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Edited Transcript of EAX.AX earnings conference call or presentation 25-Feb-20 11:30pm GMT

Half Year 2020 Energy Action Ltd Earnings Call

Parramatta, New South Wales Mar 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Energy Action Ltd earnings conference call or presentation Tuesday, February 25, 2020 at 11:30:00pm 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 '20 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'll address the questions at the conclusion of the presentation. A link to a recording of the presentation will also be available later today on the Energy Action website.

Mr. John Huggart, the Chief Executive Officer; and Ms. Tracy Bucciarelli, Chief Financial Officer of Energy Action, will be speaking shortly. I'll now hand over to John. Go ahead, John.

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John Huggart, Energy Action Limited - CEO [2]

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Thanks, [Will]. Well, good morning. And welcome, everyone. Today, we present the results for Energy Action for the first half and give an outlook update for FY '20.

So at the AGM in November, we made a few comments about our expectations. At that point, we'd shared that there'd been an operating loss through to the end of October and that we expected to record a loss for this first half.

So today, I'll be sharing results that show that we did indeed record that loss for the half or that was improved. So it was return to profit in those last couple of months. We expected, as a result of that, to have a breach of our debt covenants and that we also expected that in our discussions with the bank, we can be confident that, that would be -- the consequence of that bridge could be waived and that was agreed and shared with the market.

We also talked about BTP, which is our Business Transformation Project, or the core customer and contract platform, which we've been working on for an extended period of time, that we expect that, that would go live in January and indeed, it did.

We also provided an update for our outlook for the year. And at that point of time, our belief that we would be able to maintain an earnings at around that $1 million NPAT.

Now clearly, for Energy Action, this is a year of transition. And the expected sales that we saw in December or at the beginning of this year have either been deferred or lost in some of those assumptions, and that will have an impact on near-term revenues. And together with a couple of other evaluation of risks and opportunities, we've chosen to say that we will indeed return to profit, but our outlook for the year remains one of breakeven.

The information we're sharing today has been released to the ASX and will be available on our website. I will be handing over soon to Tracy Bucciarelli, who will provide the details of our financial results and returning myself for a summary of some of the main segment performance highlights and our outlook for the future.

But when we share results of this nature, I think as an investor or as a staff member or as a customer, when results aren't right, I think we're -- need to ask the right questions. And are we working on the right things, and are we achieving what's important and what is required for success in the future? Are we focusing on sales and growth? Are we focused on improved service performance for customers? Are we delivering and improving our capability? Are we focusing on people and engagement? And do we have a plan for the future? And I think the answer to that is yes.

So I think this year, whilst it's a year of transition, we are indeed establishing the foundations of growth for a return into a brighter future for Energy Action.

So if we move through our agenda today, the results highlights, as I said, I'll then pass to Tracy for the financial results and return for the operational performance and our priorities going forward.

On the highlights on Page 3. The business continues to generate cash. So $1.3 million generated in cash, a good conversion from EBITDA during the half year of $1.34 million. However, the operating loss we expected, $150,000. We have reduced cost of sales, and our operating costs combined almost $2 million. Our operating EBITDA is positive at $550,000 and our statutory net loss of just under $300,000, a vast improvement from the prior year improvement of the order of $9 million.

The Board had declared a new interim dividend with our focus on prioritizing debt reduction and investment in growth.

Some of our operational highlights. In our core business, the profitable core of Energy Action remains Auctions and Metrics. Our net sales order growth in this period by comparison to the prior corresponding period is 39%. And I think any organization would be proud and envious of that type of growth. The translation of that growth, some of it occurs in this current financial year and a portion in future revenues.

During this period, we've continued to invest in our digital platforms, $1.3 million. And that was really the completion of what we call BTP or the transformation of the core Customer and Contract Management platform. And we're pleased to share that we are contracting now with Sydney Trains for an embedded network service for over 300 sites for the next 3 years.

With group financial results, before we move on there, just a terrific quote, what we're here for, how we help our customers. And that's from Sue there, the CEO of Cronulla RSL. That picture in the background glimpsing through our logo is from the Cronulla RSL, and we really appreciate the comments of Sue, "We couldn't be happier with the service and results provided by Energy Action. The savings we secured are going to help fund some exciting community initiatives and give us an opportunity to look into energy efficiency projects as well." Those -- thank you, Sue, and thank you to the team, who've been able to create that value for our customers. I'll hand over to Tracy.

