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Edited Transcript of EAX.AX earnings conference call or presentation 28-Aug-19 12:30am GMT

Full Year 2019 Energy Action Ltd Earnings Call

Parramatta, New South Wales Oct 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Energy Action Ltd earnings conference call or presentation Wednesday, August 28, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* John Huggart

Energy Action Limited - CEO

* Tracy Bucciarelli

Energy Action Limited - CFO

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Presentation

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Unidentified Company Representative [1]

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Good morning, ladies and gentlemen, and welcome to the Energy Action Half Year FY '19 Group Financial Results Webcast. Before we proceed, just a couple of housekeeping points. There will be a presentation followed by a Q&A session. (Operator Instructions) We will address the questions at the conclusion of the presentation. A link to the recording of the presentation will also be available later today on the Energy Action website.

Mr. John Huggart, Chief Executive Officer; and Ms. Tracy Bucciarelli, Chief Financial Officer of Energy Action will be speaking today.

And I'll now hand over to Mr. John Huggart.

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John Huggart, Energy Action Limited - CEO [2]

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Thanks, Will, and good morning, and welcome, everyone. Welcome to today's announcement for the full year results of Energy Action. My name is John Huggart. I am the CEO. And I'm joined today by Tracy Bucciarelli, our CFO.

For those who can see on the webcast, we've got a wonderful vista there of the MCG, and I'll talk about that a little bit later. It's actually one of our clients, so a terrific way to start the presentation.

Now the full year results that I'm going to release today and have been released to the market earlier do show a poor result for the Energy Action shareholders and reflect a disappointing year for the team at Energy Action. The die was cast for these results when in December, we advised the market of the cessation of the strategic review, a significant deterioration in results and a change in CEO at that time. At the half year announcement, we identified a number of significant items, principally driven by the impairment of goodwill. And in April this year, following a review of the PAS, or Projects and Advisory Services business, a decision was made to reposition the business with cessation of project activities, a planned office closure and several redundancies.

Now Tracy will take you through the full year results in detail. But before she does, I'd like to make 3 important points for shareholders, the staff, our partners and customers of Energy Action.

My first point is this: Energy Action is a good business that provides important value to customers in a complex and challenging business market where, typically, the cost and risk of business is rising, especially in relation to energy. Our value propositions for customers to reduce their energy costs, lower their emissions and improve the value of their assets remains very relevant. And we continue to demonstrate the proof for that value proposition with a national team of energy experts who can help customers with their choices; our fierce independence, where we hold retailers and suppliers to account; and our proven systems and processes that enable automated and effective contract management.

So despite the poor results that we announced today, the underlying business remains profitable. The business continues to generate cash, we continue to invest that cash in building our digital client platforms, we maintain a strong future value book of revenue.

My second point is that immediately on my appointment, we established a back-to-basics strategic plan and priorities. Now I'll be pleased to report on this plan today and demonstrate some progress that I believe -- I hope you can agree with me -- not only shows some green shoots but represents a solid pass mark for these past few months. And after the financials, I'll share more detail. But in summary, these priorities were to focus on sales growth; deliver capability with our digital client platforms; improve our service delivery; improve profitability, including addressing the loss-making PAS business; and improve culture and engagement, building a high-performance culture.

And the third point I'll make is given the strength of our performance with our back-to-basics plan, I believe we are a fitter and stronger business, we are a fitter and stronger team, and we have a brighter and better future. Moving forward, we are building foundations of growth. Our priorities remain similar, however, given many difficult decisions have now been taken and are behind us. Many key projects have been delivered, or our transformation project is well advanced. Our focus now can return to growth.

Our priority is building the future value of our business with sales growth, moving to operational excellence to ensure service delivery, and investing in additional capability to access additional revenue streams and unlock efficiencies. These will be maintained with our consistent and equal focus on our people, improving engagement as we move towards a high-performance culture, and the maintenance of disciplined cost, cash and profit management.

