Eenergy Group (LSE:EAAS) — Investor Update

0:00 Good morning, ladies and gentlemen, and welcome to the EENERGY GROUP PLC Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged. They can be submitted at any time via the Q and A tab that's just situated on the right hand corner of your screen. Please just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today, and we'll publish those responses where it's appropriate to do so. I would now like to just submit the following poll,

0:32 and I would now like to hand you over to CEO Harvey Sinclair. Harvey, good morning, sir. Yeah. Good morning. Welcome, everybody. So I want to go through our high level strategy post what has been a very successful and transformational six months for the group. And today's webinar is an opportunity for us to provide an opportunity to discuss that strategy and talk through to the outlook. So the first slide covers some really key messages that I think are really important. Firstly, we have a very simplified revised business model following the sale of our energy management business, And it's with a business with a very high track record in delivering growth. So the plan really now is to focus on accelerating the growth of that division, having built a platform with a leading brand and to accelerate on that race to net zero, which we see in the market accelerating to 2030.

1:29 The business clearly has now a very strong balance sheet. This in turn is going to unlock a huge number of the constraints, which we've experienced historically. And this is gonna manifest to itself manifest itself in a number of different ways from being able to secure better terms with our supply chain, for example, and to be able to bid on much larger multimillion pound contracts. This balance sheet is in part, you know, required to help us agree the facility with NetWest, which is providing us with huge firepower to enhance our growth and increase our recurring income stream as we look going forward. As I said, this business has a proven track record in growth. Over the last three years since being on AIM, we delivered a 63% CAGR growth rate, which is evidence of the market opportunity, the brand we built in the in the market, and it demonstrates the scalability of our operating model.

2:29 We still see this as a very large addressable market. From the work we've been doing over the last ten years, we've been able to get very close to the sizing of our different markets. And we can see that 70% of the market in education still remains very addressable. And within the lighting opportunity alone, we estimate this to be worth 2,000,000,000. So there's a huge amount of market still to transition to net net zero. And actually, when we look at this market, we see that there's a very high barrier to entry. Over the last three years, we've built a very strong pipeline that's worth over 120,000,000, and we typically see our customers having sales cycles of somewhere between twelve and twenty four months. And with a proven track record of closing half our investment grade proposals, we're starting to get a lot more visibility in our ability to forecast.

3:27 So when I think about this business and the underlying objectives, it's really about driving scalable profitable growth. And our objective internally is that we're aiming towards high teens 20% EBITDA margin as we look into the the midterm, long term, you know, I guess, profitability of this business.

3:52 I thought it was useful if we can just reframe the the background to the energy management division. We acquired three businesses between 2020 and 2021 as part of a a strategy to diversify beyond what was a lighting as a service business that had been growing organically for seven years before we came to AIM. When we reflect back, we've been very successful in delivering on that stated strategy, and it saw us integrate three businesses onto a single platform, into a single brand. And we delivered those efficiencies, developed new products, and we gave a huge added value back to our customer base demonstrated by stronger customer retention over the period of ownership. And I'm very proud of what we achieved in the back of what was a really challenging market, COVID, and then what was a disruptive and volatile energy crisis market was a challenge for all businesses, but in particular, the energy consultancy sector.

4:51 And so following a number of approaches that I think we articulated to the market, we did conduct a strategic review of, you know, what was the options for the group. And it was concluded that it was in shareholders' best interest to divest the division and secure effectively what was a really great return on day one, which is close to a 50% increase on the entry price for these businesses, plus also retain further interest with an expected 8 to 10,000,000 of consideration over the next couple of years in a structure that we think we're we're confident delivering. So the backdrop is that we've enabled us to clear our balance sheet obligations. We've provided the business with a a springboard into what is a very exciting market opportunity where we have a leading position.

5:45 This slide is more about evolution than revolution. We've had a stated strategy, a four pillar strategy. We're finessing that strategy into a three pillar strategy, but this year is really about the first two, which is all around reduction and generation. The opportunity for EV charging, in my view, still has a huge opportunity and is still yet to have its day. And I think that as next year evolves and the, the adoption levels for EV start increasing, we will see a, a really big opportunity for EENERGY to facilitate, revenue and profitability within that customer base that we've so successfully acquired.

