Via Transportation Inc (VIA) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Spark Energy, Inc. First Quarter 2018 Earnings Conference Call. My name is Mark, 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 conference over to Mr. Christian Hettick with Spark Energy, Inc. Please go ahead.

Good morning, and welcome to Spark Energy, Inc.'s First Quarter 2018 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 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 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. After we touch on the financial results for the first quarter, I will give an update on our outlook and our strategic plan before I turn the call over to our CFO, Robert Lane, who will provide details on the financials.

We recorded $15.9 million in adjusted EBITDA and $45.7 million in retail gross margin in the quarter, decreases of 54% and 29%, respectively, over the first quarter of last year.

The primary driver for this was the sudden, extreme and prolonged cold weather in the Midwest and the Northeast, which had a significant impact on us and other energy retailers through the first 2 weeks of January.

As we discussed on our last earnings call, we expected this to have a negative impact on our financial results. The comparison to the same quarter last year is even more pronounced because of the warmer-than-normal weather in the first quarter of 2017, which resulted in very strong unit margins for these winter months a year ago.

It really was the perfect storm, with both pricing and usage increasing significantly over normal levels. To give you an idea, usage in the New England ISO was close to 20% above normal, while usage in PJM was 25% above normal, which amounted to nearly 5 standard deviations above historical norms.

While cold snaps can be well managed and are expected from time to time, this above-normal usage was for a period exceeding 2 weeks. That's over twice as long as 2014's polar vortex. Weather forecasts leading up to the cold spell were all indicating warmer-than-normal weather, and so we were hedged accordingly. The weather forecast suddenly flipped right before Christmas, and when the storm became apparent, we were forced to buy incremental supply in the day-ahead markets at prices well above normal.

Due to the credit requirements from the ISOs, we were also forced to purchase physical power at significant premiums in order to stay within our credit limits. While margins were negatively impacted by the high prices we paid to supply power in January, this has no effect on the overall health and long-term outlook of the business. Our business is very resilient, and by early February, we had already returned to a more normalized earnings run rate. And I'm happy to say we're back in line with our internal projections through both March and April.

We have taken several steps to ensure that the impact of any such future weather anomaly will be less severe were something similar to happen again. First, we expect to not renew the majority of our larger, low-margin C&I business, instead focusing more on adding higher-margin mass market RCEs, both residential and small commercial. In addition, we have been using more physical hedges instead of financial edges, which both lowers our collateral requirements with the ISOs and puts us in a more favorable credit position with our counterparties during price spikes.

As a result of these efforts, investors should expect to see longer-term unit margins increase as we refocus on our mass-market business, which we expect to have a long-term positive effect on adjusted EBITDA. We also expect our collateral posting requirements to decrease over time, which should be reflected in greater liquidity and lower credit facility utilization.

We averaged 4.2% in monthly attrition in the first quarter, which is in line with historical norms and inside our forecasted range of 3.5% to 4.5%. We also added 146,000 new RCEs through organic growth and ended the quarter slightly above where we started the year.

On the M&A front, we closed on a small acquisition of a retailer in the Northeast on March 1 and have been able to rapidly integrate those operations. We have also begun the process of moving a book of customers over from an affiliate of our parent, which we expect to be complete by the end of the current quarter.

Meanwhile, our Corporate Development team continues to explore opportunities for tuck-in companies or books of customers. As we mentioned on our last call, we had several big integration initiatives this quarter geared towards driving down our cost to serve and increasing our adjusted EBITDA. In January, we terminated the earnout with Verde, which allowed us to finish the full integration of that brand early in the second quarter.

On March 7, our board approved the reintegration of Retailco services back into Spark, which we completed on April 1. In conjunction with both of these moves, we executed on an internal corporate reorganization, wherein we eliminated duplicate positions and streamlined certain processes. When combined with some additional cost savings, we estimate that we should achieve run rate savings of approximately $15 million annually as a result of the actions we've taken to date.

