Spark Power Group Inc (SPG) Q1 2022 Earnings Call Transcript

Spark Power Group Inc (XTSE: SPG) Q1 2022 earnings call dated May. 16, 2022

Corporate Participants:

Richard Perri — Executive Vice President and Chief Financial Officer

Richard Jackson — President and Chief Executive Officer

Analysts:

Matthew Lee — Canaccord Genuity — Analyst

Paul Tepsich — High Rock Capital — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and welcome to the Spark Power Corp Investor Call and Webcast. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Richard Perry, CFO at Spark Power. Sir, the floor is yours.

Richard Perri — Executive Vice President and Chief Financial Officer

Good morning and welcome to our 2022 first-quarter conference call. I am joined today by Spark Power’s, President and CEO, Richard Jackson; Chief Investment Officer, Eric Waxman and Tom Duncan, Chief Operating Officer. Rich Jackson will begin the morning with remarks on Q1 business highlights and I will follow with a financial review of the first quarter. We will then have our usual Q&A session.

Before we commence the review, I would remind you that our presentation contains certain forward-looking statements that are based on current expectations and are subject to a number of uncertainties and risks and actual results may differ materially. Further information identifying risks, uncertainties, and assumptions and additional information on certain non-IFRS measures referred to in this call can be found in disclosure documents filed by the company with the Securities Regulatory Authorities and available on sedar.com. Further, these forward-looking statements are made as of the date of this call and except as expressly required by applicable law Spark Power assumes no obligation to publicly update or revise any forward-looking statements whether a result of new information, future events or otherwise.

With that I will turn the call over to Spark’s President and CEO, Rich Jackson for his opening comments.

Richard Jackson — President and Chief Executive Officer

Thanks, Richard. Good morning and welcome to Spark’s 2022 First Quarter Earnings Conference Call. Thank you for taking the time to join us this morning. While Spark continues to face significant macro-level headwinds in Q1, we achieved record quarterly revenue and as expected, we are seeing early signs of margin recovery coupled with continued strong demand for our services, our teams continue to manage tightly through the final stages of the pandemic, the impacts of rapidly rising inflation and the company’s capital structure, all while transitioning the company into an integrated platform. I’m grateful to all of our stakeholders for the continued patience and confidence you have in our team. As always, I want to thank our employees for their strong perseverance through unprecedented times. We certainly have a great team Spark is in the strategic transition moving from our beginnings into a mature integrated and predictable organization when I jumped into the CEO seat, one of my priorities was to continue to invest in leadership and attracting experienced leaders to support me in this transition and to lead Spark through the maturity curve. I’m focused on ensuring we have the right people in the right roles and the right leaders who have the right mix of professional experience to deliver on our operational strategy and creative approaches to deliver premium solutions for our customers. In Q1, I was pleased to bring on April Currey as our new Vice President of Sales and Marketing. April is working hard to commercialize Spark and to set a very intentional and more enhanced go-to-market strategy for the company. John krill also joined us to lead the Spark Power Canadian operations. In his capacity, John oversees our Canadian business units and the execution of service delivery and ultimate P&L experience for the organization. April and John come to Spark with significant industry experience and they along with other members of my team are set to move Spark forward. Indeed our entire senior leadership team has been completely revamped in just the last nine months.

Speaking of sales and marketing, in Q1 we launched several new commercialization initiatives to bring scalability, operational efficiency, and predictability to our organization. Some of these initiatives include refinement of our target market and segmentation, critical reviews of our services offering pricing standardization and management, developing a fully integrated and standardized sales team, and ultimately national account management programs. In Q1 we were also pleased by the successful closing of our rights offering and the combined CAD9.6 million of equity financing, primarily from the founders and our three new institutional investors. The success of this funding really speaks to the vote of confidence our institutional investors have in Spark and the legacy, we are building. The injection of this additional capital will be used to execute on our operational strategy with a focus on scalability and expansion opportunities.

I’d like to highlight that in Q1, there was continued moment momentum around the integration of our acquired companies under the One Spark operating platform. Project Darwin is on track for a phase rollout throughout 2022 and will change the way Spark conducts its business operations delivering key business process standardization and improvements across every level of our enterprise from field data collection right through to billings. Through this business process and system integration, we anticipate being able to deliver a stronger, more value-based, and consistent customer experience. The launch of project Darwin will allow us to function cohesively as One Spark. As part of the integration of the business, Spark also expects to complete a final organizational integration in its technical services and renewable segments bringing the organization into a common management structure. The company will continue to operate a regional organizational structure, but the common operating management for both business segments will provide for better efficiencies and workforce management support of the standardization of key business processes and the rightsizing of the SG&A cost structure and business operations across the operating business units.