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Tracy Bucciarelli, Energy Action Limited - CFO [3]

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Thank you, John. So I'm going to start by talking through the income statement results for the first half. We are reporting an operating loss of $0.15 million and a statutory loss of $0.29 million. We have got listed one-off significant items of $0.14 million relating to the strategic review retention and organizational restructure.

Other details in the income statement include the decline of revenue by 23% and this is across all revenue sectors. But particularly in Advisory Services, 45% of this decline relates to discontinued operations.

We have lower operating expense and COGS of 16%, with $1 million relating to lower OpEx and $0.9 million relating to lower cost of goods sold.

We do have slightly higher depreciation and amortization with an increase from the adoption of AASB 16, offset by lower D&A from accelerated amortization in prior periods.

We have lower financing costs as a result of lower interest rate and net debt compared to the prior corresponding period, and this is partially offset by an increase in lease interest expense with the adoption of AASB 16, which relates to leases.

This new accounting standard, AASB 16, was adopted on the 1st of July 2019 and has resulted in an increase in our right-of-use assets and lease liabilities of $0.99 million.

During the period, the right-of-use asset was reduced by lease depreciation. The lease liability was reduced by rent payment, and the company incurred lease expense -- lease interest expense of $28,000. The prior corresponding period has not been restated for this accounting standard change.

On Page 6, we can see a waterfall graph, graphically showing the cause of change in operating impact. Procurement revenues declining $0.62 million; CMER, down $1.14 million; and the Advisory Services revenue down by $1.36 million. That $1.36 million of Advisory revenue is split into $1.4 million of Advisory decline from discontinued lines, offset by a small growth in the remaining revenue segments.

We have lower COGS of $0.91 million, predominantly Advisory Services related, aligned with the decline in our Advisory Services revenue.

Costs were down by $1 million in operating expense with the continued focus on cost management. This includes a significant reduction in wages with a further management structure and the repositioning of Advisory in Q4 FY '19.

We also have lower occupancy costs with the consolidation of offices having -- now having an impact and lower travel. We've offset this by an investment in sales and service delivery, marketing and employee training. We can also see slightly higher D&A and lower financing costs, as discussed on the previous page.

On Page 7, we can look at our strong operating cash flow of $1.3 million before interest and tax, and this is a really healthy conversion of EBITDA at 246%.

Working capital is being managed very tightly, reporting a positive movement of $0.8 million, and we have seen significant success in trade debtors collection having a very positive improvement.

Operating cash was utilized primarily on the significant investment in software development amounting to $1.3 million and significant items of $0.36 million. This is offset by the drawdown of the loan of $1.2 million. The significant items cash payments relates to strategic review retention and organizational restructuring costs.

And Page 8 refers to the bank facility and movements over the last 6 months. So as at the 31st of December, we have utilized $7.16 million of the facility. This comprises a loan of $6.92 million and bank guarantees principally in relation to rental properties and a guarantee on a specific project works.

We have $2.29 million of unrestricted cash at bank and total undrawn facilities and cash of approximately $4.43 million.

Net debt increased slightly by $0.48 million over the prior corresponding period to $4.87 million as at 31st of December 2019.

We can confirm that there was a breach of the gearing ratio covenant under the company's bank facility, which was required to be tested at 31st of December. As a result of the breach of the debt covenant, the loans and the borrowings are reported as a current liability. And subsequently, we formally requested a waiver of the bank's rights under the Event of Default due to the breach in the covenant. During February, the bank has agreed to waive the Event of Default under the facility agreement resulting from this breach and raise its -- and waive its rights arising from this breach.

As a result, the bank loan has moved back to noncurrent liabilities in February 2020. We have requested a reduction of the facility limit by $2 million, and this request is currently in the process of being executed.

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

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John Huggart, Energy Action Limited - CEO [4]

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Thanks, Tracy. So look, on our header slide there for operational performance, I talk a lot about how we're looking after customers. You'll hear me talk about our focus on customer service. But ultimately, the test of that is our customers staying with us or saying nice things about us and referring us to new customers.

So we undertake regularly a Net Promoter Score survey, an NPS survey, and we get a range of feedback. And on this page here, we'll just refer to one finance manager from Australian media and entertainment business. So these are anonymous quotes, but they give us a really good heartbeat on how we're performing against our aspiration for our customers. "Quick, easy and insightful. Business consultant was helpful and provided clear, concise information, was able to clarify all questions." So it's a nice recognition for our team, for our customer.

