Spark Power Group Inc (SPG) Q4 2021 Earnings Call Transcript

Spark Power Group Inc  ( XTSE: SPG) Q4 2021 earnings call dated Mar. 31, 2022

Corporate Participants:

Richard Perri — Executive Vice President and Chief Financial Officer

Richard Jackson — President and Chief Executive Officer

Analysts:

Maria Ripps — Canaccord Genuity — Analyst

Presentation:

Operator

Good day, ladies and gentlemen and welcome to the Spark Power Corp. [Phonetic] Investor call and webcast. [Operator Instructions]

It is now my pleasure to turn the floor over to your host, Richard Perri, Executive Vice President and Chief Financial Officer. Sir, the floor is yours.

Richard Perri — Executive Vice President and Chief Financial Officer

Thank you. Good morning and welcome to our 2021 fourth quarter and fiscal 2021 conference call. I’m 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 the current state and outlook for the business and I will follow with a review of the fourth 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 statement 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 Power’s fourth quarter and fiscal 2021 earnings conference call. Thank you for taking the time to join us. Overall 2021 was a year of steady growth across most of our business segments. However, our fourth quarter faced significant challenges with the surge of COVID-19’s Omicron variant. In addition to the continuous global supply chain disruptions and rapidly rising inflation, all of which put significant pressures on our gross margins. Despite these setbacks, I have full confidence that as these global events begin to normalize through 2022, we will see gradual margin recovery and the momentum of business operations continuing to support our organic growth and market expansion opportunities.

Looking back on Spark Power, last year we experienced strong organic growth across our Canadian and US markets and just under 13% growth year-over-year as compared to 2020. We’re very proud that this was accomplished 100% organically through our growing footprint, specifically in our US market and the growing demand for our services. The quality of our field work talent — field worker talent and the collaboration and breadth of services, we continue to bring forth to address the diversity of our customer’s unique needs.

While the last few years of the pandemic has been a challenge, I remain deeply proud of our employees for their ongoing resilience and focus on safety. Our leadership team for their very strong commitment and our Board of Directors for their continued support of and confidence in the business. Of course, it goes without saying, we continue to value the deep and growing relationships with our customer base across North America as they too navigate these unprecedented times.

In 2021, we completed our first formal customer survey with significant response rates resulting in industry-leading net promoter scores. 2021 was also a year of laying down the right pathway to support the continued growth and maturation of the business. As part of laying this new foundation to support the next stage of our growth, we introduced a new flatten management structure in early 2021 as part of the business is focused on field operations and scalability. These senior leadership enhancements include Richard Perri who succeeded Dan Ardila as our EVP, CFO; Tom Duncan as EVP and COO; and additionally, we were pleased to share the promotions of Grayson Swan to Executive Vice President of Renewables; Najlaa Rauf to Vice President of People and Culture; and Suha Jethalal to Vice President of Sustainability leading our both business unit.

In early 2022, we also welcomed April Currey as our new Vice President of Sales and Marketing; John Marcelo [Phonetic], as Vice President of Finance; and John Krill, Succeeding Tom Duncan as our Senior Vice President and General Manager of Canadian Technical Services. The completion of the founder transition in Q1 in 2021 followed by the transitional succession and strategic replacement of our senior leadership team brings a renewed focus on business operations and a more experienced and mature structure to Spark’s operations. This newly organized management structure will help guide capital allocation decisions and position us well as we navigate the next stage of our maturity curve and execute on the next strategy for the Company.

As we have reported previously Spark has continuously sought new sources of capital to support our growth strategy. And while we conducted and closed off our strategic review process in Q4, we continue to see capital and launched our rights offering towards the latter half of the quarter. Our rights offering and private placement closed in early Q1 ’22 and generated a combined total of CAD39 million of new capital for the business.

This injection of capital provides us with the necessary funds to execute our 2022 operating plan, which includes continued integration activities, which also includes our Project Darwin initiative, working capital support and our ability to continue to grow sustainably. To this point Spark experienced strong and rapid growth around our renewables business segment in 2021. This growth was equally supported by strong transactional and long-term US based demand for the development of wind, solar and energy storage assets.