In Q1 we began making these changes and expect to have our integrated organization fully in place by the end of 2022. This also includes a streamlining of our head office functions and ensuring that once we have closed out on project Darwin, we have a very scalable SG&A cost base to support the next growth phase for Spark. As CEO, I’m incredibly proud of the progress in there probably we have made since last quarter. I’m also very proud to be leading such a resilient team achieving record quarterly revenue in Q1, while navigating significant headwinds is an indicator that we are on track to continue our strong record of organic growth. This coupled with our margin improvement activities and continued cost realignment related to integration, gives us the right recipe for a robust profitable path forward through the balance of 2022 and beyond. And to be clear, we intend to grow profitably and sustainably, and not go for the sake of growth. I will now turn the call over to CFO, Richard Perry to share our Q1 financial results. Richard?

Richard Perri — Executive Vice President and Chief Financial Officer

Thank you, Rich. I am pleased to report sequential growth quarter-on-quarter for both revenues and adjusted EBITDA margins as we execute on our plans to improve margin realization and rationalize our cost structure. Gross margin realizations were 23.7% and reflect the strong revenue growth in the quarter, coupled with the early returns of various margin enhancement initiatives that we implemented in the quarter. At the same time, we implemented targeted cost actions to rightsize our SG&A cost base moving forward. While there is more work to be done, the first quarter showed positive momentum building into Q2.

During the first quarter, we reported revenue of CAD70 million as compared to CAD56 million in Q1 $2021 and $64 million in Q4 2021, representing increases of 25% and 7% respectively. Revenue growth was related to increasing volumes in our Canadian and U.S. tech services businesses and ongoing momentum in our renewables and sustainability segments. In our Technical Services segment revenues were up CAD9.6 million as compared to Q1 of last year, representing an increase of 26.8% over the prior year and up 7% over Q4 2021. The growth reflects strong project work in Eastern Canada combined with ramping volumes in the U.S. market.

Our Renewable segment continues to deliver strong organic growth with revenues increasing by CAD3.4 million or 20% over the prior year tied to increasing demand for solar energy in the U.S. market. Our sustainability segment continued to post strong growth and was up 37% in the quarter over the prior year and up 65.2% over Q4 2021 accounting for over 5.4% of total quarterly revenue. Gross margin, excluding non-cash depreciation and amortization was 23.7% in Q1 2022, up 4.5% from Q4 2021 and down over prior year, in part due to government subsidies recognized in 2021. The drivers to this recovery include operational improvements in executing field-work, preliminary benefits of targeted margin initiatives that were implemented in the quarter and estimate updates in the fourth quarter of 2021 not experienced in the current quarter. Although we have realized margin improvements, we continue to confront the cost of inflation impacts on our cost of goods, as well as the impact of COVID-19 protocols on labor productivity in the field. We expect these headwinds to subside through the balance of the year as we realize the full benefits of our margin expansion initiatives.

Selling, general and administration costs, exclusive of the impact of depreciation and amortization were CAD13.8 million, down CAD1.3 million or 8.6% from Q4 2021. In the quarter, the company executed targeted cost actions to right-size our SG&A cost base as part of our broader plan to expand EBITDA margins more specifically, an estimated CAD4.5 million of annualized selling, general, and administration cost savings were executed through the start of Q2. As stated in previous quarters. We are focused on delivering scale in our operating model and driving efficiencies to support the next phase of our growth strategy. The work on our integrated business processes and technology platform continues to progress well and through the second half of ’22 will move into production. This is an important next step in the evolution of our business and will deliver business standardization and scalability across the entire Spark Power Portfolio.

During the first quarter, the company has reported adjusted EBITDA was CAD2.8 million or 4% of revenue in Q1 2022 and CAD3.9 million or 5.6% of revenue on a pro forma basis, considering the SG&A actions executed in the first quarter as compared to 2.5 million or 3.6% of revenue in Q4 2021. During the first quarter of 2022, the Company deployed a portion of the proceeds from the rights offering to reduce accounts payable and settled certain outstanding vendor notes. As a result, cash flow from operations was a use of CAD2 million in the quarter. Capital expenditures in the quarter were CAD0.9 million and was spread across all classes of property, plant, and equipment. During the quarter the company satisfied point CAD2.1 million of debt obligations to its lender under its term debt facility and principal payments towards vehicle and premises Lease liabilities of CAD2 million. The net result of cash flows was a decrease in bank indebtedness of CAD12.1 one million in the quarter. The company had approximately CAD17.7 million dollars of liquidity on its operating line at March 31, 2022.

