Good morning, ladies and gentlemen. Welcome to the Spark Energy Inc. First Quarter 2017 Earnings Conference Call. My name is Grace and I'll be the operator today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.
[Operator Instructions] As a reminder, this conference is being recorded for replay purposes and this call is to be posted on Spark Energy's website. I would now like to turn the conference over to Mr. Christian Hettick with Spark Energy Inc. Please go ahead..
Good morning and welcome to Spark Energy, Inc.'s first quarter 2017 earnings call. This morning's call is being broadcast live over the phone and via webcast, which can be located under Events and Presentations in the Investor Relations section of our website at www.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 today's earnings release as well as the risk factors contained in our SEC filings.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. During this morning's call, we will refer to both GAAP and non-GAAP financial measures of the Company's operating and financial results.
For information regarding our non-GAAP financial measures and reconciliation to the most directly comparable GAAP measures, please refer to today's earnings release. With that, I'll turn the call over to Nathan Kroeker, our President and Chief Executive Officer..
Welcome to the call this morning, Christian. As some of you know, Andy Davis has transitioned out of his Investor Relations responsibilities and has taken on a full-time business development role to support our ongoing acquisition activity.
Christian is now serving as the IR contact within Spark and with that, I want to welcome our shareholders and analysts to Spark's First Quarter 2017 Earnings Call. Spark has once again experienced a quarter never-seen in our company's history, reaching all-time highs in adjusted EBITDA, retail gross margin and RCE count.
In addition, it has been another successful quarter on the M&A front. I will make a few opening remarks about our opening results and our three new acquisitions and then I'll turn the call over to our CFO Rob Lane to provide some details on the financial results. We will then conclude with questions from our analyst.
We recorded $34.2 million in adjusted EBITDA in the quarter, a 62% increase over the first quarter of 2016 and the largest adjusted EBITDA we've achieved in any quarter in our history. Similarly, our retail gross margin reached $64.3 million for the first three months of 2017, an increase of 63% over last year.
Although there was some minor movement in our unit margin, the main driver of this activity was around volumes, which reaps [ph] significantly year-over-year, primarily as a result of the major and provider acquisitions that closed in the middle of 2016.
Our monthly attrition rate averaged 3.8% for the quarter, which is a 12% improvement over our full year 2016 attrition rate of 4.3%. This improvement in retention is in large part because we continue to refine our pricing and product selection, our customer service and our ongoing sales quality efforts.
Turning to M&A, on April 1, we closed on our acquisition at Perigee Energy, a company with 19,000 RCEs and also exercised an option to acquire an additional 41,000 RCEs from a third party in connection with this acquisition.
These transactions which we first discussed on our last call add the state of Delaware to our existing footprint and we expect these transactions to be immediately accretive to adjusted EBITDA. Today we're announcing the signing of a purchasing sale agreement to acquire the Verde Energy Companies.
Verde is a strong renewable energy brand serving approximately 145,000 RCE with renewable electricity or carbon neutral natural gas products in 40 utility service territories across eight states.
Verde has developed a unique sales channel that we are excited to expand across our other brands and we expect to see improvements in our overall organic sales efforts as a result.
Upon closing, Verde will add two new utility service territories to Spark's footprint, as well as a seasoned and dynamic theme of industry professionals that we look forward to welcoming into this part family. We expect to close Verde in the second half of '17, subject to obtaining regulatory approvals.
Spark will pay total consideration of $65 million plus working capital, consisting of $45 million in cash at closing and a $20 million seller's note payable over 18 months. There is an additional earn out that is subject to Verde's ability to achieve defined performance metrics.
We expect to close the Verde acquisition in the second half of 2017 utilizing a combination of cash-on-hand along with additional borrowings under our existing credit facilities. Upon closing this deal, we will be serving almost a million RCEs in 93 utility service territories across 19 states.
At this point, we are reaffirming our guidance for 2017 in the range of $110 million to $120 million in adjusted EBITDA. If you assume the midpoint of this range, it is more than three times what our adjusted EBITDA was in 2015.
I want to highlight that this does not include the pending Verde acquisition or any of the other new acquisitions we are currently working on. It has been a great quarter and we expect much of this good news to continue as we get into the second quarter.
I want to take this opportunity to thank all of our employees who have helped to triple the size of this business since our IPO and make this company the success story that it is. Thank you for your attention and with that, I will now turn the call over to Rob for his financial review.
Rob?.
Good morning. As Nathan mentioned, we are extremely pleased with our first quarter results. During the quarter, we achieved $34.2 million in adjusted EBITDA, an increase of 62% over last year's first quarter of $21.1 million.
