savings, we're working on achieving those now, but the majority of those will show up in the beginning of 2019.

Okay, okay. And then moving on, just so I understand, your liquidity position today, obviously, you resized your credit facility last year and added some syndication partners. I think I heard you say you have approximately $200 million outstanding between the different facilities. A, is that correct? And then you, obviously, had some from the preferred raise. Do you feel this gives you sufficient liquidity if you found a big M&A opportunity maybe of the size of Verde? Would you be able to act on that quickly? Or how would you be able to facilitate something if it were north of what you're current liquidity position is?

Carter, this is Rob. Let me answer the first part of the question. Nathan and I will tackle that second part together. We have $200 million of commitments. As you know, a lot of that is actually with our LCs. So it's not available to draw, but it's not drawn. And then the other piece of that is what's actually drawn is, I believe, at the end of the year, is a little over $100 million, but it's actually lower than that now. So from a capacity utilization standpoint, we are not utilizing that full $200 million right now. We've got some good room on that plus cash available, plus there's also that short-term liquidity that our sponsor provides us as well. And we have the preferred as well. If we look and say, well, how will we finance another acquisition? We'd probably look to use some sort of combination of cash on hand and the preferred stock that we have. We might look to do some stuff on the debt side as well. At this point, I don't believe that there would really be any utilization of the common stock to be able to do that, and that's really not something we anticipate.

Okay. And then related to that. So if you're comfortable, because preferred is, obviously, pays a nice dividend, do you feel comfortable with your payout ratio with the moving parts, at least, for 2018? Obviously, there's more cost savings, as Nathan alluded to, impacting 2019. Just want to make sure you feel comfortable with the payout ratio, and then I just have one last follow-up.

We're very comfortable with that, and that's something that our board is very tightly focused on and that they spend time on as well. So we do feel comfortable there.

Okay. And then just lastly, obviously, the big question in the room with the engagement of Morgan Stanley. Just give me an idea of how the engagement was broached? Were -- are there parties like maybe IPPs with bigger balance sheets coming to you looking to buy a book and seeing maybe a depressed stock price as an opportunity to be opportunistic, much like you guys have been over the past several years? Is it to facilitate international expansion and/or a change in your business strategy? Just maybe characterize what you envision engagement. Could it be some or all of those aforementioned?

Yes, Carter. I mean, we've had some interest over the last several months. And I think management, as I said earlier, management and the board both believe that the current stock price does not reflect the underlying value of the business, and as such, we've engaged Morgan Stanley to assist us. We've just recently engaged them, so really don't have anything else to report at this time, but we will be happy to do so as information becomes available.

Our next question comes from the line of Mike Gyure with Janney.

Yes. I was wondering if you guys could maybe give us an update on kind of the New York regulatory environment and I guess what you're thinking there. And I guess I get questions everyday about it, and maybe just to get your perspective.

Sure, Mike. Really, our view hasn't changed on New York in 2 years. And we continue to work with a group of other larger retailers, trying to get an audience with the commission with the Governor's office. At this point, the commission has said they don't really want to do anything until the court process plays out. And we anticipate sometime this summer, we'll be able to get in there and enter into some sort of settlement negotiations with them. When I say settlement, I'm talking about settling on what are the potential rule changes, not any sort of dollars. And by the end of the year, maybe early 2019, I anticipate a set of rule changes or disclosure requirements or other things that we're familiar with from other markets, and we'll adapt to it and we'll continue to operate our business. The other thing I would highlight is that as we've continued to grow and expand in other markets, New York, today, is only about 15% of our overall business, both top and bottom line. And we continue to focus on growing in other geographies. So we're kind of where we've been for 2 years on that issue.

Okay, great. And then maybe one more on the customer acquisition cost. I guess, what are you thinking as far as spending for 2018, maybe just directionally compared with 2017, do you view it as same, more, or what you're looking at there?

So the one thing I will highlight is part of these internal initiatives to drive down costs have been very focused on reducing the amount we spend on certain sales channels. And one of the big areas for us to realize cost savings as we integrate these acquisitions is to get the cost of customer adds down. On a consolidated basis, we reduced the cost by 3% year-over-year in terms of adding customers, and I think there's significantly more that we can do now that Verde's earnout is behind us and as we get near the end of the major earnout. Those were 2 large pools of CAC dollars. So I will tell you that underlying our 2018 view, the CAC dollars go down, but the number of customer adds are consistent.

(Operator Instructions) I'm not showing any further questions at this time.

All right, just want to say thanks again to everybody for participating in today's call and we look forward to talking to you soon.

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.