6:31 But reflecting back on where our core market is, this is all about focus. And for our business right now, there's such a huge opportunity in energy efficiency and and on-site generation both within our existing customers, but also as part of our customer acquisition strategy. And I guess now that we have secured such a strong brand in the market and also now such a unique product, which we'll talk about shortly, in the Net West facility, we've got two quite clever and differentiation wraps to our our proposition. One is this whole, you know, competitive and compliant financing solution that is becoming ever more attractive to customers and what is a capital constrained environment.

7:16 But also having retained an exclusive license to my Xero, we're able to focus in on embedding what is essentially a very big differentiation around providing data services, verification of savings, and a a Trojan horse strategy really into our customers where by the virtue of having a embedded smart metering solution and visibility of data, we've got a downstream natural follow on for other energy transition services.

7:50 So before I hand over to to Chris, then I want to just tackle really the the market opportunity as we see it, but also our route to market. The energy crisis in twenty twenty two was a big wake up call. There's no getting away from the fact that cost savings became the main driver.

8:10 But I think whilst we've seen a settling of energy prices in the market, we're still a 100% more expensive our price per kilowatt than we were in pre COVID times. So there is still a very key driver in cost reduction and reduction, you know, energy price considerations for organizations. But aside of those, I think we're starting to see stronger drivers in compliance and regulation. We've got a market that's gone through a significant change in cost of capital. So there's a scarcity of capital, scarcity of grants and budgets. So the energy as a service proposition is stuff become very relevant, and the fact that we've got such a unique product now starting to become a real key differentiator.

9:01 The ban on fluorescent lamps last year, you know, is an inflection point for lighting. You know, we've now got another wave of focus for organizations who have got essentially end of life lighting solutions and who are now no longer able to purchase fluorescent alternatives. EPC ratings for landlords, another huge driver where landlords and owner operators are starting to see the inherent increase in property value that on-site generation delivers for them. Carbon tax and supply chain pressures, government policy for net zero commitments, all all intensifying. So there's this backdrop of nonfinancial drivers that are starting to, I guess, accelerate this this this move to net zero transition, and it's starting to be intensifying look at 2030, which is only now, you know, as we can see five, six years away.

10:00 I also think it's important to just take a moment and think about the competitive landscape that we operate in. From From from my perspective and the research we've done both internally and through due diligence providers as we look at this market from a buy side and sell side over the years, this is a thinly served competitive landscape. There are very few, in comparison to the size of the market, competitive, genuine, like for like competitors in this market. And I think that in itself provides us with an incredible opportunity to, you know, double down and and leverage our existing brand presence and and further intensify that presence in the public sector.

10:44 So when I think about route to market, historically, we've had a successful direct sales model. That model remains very successful, aided by the use of in an application technology through our own proprietary platforms and clever, eLite, and EENERGY apps that we've created over the years. But now as we start thinking about how do we scale the business, we're running in parallel an indirect channel partner strategy. And as we think about how we're starting to increase scalability and revenues, expanding out our public sector frameworks and thinking about how, you know, our stronger balance sheet can leverage our ability to win very large 7 figure deals, we start to think about, you know, those channel partners being a larger, more successful route to market than just scaling direct sales model. So the plan this year is to think about that strategically rather than just adding more direct sales cost to the business, and we think that's gonna create stronger leverage.

11:51 Chris, over to you. Thanks, Harvey. As Harvey has already referenced, the disposal of the energy management division has had a transformative impact on our balance sheet, and this now gives us a key competitive advantage and a barrier to entry. It's not unusual for high growth businesses, to experience balance sheet constraints, and that those constraints have restricted aggregate revenue growth in previous periods. And it's also held back our margins. By necessity, decision making was focused on short term cash priorities rather than for long term strategic benefits. So going forward, we intend to maintain a robust cash position for precisely this reason. So whilst we see a number of opportunities to invest working capital to drive growth, we'll take a measured and prudent approach to capital deployment with a target to be net operating cash generative in any twelve month period.