Based on this opportunity, we expanded our footprint and launched a new branch in Albany, New York, serviced Northeastern market with a particular focus on renewables. Our footprint also expanded with new branches launched in Bakersfield, California and Houston, Texas, both of which focus on our Technical Service segment of the business. In 2021, we launched a set of new company values with a focus on our field focused operating model that prioritizes field efforts and customer service. The five values that we identified are aspirational and serve as our guidepost for everything we aspire to be and do going forward as an organization. These five values which were developed with the help and insight of all Spark Power employees across the business, our trust, community, team, excellence and sustainability.

Together these value support our purpose, which is to be our customers’ trusted partner and power and reflect direction that Spark is headed as we reshape and build upon our business platform and transition into a more mature enterprise. Continuing on our focus on business integration initiatives and scalability, we completed our brand immigration, uniting our Spark acquisitions across Canada and the US under a cohesive singular One Spark Power Brand, this project was a two year endeavor and the completion of this milestone makes us incredibly proud.

Going forward when our customers see Spark Power fleet vehicle or a Spark Power service provider. They will know that the breadth of services that can be offered to them reaches across various divisions from low voltage, high-voltage renewable storm services engineering and sustainability. We really are one of North America’s leading independent providers for Power Solutions and our customers’ trusted partner in power.

As we are well into the first quarter of 2022 and as we strategically transitioned the business into the next level of maturity, the investment and development of our newly integrated enterprise-wide business process and technology platform, what we refer to as project Darwin remains a critical objective and a key priority of ours.

This implementation of Project Darwin was a two year endeavor that we began in early 2021. Its purpose is to bring key business processes and system enhancements and standardizations to our Spark Power operations. Company-wide in conjunction with project Darwin, we have also launched Operational Excellence as key business function and philosophy within Spark. Opex will drive consistent business KPIs standard management reporting and continuous improvement initiatives that align well to our new set of standard business processes.

Darwin is a phased project and we look forward to our first go live at the end of Q2 with our second go live at the end of the year. Thinking ahead in terms of our growth, we continue to commit to a talent attraction and retention initiatives for the skilled trades. We were pleased to be awarded a CAD5.3 million grant for the Government of Ontario skill development fund in Q2 of 2021, which supports the launch of employee training and advancement initiatives such as enhanced on-the-job training for electricians, technicians and apprentices.

Community outreach programs that promote skilled trades work in Ontario and the launch of our Be Powerful scholarship program for underrepresented students to enter the trades. In addition to this, we have launched our new learning management system and our Spark View virtual platform in support of providing all Spark employees the opportunity to grow in their careers as we continue to grow.

Looking ahead and with 2022 well underway, our priority remains focused on gradual margin recovery, scalability and a sustainable level of organic growth while completing the final pieces of our integration. We remain focused on operational excellence, enhancing our gross margin performance. Richard Perri can speak to this in more detail but operationally speaking these gradual improvements will come from some of the reduced impacts of the pandemic as COVID measures reflect the expected change from pandemic to endemic. We expect to naturally experience some improvement, just in terms of our own operational efficiencies related to the pandemic.

More focus pricing actions and introducing fair but necessary increases to absorb some of the cost caused by the significant rise in inflation transitioning to value-based pricing, Spark as a reputation in the industry for being the choice service provider and as our customer surveys have reaffirmed, we provide extensive value to our customers. Our ability to implement more focused pricing actions and provide prices based on the value we provide is very important.

Stronger commercialization of our business and a more intentional approach to how we go to market, focusing on market segments both geographical and service line oriented, focusing on what we do best, and where we create value versus our build-up of market presence in critical math. And enhancing our supply chain management, we are continuing to look at ways we can enhance our vendor relationships and seek out better and more beneficial opportunities as we continue to consolidate, negotiate our supply chain.

And lastly, a continued focus on opex and building strong leaders and driving strong project management. We have over 180 project managers across North America, who do good work every single day and we will continue to provide the training and the necessary development opportunities to help them in turn and help our business grow profitably.

I would like to now to turn it over to Richard Perri to share our financial results. Richard?