We are moving forward with additional measures, which include consolidating brands in certain markets, consolidating billing systems, and automating a number of manual processes, each of which we expect to result in additional cost savings. On our last call, we mentioned that we were targeting $20 million of run rate savings by the end of 2019. We are well on our way and ahead of schedule for that goal, and we now believe that we should have most of those savings in place by the end of 2018.

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

Thank you, Nathan. Good morning. In the quarter, we achieved $15.9 million in adjusted EBITDA, a decrease of 54% compared to last year's first quarter of $34.4 million.

Retail gross margin for the quarter was $45.7 million compared with $64.6 million last year, a decrease of 29%. There are a few items to be mindful of in this comparison to last year. First, as Nathan mentioned both on this earnings call and on our year-end earnings call, the effects of the winter storm and Bomb Cyclone during the beginning of this year negatively affected our retail gross margin by increasing our cost of goods sold on a per unit basis. The second was the increase in volumes year-over-year because of both the inclusion of Verde and other acquisitions as well as the additional load from the winter storms.

The third factor was that last year we were able to take advantage of the milder weather during most of the winter to optimize our supply costs, whereas, this winter, we purchased a number of physical positions and hedges that were at higher prices than we would've expected to pay had we not been constrained by the collateral requirements of the ISOs.

For G&A, expenses increased 23% from last year to $30 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 that we completed in the clean-up of the Verde book.

As Nathan mentioned, we made a number of moves during the first quarter that we expect to bring our G&A numbers down over time on a per customer basis. We ended the first quarter with a record 1,055,000 RCEs, up 1% year-to-date. The primary driver of this increase was the $4.3 million we spent to acquire 146,000 RCEs organically during the quarter.

We expect to continue this modest growth trend into the second quarter, although we may see some deliberate attrition of larger commercial customers as we elect not to renew certain contracts. Interest expense for the quarter decreased from $3.4 million to $2.2 million, primarily because of a decrease in noncash accretion of our earnout liabilities and sellers note. Income tax expense for the quarter decreased to a credit of $6.5 million as compared to expense of $2.4 million for the first quarter of 2017, primarily due to the net loss before taxes for the quarter. Our net loss for the quarter was $41.8 million or $1.09 per fully diluted share compared to net income of $11.1 million or $0.16 per fully diluted share for the first quarter of 2017 on a split-adjusted basis.

The decrease in net income is primarily driven by noncash, mark-to-market accounting associated with the hedges we put in place to lock in our margins on our retail contracts. We had a mark-to-market loss this quarter at $51.6 million compared to our mark-to-market loss of $13.9 million a year ago. As we have reminded investors in the past, when commodity curves fall, all other things being equal, we experience a noncash mark-to-market loss that ultimately does not change the actual cash we expect to receive on those fixed-price contracts.

This is the perfect example of why we believe net income is not a good indicator of our business performance. The sudden price spikes associated with the winter storm resulted in a very large mark-to-market gain in the fourth quarter of 2017, which essentially reversed at the end of the first quarter as prices returned to historical levels.

On March 16, we paid the quarterly cash dividend on our Class A Common Stock. And on April 16, we paid the quarterly dividend on our Series A Preferred Stock. On April 19, we announced our first quarter dividend of $0.18125 per share on our common stock to be paid on June 14 and first quarter dividend of $0.54688 per share of preferred stock to be paid on July 16.

As we've stated in the past, we expect to continue to pay these quarterly dividends on a go-forward basis.

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

Thanks, Rob. With the extreme cold of January behind us, Spark has taken and will continue to take measures to position ourselves to minimize downside risks, take advantage of market opportunities and drive down costs. We are excited about the rest of the year and would like to open up the line for questions from our analysts. Operator?