12:46 Maintaining that balance sheet strength will allow us to manage a lumpy working capital cycle effectively. It will give us enhanced credibility to tender for larger multisite projects, and it will help us secure better terms across the supply chain. And that includes in finance where the new NatWest facility announced last week gives a good example of the benefits which can be delivered through this approach. Turning now to that facility. We're excited to be working with a blue chip funding partner with ambitions to scale their presence in this segment of the market. This facility is a result of many years of developing a compliant, fundable product suitable for public sector customers. The excess extensive due diligence process has validated that.

13:33 The facility is also the result of achieving the scale to attract partners with access to substantial capital resources, and we hope this will prove to be just the first small step in a long term relationship with NatWest. The facility itself allows us to achieve a lower cost of finance in return for retaining a minority interest in completed projects. It's similar to a mortgage where a lower loan to value loan would have a lower rate of interest than a 100% mortgage. That lower cost of finance gives us an improved conversion of contract value to revenue, which in turn flows straight through to an increased margin. The net effect of the increased margin versus the retained interest in the project equates to an approximate 10% cash investment.

14:21 That investment pays us a predictable and recurring quarterly cash income over the duration of the customer contract of seven to ten years and is expected to deliver a return of over two times over that period compared with if we'd financed the projects through one of our previous funders.

14:38 So, for example, deployments of the full £40,000,000 facility over the next twelve twenty four months would would be be expected to equate to a circa 4,000,000 cash investment in that period with corresponding cash receipts of circa £8,000,000 over the following seven to ten years.

14:58 So to recap, we now have a stand alone operating platform in energy services benefiting from strong market drivers and with improving margins. We have a separate group PLC function focused on enhancing the capital value of the group, for example, as we have done with the NatWest facility, and on strategic expansion opportunities. It also houses the costs associated with meeting our PLC obligations. Our focus on rightsizing this cost base following the energy management disposal will see the cost run rate fall materially through the year.

15:35 Thanks, Harvey. Back to you. Great. Thank you. So just to recap, we've, over the last four years, built a strong brand in what's gonna be a big market. We've got track record of delivering solutions to complex multi site customers. We've got a market leading position in education, and we have a strong route to market with what I believe to be entrenched barriers to entry for our competitors. So the plan now really is to leverage that, expand into other, subsectors of education such as higher education and universities, but also start, really doubling down on our approach to local authorities and the, health care sector. And the networks facility covers all technologies across all those public sector opportunities.

16:26 The race to 2030 is going to start accelerating. It's a it's an explosive market opportunity for investors. I believe that the energy platform provides a route to that investment return, and I think that our performance organically demonstrates our ability to run a very successful growth business in this space. We've now got

16:51 a a retained customer base somewhere between a 1,100 across both The UK and Ireland that have been in contract with us or are in contract with us on lighting efficiency projects that now have a very strong demand for renewable solutions. We've now got the ability to

17:14 invest in that customer base as well as continue to invest in new customer acquisitions. So the the pivot to new technologies is gonna be very focused. It's not gonna be scattergun. I believe that solar is, having its moment finally. We've seen two false starts over the last decade, and the economic proposition now for solar is so compelling that anyone with a roof with, say, daytime consumption that provides, you know, consumption of that generation during the day

17:49 should be deploying solar. And that's not a passive market. It's a very active market now, we believe is very thinly served from a competitive perspective.

17:59 And the platform that we've got and that we've developed, invested in from our product apps to our systemization of our processes provides us the opportunity to start gearing the business model for high profitability. So all in all, think the business is well placed in a large addressable market with a great brand and a a very stable team with a huge pipeline to to know leverage.

18:27 And that concludes our presentation for the day. Fab. Thank you very much, Harvey and Crispin. We've got a few questions. I'm gonna try and collate some of them. So one of them is about a share buyback or a special dividend. So given the current share price and current valuation, would management consider a share buyback or special dividend? So should I tackle that one? Look. It's it's been one of the many debates we've had over the last few months regarding the disposal. Don't think it's in Sheldon's best interest to do that. I think we've got a business plan that we're a 100% committed to, and I think that the breakdown of the balance sheet explanation allows us to do that. So so, no, we have no plans to do a share buyback.