While the primary driver of these increases was last year's acquisitions of major end provider, we continue to optimize our unit margins and maintain a low cost highly scalable operating structure. Retail gross margin for the quarter was $64.3 million, compared to $39.6 million last year, an increase of 63%.
On the G&A side, expenses were up $7 million over last year to $24.4 million, primarily due to variable cost associated with a larger customer base. Once again, a low bad debt expense facilitated in part by bringing our collection's efforts in-house last year was a positive driver year-over-year.
We spent $7.7 million to require customers during the quarter. This resulted in us growing organically by a net 15,000 RCEs after replacing for attrition. Our RCE count of 789,000 at the end of the quarter represents an increase of 90% over our position at this time last year - a result not only of our M&A activities, but also strong organic growth.
Interest expense for the quarter rose from $750,000 to $3.4 million primarily because of $2.6 million of non-cash interest charges. A quick glance with a balance sheet and liquidity table in our press release shows a low debt level that has increased even further in the current quarter.
Income tax expense for the quarter increased to $2.4 million as compared to $1 million for the first quarter of 2016, primarily due to our strong operating financial results and the increased percentage of Class A common shares relative to our Class B shares.
Our net income for the quarter was $11.4 million or $0.31 for fully diluted share compared to $15.7 million and $0.68 per fully diluted share for the first quarter of 2016.
The decrease in net income, especially compared to the record retail gross margin is primarily driven by non-cash mark-to-market accounting associated with the hedges we put in place to lock in margins on our retail contracts. With commodity prices fall, all other things be equal.
We expect to experience a non-cash mark-to-market loss and ultimately does not change the actual cash we expect to receive on those fixed price contracts. As we've indicated previously, we do not believe the net income or EPS are meaningful metrics to use in evaluating our performance.
Again, we back the non-cash effects out of our adjusted EBITDA and retail gross margin calculations which we believe are the most accurate indicators of the performance of our business. On March 16, we paid a quarterly cash dividend for the first quarter of 2016 of $36.25 per share.
On April 19, we announced that our first quarter dividend of $36.25 per share where we paid on June 14. As we've stated in the past, we expect to pay this quarterly dividend on a go-forward basis.
We also announced that in the quarters with the terms of our Series A preferred stock, the initial cash dividend for the period from the date of issuance to June 30 of approximately $0.73 per share will be paid on July 15. That's all I have. Back to you, Nathan..
Thanks, Rob. In summary, we are continuing to build on a phenomenal customer and financial growth we delivered in 2016. As discussed, we are starting 2017 strong with three more accretive acquisitions ongoing organic growth along with more M&A targets identified on the pipeline.
All of this aligns to a clear line of sight to a million RCEs for the Spark family of brands in the very near future. When we look at the growth of our customer book along with our continued strong unit margins and efficient cost structure, we're very excited about the rest of the year.
And with that, we will now open up the line for questions from our analysts.
Operator?.
Thank you. [Operator Instructions] And your first question comes from Carter Driscoll from FBR. Your line is now open..
Good morning, gentlemen. Congrats on a very strong quarter, especially in such a mild winter environment. First question, you maintain the guidance, obviously, that's actually the Verde acquisition.
Could you talk about if you were able to close that early on or say by the end of 3Q what your customer acquisition cost assumption might be for 2017 and/or if you could address the competitive bidding environment and seen a little bit of activity, but I want to get your assessment of whether it's putting any pressure up or pressure on the multiples you might have to pay for some of the other activity you're talking about potentially coming down the pipe this year next?.
All right. Thanks, Carter. Two questions there. The first one, really on customer acquisition cost, we're reaffirming our guidance.
That still assumes that we're going to spend summer between $27 million and $33 million to acquire customers organically and I think your second part of that was if Verde closes at the beginning of the third quarter, what does that do to customer acquisition cost? We would anticipate that Verde would replenish its own attrition and also realize single digit organic growth on that additional 145,000 RCEs and their CAC cost is in-line with our -- so I don't have the number in front of me, but you can do the math with those inputs..
Okay..
Second part of your question then was the competitive bidding process. I think we've signaled on several of the prior calls a lot of the deals that we look at are situations that we become aware of through our relationships in the industry or unique circumstances. They tend to be bilateral negotiations.
I know in many cases, these companies have had conversations with other potential buyers, but when we get into this processes, they tend to be pretty much bilateral negotiation. We're not seeing a lot of competition out there right now on some of these deals..
Excellent. Okay. And then you talked about some other potential activity.
Is there any color you can give on the scope of some of the other companies that you're speaking with whether you have [indiscernible] or not? Just in terms of potential side, maybe relative?.
No. We've got a pipeline of acquisitions as I alluded to in my comments, but nothing that we're prepared to speak about in detail today..
Okay. Last question. The number of RCEs you had ending the quarter, does that include the additional third party acquisition that you acquired? Or is that exclusive. I believe you acquired that in April..