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

So maybe a first question, just a clarification, Nathan or Rob. So I think, you talked in last quarter that you were hoping to save about $20 million on a annualized run rate basis by the end of 2019. It sounds like you've moved it around a bit, maybe accelerated some of those cost savings, and you're hoping to do so. You're hoping to save $15 million annualized basis maybe by year-end '18. So first question is, do I have the figures correct and the timing?

So the 20 -- last quarter, what we said was $20 million or more. So we're gauging ourselves internally against that $20 million number. We have taken kind of 2 buckets of costs that we've realized to date. The first one is primarily labor and labor-related costs associated with headcount reductions for the reintegration of Verde and the reintegration of Retailco, and then de-emphasizing the large commercial sales channel. So those 3 actions that we took, and arguably accelerated a little bit, given the January weather is about $11 million of the $15 million. There's an additional $4 million associated with renegotiating third-party agreements and vendor contracts, primarily in the cost-to-serve area. That's another $4 million. Those come into effect in the next quarter. So there's your $15 million that's been realized to date. And it's a run rate savings, right, for the forward 12 months. Then we're going after the next $5 million. Arguably, the next $5 million is going to be a little more difficult to achieve, but we've got a handful of specific initiatives that I listed on the call a moment ago that we want to work through in the next 3 or 4 quarters, and that we believe will get us to our $20 million. The difference is, we were thinking it was going to take us through '19, and we now believe we can get the majority of it done by -- within calendar '18.

Okay. So you pulled it forward by 12 months, assuming you can get that incremental $5 million from the multiple additions...

Yes. Yes.

Okay. All right. I appreciate that. So obviously there were a lot of moving parts to the weather impact. Can you kind of put in context with some of the other exogenous extreme events that have happened over the past few years? Just put it, I mean, if I recall correctly you had, there was ERCOT in 2011, you had the heatwave, and then 2014, you had the polar vortex. Could you kind of compare and contrast this particular weather event with some of those other exogenous events, just to put in context?

Yes. So both of those events are ones that kind of stand out in our minds as extreme weather events. And we were a much smaller business at that time. We were probably $20 million, $30 million of EBITDA run rate at that time. Both of those events netted out to be somewhere between $1 million and $2 million financial impact for us. What you have in this situation is a couple of things. You have a higher concentration of our business in the Northeast and the New England markets. And then you also have a much more prolonged weather event, right. I mean, the polar vortex was 5 days or something. This was 2 weeks. So you've got a bigger concentration of our business, and it's a bigger business and you have a much longer-term weather event. So when you just look at size and scale, that explains a big chunk of why this is so much bigger in absolute dollars than '11 and '14 were.

Got it. And I would imagine just the composition of your business being more -- adding more in the commercial side also potentially had an impact just from being forced to buy some of the physical contracts. Is that accurate?

Yes. Yes, I mean, this is -- I'll give you just a little more color. When I said earlier, this was the perfect storm. We had a significant amount of growth in our C&I business late in 2017. So all of that load was coming on flow December and January, right as prices were spiking from this cold weather. Just those 2 facts alone would have resulted in a bad week or a bad month because we would have just been out in the market forced to pay for day-ahead power. Because of our balance sheet constraints, collateral constraints, we actually went out and bought physical instead of financial, and we also went out and hedged balance of quarter and balance of year in order to mitigate some of those short-term collateral requirements for the ISO that Rob talked about. So it really was the perfect storm of those 3 events coming together at the same time in order to create this issue for us. So like I said, I think, that was a -- I mean, that was an extreme weather event. It was exacerbated by our balance sheet and by the significant C&I growth. I think if you don't have the C&I growth or you have bigger balance sheet, a weather event like this would have been significantly less harmful to us. So we're taking proactive steps as we talked about to reduce kind of our focus on that large C&I. We've already taken steps to increase the balance sheet and have a significant amount more availability now than we did at the time. So I mean, I feel like we're taking the steps to where we will not be in that situation again.