Richard Perri — Executive Vice President and Chief Financial Officer

Thank you, Rich. I’ll provide a couple of highlights and then speak further on each of the component. During the fourth quarter, we experienced growth in certain of our segments while feeling the impact of the ongoing pandemic in our Canadian operations. As the economy continues to recover, we anticipate steady growth in 2022. Gross margin realizations on an adjusted basis were at 23.8% and reflect the impacts of macroeconomic factors related to cost inflation and business mix while SG&A was impacted by higher year-end provisions.

While this was a challenging quarter, we are actively executing on our fiscal ’22 operating plan to address the current market conditions and affect margin expansion throughout 2022. As indicated in our financial statements, MD&A and press release last night, as part of the refined approach adopted in the third quarter to estimating revenue and costs associated with longer-term construction projects, the Company recognized estimate updates at CAD3.7 million in the quarter, resulting in a decrease in revenue of CAD3.1 million and an increase in cost of goods sold of CAD0.6 million.

Management has determined that the estimate updates do not reflect the forward looking underlying operational trends for both revenues and gross margins in the business. Furthermore, management is of the view that the processes used starting in the third quarter and going forward for estimating revenues and costs associated with longer-term construction contracts will enhance the precision of such estimates for future periods.

I will now turn to a discussion on our results for the fourth quarter ended December 31, 2021 and the impact, this change in estimate had on our reported results. During the fourth quarter, we reported revenue of CAD65.4 million, representing a decrease of CAD1.4 million or 2.2% over the same period in 2020. On an adjusted basis and excluding the impact of estimate updates, we generated revenue of CAD68.5 million representing an increase of CAD1.6 million or 2.4% over the same quarter.

Revenue growth on an adjusted basis was related to ongoing momentum in our renewable segment and strong project work in our Canadian Tech Services segment. Our Renewables segment continues to drive strong organic growth with revenues increasing by CAD5.4 million or 27.6% in the quarter.

On a full year basis, this segment has increased CAD21.8 million or 33.8% and continues to see increasing demand for both wind and solar solutions in the US market. In our Technical Services segment revenues were down CAD7 million as compared to Q4 of last year. On an adjusted basis, revenues were CAD39.5 million, representing a decrease of 11.4% over the prior year. Despite strong project work in our Eastern Canada operations, revenues declined in one of our Key Western Canada markets as we redirect that business to higher margin service work.

Our sustainability segment saw an increase in revenues in the fourth quarter of 2021 of 13.5% and growth of 32.9% on a full year basis tied to increasing demand in the market for renewable energy and environmental attributes.

Gross margin excluding non-cash depreciation and amortization was CAD12.6 million or 19.2% of revenue in the fourth quarter as compared to CAD21.4 million or 32% in the comparable quarter in 2020. The factors contributing to this decline include estimate updates recorded in the quarter, negatively impacted gross margin by CAD3.7 million. Gross margin adjusted for this impact and the impact on reported revenues and excluding the depreciation and amortization was CAD16.3 million or 23.8% of revenue.

The year-on-year decline in government subsidies of CAD2.8 million negatively impacted gross margin realizations by 3.9 percentage points, the rapid rise in inflation has driven up the cost of goods, including commodities and fuel, which caused margin compression, estimated to be 2.7 percentage points, the impact of shift in business mix, both from a segment mix perspective tied to higher renewables growth as well as large project work versus time and material service work. And lastly, the ongoing lingering effects of COVID-19 protocols on labor productivity in the field.

Selling, general and administration costs, exclusive of the impact of depreciation and amortization were CAD15.1million or 23.1% of revenue and 22.1% of revenue on an adjusted basis in the fourth quarter as compared to CAD12.6 million or 18.8% in the fourth quarter of 2020. In the quarter, certain year end provisions were increased as part of our year-end review process, the impact was approximately CAD2 million for the quarter. SG&A, excluding this item was CAD13.1 million or up 4.8% compared to the fourth quarter of 2020.

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 fourth quarter, the Company’s reported EBITDA loss was CAD10.2 million or minus 15.6% of revenue and adjusted EBITDA was CAD2.5 million or 3.8% of revenue as compared to CAD8.9 million or 13.3% of revenue from the comparable quarter in 2020.