So if we head into our presentation, our agenda today, I will take you, at a very high level, through the results highlights. Tracy will step through the detail of our financial results, and I'll return for our operational performance review and outlining our priorities going forward.

So let's move now to Page 3, and there are the results issued to the stock exchange with our announcement and release earlier today. We're reporting an operating profit of $1 million. It is down substantially on last year. We've got an operating EBITDA of $2.54 million, and our margin has been compressed by the reduction in revenues. Our operating cash flow remained strong with $3.9 million and a good conversion of the EBITDA to cash. However, our statutory profit is an over $12 million loss driven by $13 million of significant items, most of which are in noncash items. Having said that, our operating costs have reduced by 12% and are down $2.4 million with some operational efficiencies being realized and a flatter and leaner management structure.

We've continued to invest in this last year over $1.7 million in our digital client platforms, and that will be a priority to continue our investment with 0 final dividend for the FY '19 year determined by our Directors. We've secured over an additional 1,000 sites under management with our retail billing services client. And Embedded Networks continues to be a growth segment for us with, again, almost 1,000 tenancies under management growing, or 72% growth for that young business.

Now before I hand over to Tracy, you can see here on Page 4 a terrific building, a landmark building there in Canberra. That's One Canberra Avenue developed by the Willemsen Group and a very pleasing reference there from a client who shares our vision for achieving energy efficiency and has been able to be assisted in that vision with the provision of our Advisory Services team's service of OptEEmise. That engagement has been led by Theo in the Advisory team who've done a terrific job of engaging and identifying these opportunities for improvement and leveraging state-of-the-art technology and high-value engineering services to bring that vision to life.

So with that, I will pass to Tracy to provide the details of that financial performance before I return to operational performance highlights.

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Tracy Bucciarelli, Energy Action Limited - CFO [3]

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Thank you, John, and I would like to add my welcome to the call.

So for the full year ending 30th of June '19, we're reporting on operating profit of $1 million, a decline of 69% from the prior year and a statutory loss of $12.09 million. We have listed one-off significant items of $13.1 million, of which 93% were noncash items. The majority of these significant items and their impact on FY '19 was announced in our half year results. The 2 additional significant items in the second half include the impairment of software and additional restructuring costs that relate to the repositioning of the PAS division to Advisory and the flattening of the management structure.

Other details in the income statement include the decline of revenue by 22% across all the revenue sectors, and John will detail some of that shortly; lower operating expenses of 9% with operational efficiencies being realized; and lower depreciation and amortization with the acceleration of depreciation and amortization reducing the remaining net debt book value of assets; and lower financing costs as a result of the reduced net debt in FY '18 to $4.3 million, and this was maintained at similar levels in FY '19.

As reported at the half year, Energy Action has restated their FY '18 results with the full retrospective adoption of 2 accounting standard changes, AASB 15 Revenue from Contracts with Customers and AASB 9 Financial Instruments. The company has also changed its accounting policy in relation to sales commission expense. The restatement of FY '18 results allows for a comparison of FY '19 to FY '18 results on a like-for-like basis. Details on the impact of adopting these changes are detailed in the appendix of the presentation.

Graphically, on Slide 6, the cause of the change in operating profit is shown. The reported NPAT of $2.59 million was restated to $3.26 million as a result of the accounting standard and company policy changes adopted. Following on, the decline in revenue was experienced in all revenue lines with Procurement revenues declining $3.45 million, CMER down $1.09 million, and Project and Advisory down $2.4 million. COGS, which is predominantly PAS related, was also down, aligned with the decline in PAS revenue. Costs were down $1.7 million in operating expenditure with the continued focus on cost management.

We can also see reduced depreciation and amortization with a lower net book value of assets following the accelerated depreciation reported in significant items. And in addition, we've got lower financing costs from the lower net debt position previously discussed.