So on Page 10. Segment performance has an overall revenue of $10.4 million. It's declined 23%, different drivers by segment. About half of that is coming from discontinued operations.

On Procurement, revenue there, 3 -- just over $3 million. It is down from the prior corresponding period. One of the key drivers of our Procurement revenue is Auctions. There were 10% lower Auction volume by comparison. But interestingly, that was despite there being 36% less retention opportunities. So let me make that a bit simpler. If there were 1,000 opportunities 1 year than the following year, during which we recorded these results, it was 640. If we had the same retention rate, then sales Auction volume would have been down 36%. In fact, it was down 10% due to a higher retention rate in combination with growth of new businesses.

And when we look more specifically at that Auction revenue, whilst the Auction numbers are down, there's been an improvement in the average Auction load. So we've done a better job with higher value customers. So the real driver of the reduction of Procurement revenue during this period has been more the loss of some corporate and progressive procurement customers.

In Contract Management and Environmental Reporting, the key drivers remain poor prior year retentions. Remember, this is a trailing revenue business and metric. It's a continued service delivery, but from contracts entered into up to 5 or 6 years ago. And in some cases, there's been very poor prior year retentions at the point where the customer needed to make a decision. So we're seeing the expiry of these contracts. As those long-term contracts expire, our focus was on building future revenues. But this year, a significant reduction in the Contract Management and Environmental Reporting revenue.

In Advisory Services, $1 million down, principally driven by discontinued operations, and that's been offset by some improvement in solar.

So what's our real progress here? Clearly, an improved retention rate of customers. We're achieving higher average value customers on the Auction platform. And despite the reduction in revenue from progressive purchases, customers, we have seen a significant growth in securing those customers over the prior corresponding period. Whilst we've got stronger sales in the period, that won't reveal itself as revenue until future periods.

There's been progress on Metrics. The stronger sales of Metrics for 2 years, lower cancellations and continued growth of our Embedded Network business.

And on Advisory, we have improved. We've moved from being a loss-making business with high risk to a breakeven business that adds value to our customer base. And we've seen the improved contribution from our channel partners with revenue from solar and other activities.

On Page 11, we talk about what we've done with our money, the cash generated. Most of it has been allocated to the significant project, which we've been working on for a number of years, 4.5 years, in fact.

I'm pleased to report that the project is live. We describe it as rapidly achieving stability, although any of you who have been associated with the major systems upgrades know that these things don't usually work out of the box. So we are learning, improving, rectifying, stabilizing that system, but we're very pleased to report that it is in live -- it is live. It is successful, and it is our platform going forward.

The other thing we spent a lot of money with over that last 6 months was the investment in improving our Energy Metrics portal, and we've received terrific feedback on that, again, evidenced through the higher retention rates for clients, especially with those with small market customers, small market sites, I should say.

With the transformation of the core Customer and Contract Management platform complete, we're upgrading our IT architecture, so we can achieve lower costs via efficiencies and automation, some offshoring. We can be faster to market. And really importantly, for this business, after locking in some really smart cable people for a number of years, refocusing them on growth and opportunities for the future.

On our Energy Metrics portal, an improved user experience, it's really cool. Meets current expectations in market. It's a better service for multisite clients so that you've got all your portfolio all in the one view, including small market sites. And again, giving us that platform through which we can scale.

On the next page, we talk about our operational savings. Given the decline of revenue, it is an absolute focus that we hold ourselves to account to maintain the business with a reduction in headcount. We have taken the decisions over the last year or so for the closure of premises, which gives us some flexibility and lowers our costs. Selective offshoring has been a successful strategy for us.

There's been a reduction in the number of directors and their fees to support our cost management, and we retained very strict cost control across discretionary spend areas.

So looking forward to the priorities for next year. We start again there, where is this -- from a member-owned financial institution, "My account manager is so helpful, always answers my questions promptly. The outcomes are what my organization look for." So with that feedback, we get energized about we are on track to help customers and grow the business.

So our growth strategy on 14 and 15, Pages 14 and 15, sales growth. Starts with sales growth, improve our customer engagement to lift acquisitions and retentions, launch new products.

What have we done? Well, first of all, we talk about the net sales order growth there. Auction and Metrics up 39% versus the prior corresponding period. Clearly, that's been achieved by an improved retention as well as new acquisition growth. We've had the strongest sales for 2 years now in Metrics and very low cancellations. A terrific improvement in retention rates. Embedded Network and channel partner revenue growth. I'll talk a little bit more later about our -- the ability for us to lay the conversation, especially in the business market and the mid-market in Australia around net zero and the demand from our customers that is driven by their Board or their customers or their employees to achieve net zero.