789,000 RCEs does not include any RCEs related to Perigee or the additional third party customers because those didn't start coming online until April. You're correct..
Okay. And then you obviously have a sufficient capital on hand to do the Verde acquisition without potentially raising any new, other than maybe upsizing the facility.
If you were to look beyond that, do you feel comfortable you'll be able to generate internal cash to be able to do so? I'm just trying to get your thoughts about what you might think beyond Verde..
As you've pointed out, we got plenty of cash to close on the Verde acquisition. We've got multiple sources for how we would fund the next acquisition whether it be on upsized credit facility, we've got our subordinated debt, we've got the preferred that we launched back in March.
We've got three or four different options in terms of how we would finance this and we're just going to optimize that capital structure at the appropriate time..
Perfect. I'd get back in the queue. Thanks for answering all my questions..
Thank you..
Thank you and our next question comes from Mike Gyure with Janney. Your line is now open..
Yes.
Can you talk a little bit about the Verde acquisition? I guess a kind of a diversification? I guess new products and the new geographies that you're entering into with that acquisition?.
Sure, Mike. Verde is gas and electricity, it's in eight different states, they overlap significantly with our current footprint, they do bring us to new utility service territories. Verde has a very strong renewable energy brand. A 100% of their customers are on renewable products, whether it be renewable electricity or carbon neutral natural gas.
So a lot of brand value out there in terms of that.
One of the things that is unique to Verde which is very attractive to us is they have developed a proprietary sales channel that's unique to them and it actually allows us to go and access a segment of customers or certain demographic of customers that we previously have not been very successful at accessing and we intend to expand that sales channel across all of our brands and the rest of our footprint.
That's one of the things that was very attractive to us about this particular business..
Great. That's all I got. Thanks..
All right. Thanks, Mike..
Thank you. And our next question comes from Sophie Karp with Guggenheim. Your line is now open..
Hi. Good morning. I think you've taken my question. Could you maybe talk a little bit about the customer margins that the customers have already have versus the rest of your portfolio book? I understand these are mostly green customers.
So from the margin standpoint, how do they come payer to the general mix?.
I think it's fairly common knowledge that green products or renewable products tend to generate higher unit margins, or what I would tell you, that is the case here. We're seeing very strong unit margins in the Verde book slightly higher than what we've had historically and I think they've kind of proven themselves over a number of years.
They're able to realize those margins in all sorts of economic situations, all sorts of commodity price environment. So we're very excited about that..
What about the contract duration on the Verde book? Could you comment on that a little bit?.
It's a mix. It's similar to our business. It's a mix of fixed and variable type contracts. It would be very similar to our existing book..
Got it. Thank you..
Thank you. And our next question comes from Dan Fidell from U.S. Capital Advisors. Your line is now open..
Thank you. Good morning and nice job with the quarter and obviously the latest deal. I just wanted to ask a quick question you've mentioned in the release about your expectations for about $25 million incremental lift to adjusted EBITDA.
Can you talk a little bit about how you see that rolling in? I think you have mentioned in the release that that does include synergies as part of the deal.
How should we be thinking about that lift as we look forward?.
We're going to have some integration cost in the first couple of months.
Once we get through that integration period, we believe the run rate for this business after synergy, this $25 million, in terms of how much of that rolls into the balance of '17 is really dependent on the timing around our regulatory approvals and the closing of the transaction. Because of that, we're not updating our guidance today.
We don't control the timing of those approvals..
Understood. Thank you. Very helpful and congrats again..
Thanks..
Thank you. And we have a follow-up question from Carter Driscoll from FBR. Your line is now open..
Germany.
Could you address or contrast the earn out that you have for Verde with major or just talk about the structure and how that's arranged? And then maybe could you provide any incremental update on your activities in Japan?.
The earn out on this deal is it's a lot simpler than the major earn out. It has two primary components. One is an adjusted EBITDA component and obviously the sellers are incentivized to maximize adjusted EBITDA, but it also has RCE count thresholds in it, so they cannot harvest the business in order to maximize adjusted EBITDA.
So they're really incentivized to grow the business modestly and then maximize adjusted EBITDA over an 18-month period.
Did I answer your first question?.
It does. Thank you..
Business in Japan, we've passed the 50,000 customer mark. We were right on track in terms of that pace of growth, in terms of customer count. We're well ahead of budget both in terms of gross margin as well as net income, but we don't provide a lot of details on that in our financials at this point in time..
Okay. I appreciate answering it. Thank you..
Thank you. And I'm not showing any further questions at this moment. I would like to turn the call back to Nathan Kroeker for any further remarks..
Once again, thanks to everybody for participating in today's call and we look forward to talking to you soon..