On Slide 7, we detail our strong operating cash flow. Here, you can see we continue to generate strong operating cash flow of $3.9 million before interest and tax, and a healthy conversion of EBITDA greater than 100%. Working capital is managed tightly, reporting a positive movement of $1.4 million. Operating cash was utilized primarily on the significant investment in software development. Dividends were paid of $1 million in September '18, and significant items of $666,000 were offset by the drawdown of the loan of $0.624 million.

On Slide 8, we detail debt position. During the second half, Energy Action has formally extended the previous facility by 2 years to September 2021. The extension has a revised liquidity of 9.5 -- $9.3 million under substantially the same terms and conditions. The change in the limit has reduced our liquidity by $2.7 million, generating an estimated savings of $48,000 per annum. And in addition, there continues to be sufficient available headroom under the facility of $4.9 million. We also continued to meet all of our bank covenants at the end of June '19.

I'll now hand back to John to talk about the operational performance.

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John Huggart, Energy Action Limited - CEO [4]

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Thanks, Tracy. And we're back on our slide now. We're back to the MCG, so we're on the operational performance. But a terrific endorsement here from the client, Peter from the MCC, who recently undertook an auction. I've got to tell you what. It was a hotly contested and well-watched auction. So we're all interested in the -- in that process, a terrific job, and he felt very well supported by John, our Account Manager there in Victoria.

If I move through into the next slide we're just talking about well, what does this back-to-basics priorities mean, what are they and how do we go against them. So they were primarily, obviously, sales growth, the delivery of capability, improvement in service, addressing profitability, and culture or engagement.

So our back to basics plan was -- in sales growth -- was really addressing that mid-market sales team to accelerate our acquisitions and also improve the retention of customers. And we undertook quite a substantial project called [Project Up] at the commencement of the year. And in terms of progress, I'm really pleased to report that the first 2 phases of that project had been completed. Retention rates for customers from January to June have increased substantively due to improved sales and also sales management. And for the 3 months, now June, July and August, the number of auctions have well exceeded the prior year. So very encouraging results for us in the getting back to basics and improvement in sales.

On capability, our plan at the beginning of the year was to deliver on [Project Flame]. That was internal project name given to the establishment of the retail billing project, which was delivered on time and on budget.

Our second project there was the replacement of our group core Customer and Contract Management platform. Now this is a substantial business transformation project that's been in place for a number of years and has absorbed a lot of capital. I'm very pleased to say we're at the final stages of completion. We're well advanced into UAT. And we're planning again, within time and budget allowed, to have that system go live in the next couple of weeks. And in addition to the allowance we've made to ensure this project is set up for success, we've got a planned hypercare period to ensure that we embed and address any remaining system or training gaps to ensure that the project runs and the transformation of our business runs smoothly.

And finally, on capability, we plan to refresh our Metrics portal and platform and add additional functionality for small-market sites. I'm pleased to report that is complete and in BAU.

On service, it remains a continued focus of us to ensure the customer expectations are met. And I'm pleased to report that milestone in reporting including network tariff reviews and the budget estimates have been on time and are really part of our focus on ensuring that we meet and exceed our customer expectations on a timely basis for delivery of our services.

In profit, we've made some tough decisions to reposition PAS to Advisory Services with appointed referral partners to ensure that our clients still have access to the support they need to meet their energy needs. We've also got the benefits of a leaner and flatter leadership team with lower cost and continued cash and cost focus very well managed by Tracy and her team, enabling us to invest. And that investment is in our capability with the digital platforms, and it's also in ensuring we've got the right staff to support our service delivery.

And on engagement, working towards a high-performance culture and a significant improvement in our engagement score reported with a survey undertaken in June.

On our next page, Tracy did identify some of the key drivers of our revenue decline. So just a little bit more of a deep-dive discussion on those drivers for Procurement, Monitoring and Advisory. So we have reported that in the financial year 2019, the key driver of Procurement decline has been our poorer sales performance, the inability to be close enough and fast enough to our customers and anticipate their needs and be with them as they're making decisions. Similarly, that's had an impact on our Monitoring revenues.