The Company completed its rights offering and contemporaneous private placement in early Q1 2022 for aggregate subscription proceeds of approximately CAD39.6 million. This injection provide Spark Power with the additional capital to reduce debt, strengthen our balance sheet and execute on our operational strategy, which includes completing integration initiatives and future expansion opportunities. At the end of the first quarter of 2022, total debt outstanding to our lender decreased by CAD15 million to CAD76.8 million. In closing, I am pleased with the record quarterly revenue we achieved in Q1 and the early signs of margin recovery that started to take hold. With the tailwinds of the equity injection of CAD39.6 million and the continued support of our lender, Spark will continue forward with the final stages of the wholesale integration of acquired companies under our One Spark platform. I am confident that as we continue to execute on our margin expansion initiatives and realize the benefits of our integration plan Spark will be positioned well for scalability and profitable long-term growth.

Lastly, I am also pleased with the progress we have made to strengthen our financial reporting processes and I want to acknowledge the team for their commitment and dedication to a more robust approach. With that, this concludes our prepared remarks. I will now turn the call over to our operator for questions, operator. Please go ahead.

Questions and Answers:

Operator

Certainly. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Please hold while we poll for questions. And we did have a question come in from Matthew Lee from Canaccord Genuity. Matthew. Your line is live.

Matthew Lee — Canaccord Genuity — Analyst

Hey hi, guys. So revenue and gross margin are pretty good this quarter, but SG&A really has been the John. So maybe you can soundbar explaining some of the puts and takes non-labor cost increases that you’re seeing?

Richard Jackson — President and Chief Executive Officer

Yeah, so. Thanks, Matt. For the question. So you’re referencing the increase in SG&A year-over-year. And so for sure when you look at staffing costs in terms of sort of targeted increases we have made some investments from a sales and marketing perspective, Rich talked a little bit about some of the work underway in terms of bolstering our marketing approach and starting to increase our presence, both in the Canadian and U.S. markets from a sales channel perspective as well as some of the demand gen initiatives so that for sure would be one area that we continue to expand in. Secondly, as part of our integration efforts and starting to move to a One Spark platform, we do continue to invest in some shared services that over time will allow us to increase efficiency and ultimately sort of streamline some of the order to cash processes that today sort of take place in the field and over time, sort of move to a more shared services model. So that’s just a couple of examples where we’ve made some investments from an SG&A perspective.

Matt, that causes some of the increase from a year-over-year perspective, I would also note of course further to my comments. If you look at sort of the movement in SG&A from where we were as we ended the year in Q4. Certainly, we are starting to see the reductions from an SG&A perspective that coupled with the cost actions that were taken through the quarter into the early part of Q2, we’ll absolutely set up our SG&A base moving forward.

Matthew Lee — Canaccord Genuity — Analyst

Great, that’s helpful. Maybe a follow-up to that, when are you expecting to see EBITDA margins get back in the double-digit range, is that kind of a back half of the year thing or maybe the 2023? And then just maybe given the change in mix of your business, whether the EBITDA margin that you comfortable with the long-term. Yeah, so again a great question, Matt. So as we Outlook into sort of the back half of the year. We absolutely anticipate that EBITDA margins will crest over the double-digit mark through the back half, again sort of tied to both revenue growth as well as the margin expansion initiatives and the work being done from an SG&A cost base perspective as we sort of look beyond 2022 and think about sort of long-term targeted EBITDA margins. We anticipate that we should be in the low teens moving forward and that really is sort of where our focus is the plan, the initiatives and ultimately tied to our growth strategy. Great. And then maybe just lastly a bigger picture question. You know with the equity raise now behind us, how comfortable are you with the current balance sheet and your of each operational goals with the capital that you have, as well as giving your lenders happy? Yeah. So I’m feeling really good Matt regarding sort of where we are in the balance sheet, obviously the capital injection was very important for us, very significant at just under CAD40 million allowed us to, as I mentioned in my comments sort of reduce some debt on the balance sheet, strengthen in other parts of the balance sheet earmarked some dollars to support working capital needs and ultimately allow us to be able to execute, not just the 2022 plan, but also allow us and position us to be able to execute our longer-term growth strategy. Okay, thank you very much, appreciate the call thank you. Thank you. And once again, ladies and gentlemen if there were any other questions from the lines, [Operator Instructions] And we did have another question coming from Paul Tepsich from High Rock Capital. Paul, your line is live.

Paul Tepsich — High Rock Capital — Analyst

Thank you. Congratulations on great revenue growth and getting your credit facility waived. I have a question as well around SG&A including D&A, it looks like you’re darn close to CAD16 million in the first quarter of that roughly CAD9 million is from segment, SG&A and then roughly CAD6 million is for corporate cost SG&A. So where are you annualizing that. It’s about CAD60 million. I think you give guidance that you’ll be around CAD48 to CAD50 million this year. So where the savings is going to come from segment, SG&A or from head office?