Okay. I appreciate that color. Could you then -- you talked about roughly being flat year-over-year, or maintaining the guidance despite a very tough January. Maybe characterize some of the other months, whether they were on plan since that point you've had, obviously, February, March and April and the start to May. Could you kind of give us some context as to what gives you comfort that you'll be able to make up the shortfall from this quarter and the balance of the year?

Sure. Yes. We bounced right back in February. February was a good month for us. And then kind of refreshed our internal plans, made a few changes. Accelerated some of the cost savings, refocused our sales efforts, all the things that we've talked about and kind of reset that internal plan in order to be able to say that we would be in line with '18. And I'm happy to say that 4 months into the year, Feb, March and April, we're tracking right along that refreshed internal plan.

Okay. Okay. Maybe just last one for me. Obviously, 2 -- I should say, 2 issues. So I would imagine that much like what happened after the polar vortex, some of the smaller players, maybe even with less capital availability or even more geographic concentration might have been hurt by the same exogenous weather event that you were in January. Do you think that maybe opens up some opportunities to pick up maybe some smaller books or brands in the latter part of this year? Not whether you have any additional LOIs, but maybe just characterize the M&A environment for some of the other players.

Yes. Absolutely. We're starting to see a little bit of it now. If you think back to the polar vortex, it took about a year before those things really started to get active on the market. I think a lot of the small players think, oh, I can manage through this, and I'm going to be fine and they have a sleeve provider that carries them along for a little while, and eventually, they just get tired of it and will decide to sell the business. We've had a few inbound calls already. And I would anticipate that activity to pick up just like it did in 2014, which is why I said, from our standpoint, if I can do tuck-in deals or small acquisitions like that, those are relatively straightforward for us to do. And we're going to be focused on that if those opportunities are out there.

Okay. And then just last one for me, obviously, you've engaged someone to explore opportunities. Could you talk about where you are in the process? Or have you had anything concrete materialize?

Sure. We're working with Morgan Stanley. Our board is still very actively involved with them. It's still fairly early in that process. So I don't have anything other than that to provide in terms of updates today, but we will certainly be back with updates as they -- as things progress.

And our next question comes from the line of Mike Gyure from Janney.

Could you guys talk a little bit about customer acquisition costs, the spend here in the first quarter and then maybe what your expectations are for the remainder of the year in light of, I guess, what's going on with the spending this year?

Yes. You see us pull back a little bit in Q1 from where we were last year. Part of that is us just getting a lot more efficient with our sales channels and part of that is us just pulling back on dollars given the January weather event. I think you're going to see us continue to manage our CAC costs pretty aggressively through the balance of the year. And we say, mass market is an area of focus for us, but we're going to be very smart about those dollars until we kind of get through the next couple of months. But our long-term outlook hasn't changed in terms of organic growth, but we have slowed things down here for the short term just to manage through this weather event.

Okay. And then maybe could you give us an update on your mix of your business, commercial versus residential? It sounds like you potentially going to walk away from some of the lower-margin commercial business. Kind of what should we think about the mix of that business going forward or between the 2 relationship going ahead?

So if you look at on a volumetric basis today, Mike, we're 52% resi and 48% commercial. That 48% commercial, that's a mix of small comm and large comm. And what our focus is, is very specific. Our focus is to reduce the amount of large commercial volume at lower margins that we have specifically up in the Northeast and New England, which is where we have the constraints. So my goal is to get that back to kind of 60:40 resi, commercial or even 70:30 resi, commercial over the next couple of years.

Okay. And then maybe a similar question on the natural gas part of your portfolio versus the electricity. Any...

Yes. 84% electricity, 16% natural gas today. That's not a strategic shift on our part to avoid gas. We really like gas. That's a function of the acquisitions that we've done have been historically focused on electricity. So I would be very keen to do an acquisition of a gas business in the next 12 months if I can find the right one. So that's the focus for us, is how do we continue to expand that portion of it -- the gas portion of the portfolio.

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

All right. Thanks, again, everybody, for joining us today. And we look forward to talking to you, again, next quarter.