We've seen growth in our progressive purchasing sales. And we've talked about our growth of our Embedded Network business with securing the agreement with Sydney Trains.

On capability, we'll further develop our scalable digital platforms and eliminate legacy systems now, which is an important opportunity in cost reduction and efficiency following the delivery of BTP. We'll enhance our Metrics platform, deliver data-led energy insights and focus on small market customers.

So what have we done there? Obviously, we have replaced our core Customer and Contract Management platforms to complete and stabilize. We've had great feedback on the investment we've made in the Metrics portal. And we're more efficient now for simply quoting SME customers, and that can make us more efficient, not only for customers and also help grow revenues.

The following page in service is to improve customer engagement, delivery to improve retention and net promoter outcomes. So we've seen the best Net Promoter Scores in over 5 years, and that's leading to improved retentions, winning back customers. And importantly, it's reducing in cancellations or disputes as well. We're maintaining our commitment for on-time milestone report delivery.

On profit, we'll retain disciplined performance and cost control, lift our forward revenue, drive efficiencies via the technology and achieve commercial outcomes for our Advisory business.

So again, what have we done there? We've upgraded our digital platforms. That becomes an enabler to reduce cost in the future through further automation, leveraging that efficiency and selective offshoring. We have reduced costs in this half, whilst focusing on growth. We have accelerated sales in our core business products of Auction and Metrics. Advisory Services is now more on a breakeven contribution rather than a loss, and we're still generating cash.

And on engagement, finally, to move towards and build a high-performance culture, I'm pleased to report that our employee engagement scores, best in over 5 years and associated with the lower staff turnover, which is really important. It means that we're maintaining and retaining relationships with customers and business knowledge that helps create a competitive advantage for Energy Action.

So our outlook. At the beginning of the presentation, I identified that due to either missing or the deferral of some of the sales opportunities, especially in Advisory and corporate key accounts, and together with a view of the risks and opportunities ahead of us, we do believe that we'll return to profit in the second half and will break even for the full financial year.

Now in that circumstance, there is a possibility we may breach the bank covenants at 30th of June. It's not a given. But I can assure you that we'll continue to work proactively with the bank to manage any noncompliance. And we've commenced those discussions, including a potential waive or variation in the facility agreement. I remain confident of a favorable outcome for those discussions, given the $5.9 million of future collectible revenue owing over the next 24 months, let alone the future revenue book for Metrics.

So what's our focus going forward? Operationally, leading the conversation around net zero. It's a major sales program designed to meet heightened client demand that I spoke about earlier.

Energy Action is ideally poised with our portfolio of products and services to help customers on their net zero journey. We will accelerate the growth and improvement of our Auction and Metrics business to drive our core profitable growth. And now that we've invested all that money in BTP and improved systems, we want to leverage that investment and eliminate legacy systems, create a simpler business and more efficient business, a more profitable business for the future.

So with our presentation today, I think we've got the opportunity to receive or take any questions. I'll hand back to the moderator now to -- Will, is there any questions for us to address?

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Unidentified Company Representative, [5]

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(Operator Instructions) At this time, there are no further questions by the webcast. If there are questions that are queued on the teleconference, we can take some now.

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Operator [6]

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There are currently no questions via the phone line.

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Unidentified Company Representative, [7]

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As there's no further questions at this time, I'll pass back to John to conclude today's presentation.

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John Huggart, Energy Action Limited - CEO [8]

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Thanks, [Will]. Thanks, Tracy, for sharing with me the presentation for the results for the half year. I'll just finish with a note reinforcing the discussion I commenced with. I think as an investor, as a staff member or a customer, when we share these results, if the results aren't right, you've got to ask the question, are we doing the right things? Are we doing the right things in terms of focusing on our profitable core products in sales growth?

Are we doing the right things in terms of looking after our customers and ensuring that they achieve the service and value that we expect and promise them? Are we investing in capability for the future? Are we supporting and empowering our staff to be effective? Do we have a plan for the future for growth? And my answer to that is, I believe the answer is yes, and that we have indeed built the foundations of growth for the future.

So I wish to thank you all for your attendance at this session today. And I'll hand back to Will .

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Unidentified Company Representative, [9]

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Ladies and gentlemen, that concludes our formal presentation. A copy of the webcast will be available via the Energy Action website following the presentation.