And in addition there, we've been impacted by long-term contracts expiring. We've had poor service delivery in cases, which had led to clients' departures. And we've had competitive price pressures as you can imagine in any good competitive market. But that has been offset by some growth in our Embedded Network business and the Bureau Services in some of those highlights we identified before. And finally, on Advisory, we've quit the unprofitable and higher-risk businesses.

So how is our progress going as we look forward now? We've seen a terrific improvement in sales performance from the last quarter. And our outlook for this year is our focus on new products to these segments, including progressive purchasing and expanding our offering into the SME segment.

In the Monitoring, we see the benefit of our improved sales performance, that we've started to see the benefits from in the last quarter and we see continuing in these first 2 months of the year. We will still be impacted by those long-term contracts expiring, but we're excited to see the benefits now of our improved focus on service with on-time reporting and the enhanced capability. And we'll continue to invest and see the growth in our Embedded Network and Bureau Services business.

And finally, in Advisory, a repositioned Advisory Services aligned to our core offer will enable us to achieve improved commercial performance.

On the next page. What have we done with our money? Our capital investment, digital client platforms. So the first one there is our transformation I spoke about earlier in our core Customer and Contract Management platforms. Now we've had the best-looking Excel spreadsheet and Access databases you can look for a 20-year business. What we had to do was replace them with a platform that's scalable, modern, global, and that's what we're achieving with this investment. Enhanced operational efficiencies with an architecture to deliver for those core products and services but also leveraging significant levels of automation and data validation.

This will give us the capacity for more agility and speed to market for new services with that modular framework as we go to market with those new products and services in a scalable and global platform. It also helps us to refocus resources because a lot of the actual functionality now can be in the hands of our users, our data experts to support data-driven decisions. That investment, as I say, is at the closing stages and due for implementation within time and in -- within the budget, established at the beginning of the year, in the next couple of weeks.

The other investment we've made has been to the Energy Metrics portal and the addition of our small-market capability. Our portal gives our customers online access. The look and feel of that portal has been improved and meets customers' modern expectations. In addition, it's mobile-friendly so it works very, very well on a mobile phone or on tablets. In addition, really importantly, we've added small sites, small-market sites as well as large-market sites within the one portfolio view. We've got improved scalability as well and extensibility for clients to accommodate more users across their business, making it simpler for them to go about their energy needs.

So we go to Page 13, just again, a summary of our corporate highlights. So an increase in our Embedded Network tenancies under management, let's call it close to 1,000 there, 999; 72% growth in that business, and that is a long-term annuity relationship business. We've won a multiyear contract to supply retail billing services to CS Energy, well established now for the last 6 months. We delivered earlier in the year the Western Sydney Airport energy strategy. Our BPO team in Clark in the Philippines has expanded. Our operating cash conversion remains strong. We've adopted a leaner management structure and reduced our operating costs.

We're well-developed in replacing our core Customer and Contract Management platform. Our retention rates for our customers has increased substantively. Our Metrics portal, as I explained before, looks and feels better, and it's more functional with small-market sites. We've experienced a strong improvement in employee engagement. We've taken actions we needed to with PAS. And we've closed and consolidated a number of premises to reduce operating costs.

With the decline in revenue, we can't stand still. We need to reduce cost, and you'll see here on this next page with operational savings some of the outline and steps we've taken to achieve that 12% in the last year or $2.4 million. A lot of that was with the -- a flatter and leaner management structure. The higher-cost leadership of 5 full-time leaders, helping us achieve our savings in excess of $1 million per annum, which will continue.

We have continued to expand our offshore resource support in Clark in the Philippines. The number of employees in Advisory, which was previously PAS, has come down substantively by 27. Having said that, we have invested in skilled and experienced staff to ensure that we can meet our service delivery improvements and improve customer service outcomes. We've invested in our campaign sales capability, that in conjunction with our change in the sales and service model, which has helped accelerate our results in the mid-market.