19:13 Thanks, Harvey. Can we expect any m and a given the previous strategy to buy and build? Not in the near term. That's not to say that we wouldn't consider in the mid to long term, but in the near term, either next twelve to eighteen months is not on our strategy. We think there's there's sufficient shareholder returns to be gained by good organic strong growth and retaining retaining that balance sheet internally. Got it. How cash generative do you expect the business to be this year, and what is your current cash position? Shall I take that, Harvey? Yep. So, yeah, I've outlined our targets is to be cash generative in any twelve month period even after the the working capital investments we've we've we've referenced.

20:08 Equity development have a good good research note, which is published on our website that that shows us being at around 10 to 11,000,000 of cash at the year end at the end of December.

20:18 And our current thinking is is in line with that. That's in line with our expectations. Fab. Thanks. And then just something around the NatWest facility. Someone's asked, is the financing at a fixed or a floating rate, and what is this? Yeah. So the financing is at a floating rate, but the mechanics are that we effectively fix that rate to to to match when we tie in the customer. So at the at the point of drawdown and actually slightly before drawdown to match when we lock in a pricing with with the customer, we we will be fixing those rates. What just about the Laseko, and what benefit does it bring as a strategic investor?

21:09 Sure. That's a good question. So Laseko being one of our supply chain partners for some time, I think having them as an investor provides a couple of key benefits. One is allows us to start thinking about vertical integration strategic product innovation across our portfolio. It also gives us some alignment around large large project rollouts and the confidence we can give with the, you know, UK based partner that's aligned with our interests. Thank you. In regards to just a bit of clarity around the myZero and whether it was sold as part of the energy management deal.

21:55 Yeah. So we we did divest the business to DCC. However, we did retain an exclusive license for two years. That license allows us to have exclusive terms. The plan with our, I guess, my zero license is to ensure that our products are embedded within the lighting and renewable solutions. It gives us a differentiation to our competitors at a competitive price point that provides us with a almost trading horse strategy to sell downstream products and services. So in in simple terms, we've retained the same economics as if we had retained ownership, but we obviously have the ability to use use our working capital more efficiently.

22:44 Thank you, Harvey. Another one is about the additional payments and how confident you are in receiving them. Kind of is eight to 10 the midpoint, the lower end, or just more on expectations around that? Do want me to start that, Harvey? So I'll take I'll take half the question. I think we we worked at length on this concept of a deferred consideration, and what we wanted to avoid was a binary cliff where it was a no or nothing solution. So I think we found a really good balance. One of the attractiveness around doing a deal with DCC was two things. Firstly, the terms we agreed, and secondly, was around the synergies that we believe that energy management can can achieve through by being owned and part of the DCC portfolio, which is principally to access huge customers with a with an open door strategy and where DCC have a track record of incubating acquisitions very successfully driving those synergies.

23:48 So we've got a a pan a pan for pan type earn out structure, which Chris we can talk about. We do have a couple of EBITDA gains, but we we think they're well within the threshold of tolerance. So in short answer, I think it's a very achievable expectation that we set out. Doesn't have a cliff edge, has, obviously, a 20,000,000 cap. So we think the 8 to 10 is our expectation, and we think there's an upside to that. Yeah. I think that covers most of points I was gonna make. I I think the 8 to 10,000,000 is, you know, a reflection of of the the the business plan on a stand alone basis. I think, you know, we we've tried to structure an earn out that avoids some of the misalignment that you can have in earn outs, and and as Harvey referenced, key point on that is it's pound for pound. So, you know, the the the the DCC business going forward has every incentive to get behind this. It's a strategic acquisition for them. They've got a huge customer base that they can, you know, introduce to the business and every incentive to to to to get the behind behind it and drive growth through the earn out period.