Richard Perri — Executive Vice President and Chief Financial Officer

Yes. So thanks, Paul. For the question. So from an SG&A perspective we are trending in and around $13.5 to $14 million a quarter is sort of where our trends are running at. And the split that you referenced between segment versus corporate for sure the work that is underway is sort of targeting both segment as well as corporate SG&A, we have a number of opportunities. I mentioned some of the work being done from a sort of shared services perspective to build that out. We have work underway as it relates to sort of looking at our real estate footprint and trying to optimize what that real estate footprint looks like moving forward. We have work around some of the, obviously discretionary spend some of the professional fees. So all that is work underway as we Outlook that range of CAD48 to CAD50 million. That is our targeted range based on sort of where we are trending now the cost actions that have been taken through Q1 into the start of Q2 as well as some of the additional work as we accelerate the benefits of integration in part tied to project Darwin, which is our enterprise-wide system integration.

So those are really the key opportunities in play right now for us that will sort of reset our cost base through the balance of ’22 as well as I think really setting us up as we outlook beyond ’22 into ’23 moving forward and ultimately the objective is creating scale, driving efficiencies, and really allowing us to sort of re-purpose and reallocate dollars to continue to drive revenue growth and ultimately margin expansion.

Paul Tepsich — High Rock Capital — Analyst

Okay, great. If you can get it down there. I would note too — that I mean CAD6 million per quarter on head office costs decentralized business since or an annualized rate of CAD24 million a year for a company is big. So if you can get, get those down. I can see how margins have been improved rather dramatically here quickly. Maybe another question or two material cost inflation seem to be a problem, related to these larger contracts that you had. How are you going to alleviate those or is there any way to pass line as well as the subcontractor costs you have escalation clauses in place now or are you avoiding those types of contracts, what are you doing to offset that.

Richard Jackson — President and Chief Executive Officer

Thanks, Paul. It’s Rich Jackson. Yeah. So we’ve been grappling with the inflationary challenges over the last four or five months, and obviously, it’s no secret. I think everyone’s kind of grappling with it a few things have happened in the business internally to help manage it. One is Tom and myself have laid out clear instructions to all of our teams, that there are just certain pockets of the market we’re not going to play in and push back on some of the type of work that perhaps we would have taken through the pandemic when we were a little bit lighter on the backlog. So a couple of examples of that would be larger fixed-price projects where we wanted to keep labor off the bench and out in the field, which typically comes with larger material components and so on. We’re not taking — we’re being a little bit more cautious around taking that type of work in the current climate.

The second thing I would say that’s really helping us is we’ve raised our material cost structures in the business system to offset the impacts of inflation to give us a buffer and then be an additional piece to that would be our surcharges and industry-wide we’re starting to see the same thing, surcharges on fuel, surcharges on material specifically around commodity pricing, obviously, a lot of work we do is centered around copper. So we’ve launched that for the most part in Q1 and you’ll see that sort of translate through the business. We have a 90 to 120-day period of when we estimate a project or a small job through to when it goes through the billing cycle. So I expect to see that play out. And then, obviously, of course, just general charter-out rate increases and price increases at large, and we continue to do that, we, we’ve done three now. We’ll likely do another one here in Q2 and continue to monitor how the market responds to that. So a lot of blocking and tackling, I would say, in the business to manage around it. It’s been a challenge, but I’m confident that we’ve laid out the kind of the granular processes at least to react at the very least to react to what’s going on in the global market. But certainly, the long-term play would be ensuring that our systems and our business processes support and address these kinds of issues going forward.

Paul Tepsich — High Rock Capital — Analyst

That’s great. Well, thank you very much. And it sounds like you’re both on [Indecipherable]. Thanks.

Richard Jackson — President and Chief Executive Officer

Thanks, Paul.

Operator

Thank you. And there were no other questions in queue at this time, I would now like to hand the call back to Richard Jackson, CEO of Spark Power for some closing remarks.

Richard Jackson — President and Chief Executive Officer

Thanks, Paul. Yeah, so I just want to send a big thank you out again to all of our employees. We’re obviously going through some pretty unprecedented times starting with the pandemic and then dealing with some of the macro-level impact of inflation and so on. So I really want to emphasize, we have a great team they are a resilient team and we continue to ride through this together and the other thing I’d like to do is just thank our stakeholders, our lending partners, our new institutional investors, our founders, Spark is a really good business going through a real transition and focusing on the long game and seeing where we’re going as a business, I have all the confidence in our team to deliver and the confidence of the stakeholder community to continue giving us the patient, the time, the space, the support to get us through to the other side, so just wanted to leave off on that. Thank you.

Operator

[Operator Closing Remarks]