We've talked about the closure and consolidation of office locations not only giving us savings but also operational efficiencies and improving the culture, quite frankly, when you all come together and work as one team.

The Directors took the decision to reduce their fees, and that has resulted in additional savings for the business. Tracy, myself and the team maintained a strict cost control regime across all discretionary spend areas. And we will see, going forward, a decline in the operating depreciation and amortization because we've accelerated depreciation and amortization from the reassessment of customer relationships, and some of the software useful life at the end of June 2019.

So if we go to the next page and talk about our priorities, I'm really pleased with this one. A couple of things. So this organization, D'Orsogna, there, this is quite a rooftop there. For those playing at home, that's a 1-megawatt array. Often at home, you might have a 5-kilowatt system. It's about 200x the size of that. So an industrial business realizing the value of their rooftop. D'Orsogna, a terrific client of Michelle and working with our partners to deliver a terrific project and a terrific outcome for the customer.

And it's joined here by a really important observation from the important market participant, Utility Market Intelligence. Now what UMI do is they're engaged by the key retailers in Australia to survey their customer base and hear what they're saying, and they made 2 very important observations.

In response to growing energy market complexity, the proportion of C&I customers engaging consultants and other intermediaries is increasing. And amongst those commercial, industrial consumers using a consultant or broker for energy procurement and reporting, Energy Action has the highest customer share. And you can join me in sharing our enthusiasm and excitement to hear that comment. And it demonstrates the value of the business I spoke about earlier and the importance of us in refocusing our business on back to basics and retaining that leadership position that we hold dearly in the market.

So what's our outlook for next year, our top priorities for FY '20 going forward? Successfully, on the back of our back to basics plan, we're now laying the foundations for growth. We will continue to leverage the value and efficiencies from our systems investment, improve our focus on the core business with a plan to increase the future contracted revenue.

On sales, yes, we'll carry on with our focus on sales growth and our customer management programs to lift retention and acquisition rates more broadly now across the business, not just in the mid-market but across all of our customer segments. We're going to launch new products to key customer segments, including expanding our progressive purchasing clients and environmental reporting offering to customers.

With our capability, we're going to continue to develop the scalable platforms to capture additional efficiencies and eliminate those remaining legacy systems. We'll continue to improve in the Metrics platform for customers to meet their existing and emerging customer demand and develop energy insights underpinned by data management and analysis. We'll enhance our capability to assist small-market customers.

On service, our ongoing mission to improve customer interactions and delivery to achieve improved retention and Net Promoter Score outcomes.

And on profit, we will continue to maintain our disciplined performance management and cost control, lift the value of forward revenue, leverage the efficiencies of the newly built core systems and ensure Advisory business achieves commercial outcomes.

And on engagement, we will continue to build and maintain a higher-performance culture.

Now that takes us to the end of the formal part of the presentation. But before I hand over and seek questions, I'd like to take this opportunity to thank the Board for their support, encouragement and direction for me in taking on the role this year. I'd like to thank my newly formed senior leadership team, a team that continues to grow stronger in capability and are committed to our plans for this business. To our teams across Australia and the Philippines who are generally committed to meeting client expectations; and, finally, to our shareholders, our partners, our clients who have stayed with us or have joined us recently, I can assure you of my personal commitment and the commitment of our business that we will strive to ensure we meet and exceed your expectations.

Looking forward, we have the foundations of growth. We are a stronger and fitter business, we have a stronger and fitter team, and we have a better and brighter future. Thank you.

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Unidentified Company Representative [5]

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Ladies and gentlemen, that concludes the formal part of the presentation. Just as reminder, we have 2 streams of communication running right now. We have some people on the teleconference, also people out there on the live broadcast link.