25:08 Thanks, Crispin. Another question is what does the term comply what does the term a compliant product? In what sense can this be entered by public sector? Is it considered to be a debt? Okay. So in the public sector, there are a number of regulations and and government points around how third parties can invest in long term contracts and how the public sector can engage in long term contracts that are from a accounting reliance perspective, but also from a policy perspective. So it is not easy, and it is not possible just to simply provide traditional asset financing as you would be able to do so in the commercial sector.

25:59 The the guidelines are changing and have changed, and we've worked with NetWares to create a product that navigates the landscape very effectively. So, it's a sympathetic product within the guidelines of the public sector with a very clear focus of meeting those, regulatory guidelines. Thank you, Harvey. Another question is, who are your competitors? What is your USP, and what's your barriers to entry? Okay. So competitors fall into a number of buckets. We have small single focused players that do one particular service offering. So so for example, there are, you know, a small handful of just dedicated lighting services businesses that either do or don't offer third party funding, where we have a particular, differentiation to those players and that the same applies for charging and solar.

26:59 In the solar sector, there are, you know, broadly three camps of of players. EPC providers who do the engineering procurement and construction, do very little in the customer acquisition side, and do very little on the funding side, if any. You have your funding partners that have a variety of different products in the market that work through service providers like ourselves, but that's PPA providers. And then you have developers who originate projects and then outsource. We are a hybrid, so we consider ourselves to be in a smaller group of full turnkey solutions providers. So when I think about who are our genuine direct competitors, you know, at the large scale, you've got companies like Equans, Redaptive in America that have a small presence in Europe.

27:49 You have niche players that do e c EPC solutions providers. And I think we we sit in a in a in a position in the market where there's really only, you know, a couple of providers. Energy Efficiency Solutions Group is one that does a a comparable service offering. We would consider ourselves to be different with our funding of balance sheet solutions rep. So, yeah, it's a it's a it's a small direct competitive landscape, but a larger competitive landscape in some of the specific areas. Thank you, Harvey. On the financing, does EENERGY's 20% project in how does EENERGY EENERGY's project interest rank alongside the NatWest contribution?

28:38 So, yeah, it's a so it's a NatWest senior to our retained interest, which is, yeah, normal for for for this sort of structuring. Thank you. And then the final one, if you have over a thousand prior or current clients, why do you need to use an agent sales? Okay. Two reasons. We have long sales cycles where we have clearly customers who have different priorities around their own infrastructure upgrades, forcing them to work within our own timescales is not a productive sales strategy. Now that we have got a very clear focus around renewables, we have a very big focus on working with our existing customers.

29:31 The indirect sales routes tend to give us access to much larger. So we're talking, you know, one to ten million pound projects rather than a 100,000 to £1,000,000 project, which is typically the landscape of direct sales. We have a strategy now to start going after multimillion pound contracts that previously with our undercapitalized balance sheet was out of reach partly because of the sales cycle, partly because of the investment needed, and partly because of the the cash flow profile of those type of projects. And I think that's really at the center of how we can significantly gear the success of this business. When you think about large infrastructure grade projects, five to fifty million pounds, which we've been unable to tender for, we're now in a position to start tendering.

30:20 Those don't very readily come through direct sales opportunities. They're generally through frameworks or through tendering opportunities. Thanks very much, Harvey. Katie, that is that the the end of our questions today? Yes. That is. Perfect. Thank you very much. Perfect. Katie, Harvey, Crispin, thank you very much indeed for addressing all of those questions that came in from investors this morning. And then, of course, we'll publish all those responses out on the platform. But Harvey, perhaps before really just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company, I could please just ask you for a few closing comments to wrap up with, that'd be great. Thanks very much. So I I'd simply reinforce proven track record in growing this business organically, 63% CAGR rate, larger market opportunity available to us now than there was three years ago, strong balance sheet, ability to scale and leverage our position, and a a very exciting five to ten year window as we look forward to net zero.

31:25 Perfect, Harvey. That's great. Thank you once again for updating investors this morning. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order the management team can really better understand your views and expectations? Will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of EENERGY GROUP PLC, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.