For those of you out on the broadcast, if you would like to ask a question, as a reminder, there is a question at the bottom -- button at the bottom of the screen through which you can interact with us here in the studio. (Operator Instructions)

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Questions and Answers

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Unidentified Company Representative [1]

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Okay. So we have our first question in. What was the main cause of lower sales? And what are we doing about it?

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John Huggart, Energy Action Limited - CEO [2]

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Okay. Thank you. Yes. One of the key questions that kept me up at night. So look, what we determined, especially with that back-to-basics strategy was in the mid-market, we'd probably -- as a result of a combination of uncertainty that we faced, the latter half of last calendar year and, of course, the first half of this financial year, a large amount of uncertainty from our sales teams.

And probably, to be fair, we were distracted from getting on with the main game of speaking to our customers. And when you don't speak to customers, there are plenty of other options out there. We reported at the half year that our -- we'd failed to respond effectively enough to the fact that retailers were able to contract ahead of time and earlier for their customers. Now we know the likely impact of that for the customer in terms of pricing outcomes, but the reality is customers need assurance, and they were able to take that option. So I think that's one thing that we've done about it, is to ensure that we are speaking to our customers more frequently and more effectively.

Now how have we done that? I think that was the second part of that question. So a few things that we've done. We've segmented our client base and ensured that we've freed the reps that we do have around Australia to have less customers to serve so they can be more effective at serving those customers. But we've matched that with the build of a capability of our campaign sales team to reach out and maintain relationship with our lower-value client so they get a higher level of service.

And that's been effective on 2 counts: it's freed up our existing representatives to go out and have conversation with customers and add value; and it's ensured that we've been in touch with our customers to be effective in those key moments when they need an energy partner because they're coming up to a key decision with their energy procurement or they're facing options around what do they do about solar or batteries.

So I hope that answers that question. And in fact, it was an 8-part plan, and I'm happy to go through it in more detail if you like, but I think the results are starting to speak for themselves, and we look forward those enduring through the course of this FY '20 year.

Are there any more questions?

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Unidentified Company Representative [3]

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John, there's a broad question here that's just come in that's asking a really -- for a view on your -- or your view, really, on the general growth outlook for the industry in terms of energy prices.

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John Huggart, Energy Action Limited - CEO [4]

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Okay. That's a crystal ball question. Well, there's always a number of factors that impact that outlook. At a very broad industry level, the industry talked about a trilemma. You've got to make the choice between lower costs, lower emissions and reliability. And when participants in our industry talk about a vacuum of policy leadership by government, it is because we feel and customers have experienced that we've not addressed the trilemma. We've usually addressed at least 1 or 2 of those sticks.

And as you know, at the moment, Angus Taylor, our Federal Energy Minister, has been very clear his #1 priority is reducing costs. And there are many other drivers of the industry, and he's achieved that in some ways by a big stick approach, which has got some other commentary associated with it.

At a very high level, there is an increasing supply of renewables in the market as result of the success of the renewable energy target and associated policies. That is seeing prices decline, especially intraday when there is lower demand. And we're seeing frequent occasions now, even during peak working days, we have prices free or close to 0.

But that is mixed with those other moments in time when any market events -- such as during the course of this week when the power cord between Tasmania and Victoria was cut -- and as result, that is having an impact on the volatility in price, and that will be impacted by customers. So the outlook, long term, reducing, but volatility remains, and our customers are seeing that with increased prices.

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Unidentified Company Representative [5]

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Thank you, John. We'll just wait another few moments to see whether we have any more questions coming through; but we are getting close to time, so we do understand that you may well be moving on to other events this morning. So I will stand by for another minute, and we'll await further questions.

Ladies and gentlemen, there are no further questions on either line so we will wrap up today's event and thank John and Tracy for presenting the result.

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John Huggart, Energy Action Limited - CEO [6]

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Thank you, Will. Cheers.

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Tracy Bucciarelli, Energy Action Limited - CFO [7]

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Thank you.