In the quarter, we booked an impairment charge of CAD4 million for one of our operating units in Western Canada as we reposition our business for profitable growth. During the fourth quarter of 2021, the Company generated cash flow from operations, up CAD3.2 million. Operating cash flow benefited from a decrease in contract assets of CAD7.2 million and an CAD8.1 million increase in accounts payable offset by an increase in accounts receivable of CAD5.4 million. Capital expenditures in the quarter were CAD0.7 million and was spread across all classes of property, plant and equipment. During the quarter, the Company satisfied CAD2.1million of debt obligations to its lender under its term debt facility and principal payments towards vehicle and premises lease liabilities of CAD2.1 million. The net result of cash flows was an increase in bank indebtedness of CAD1.6 million in the quarter. The Company had approximately CAD5 million of liquidity on its operating line at December 31, 2021. As Rich stated earlier, the Company launched rights offering and contemporaneous private placement at the end of Q4 2021.

The rights offering was completed in early Q1 2022 for aggregate subscription proceeds of approximately CAD39.6 million. This provided Spark Power with additional capital to execute on our long-term operational strategy. At the end of the fourth quarter of 2021, total debt outstanding to our lender increased by CAD1.1 million to CAD91.8 million.

In closing, I’m excited to be working with Rich Jackson and the leadership team to execute on our growth strategy and drive margin recovery performance in 2022. I am optimistic about the growing market demand for our services and I believe that we are well positioned to take advantage of this opportunity.

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

Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And our first question today is coming from Matthew Lee at Canaccord Genuity. Your line is live. You may begin.

Maria Ripps — Canaccord Genuity — Analyst

Hey guys, this is Maria [Phonetic] calling in Matthew. Let me — just couple of questions, the first being on, your 2022 outlook suggested [Indecipherable] pandemic revenues. If I was wondering if I can get some clarification on that. If you look at 2019 numbers, the revenue took spiral [Indecipherable] so I’m just wondering if you’re implying a return to that level or is it more strategic with the growth.

Richard Jackson — President and Chief Executive Officer

We have a little bit of static on your line. Could you repeat the question?

Maria Ripps — Canaccord Genuity — Analyst

For sure. Can you hear me better this way?

Richard Jackson — President and Chief Executive Officer

That’s much better. Thank you.

Maria Ripps — Canaccord Genuity — Analyst

Okay, fantastic. No, just wondering, regarding your 2022 outlook. So, you’re suggesting that a return to pre-pandemic revenue levels and I was wondering, just looking at the 2019, the revenue through far below the current levels. So I’m wondering if you’re implying a return to that level or is it more to do with growth?

Richard Jackson — President and Chief Executive Officer

Yeah, I mean I would say that it’s more to do with growth and I think the position we’re taking on our topline revenue right now is, and as I mentioned earlier is really focusing in on healthy margins and a better profile of revenue from a margin perspective.

Maria Ripps — Canaccord Genuity — Analyst

Okay.

Richard Jackson — President and Chief Executive Officer

So really what we’re basically saying is pre-pandemic margins and the same level of growth in the business. But on the basis of intentional ways of going to market and really bringing in a healthier base of revenue versus doing the critical mass growth sort of providing a critical mass profile. If you know Spark, it has been in growth mode in the current strategy that we’re in today. And obviously in new markets like the US where we’ve basically gone into market on a critical mass basis, it’s really migrating closer to a better margin profile of our revenues. So that’s really what that implies. I hope that answers the question.

Maria Ripps — Canaccord Genuity — Analyst

No, for sure. And if I may ask follow-up questions regarding the margins, so for Q4, you obviously have some supply chain issues there within the results. I was wondering if you can give us some color on how long you expect those headwinds to persist?

Richard Jackson — President and Chief Executive Officer

Yeah, I mean I’ll let Richard Perri speak to this as well, but I would just say that we’re continuing to navigate through this inflation challenge and it’s not unlike most organizations right now supply chains are one, there’s disruption in terms of supply and availability supply. Two is the constant barrage of pricing structure and pricing increases that were being impacted by and we haven’t seen a full lightening up of that yet. So our intention right now is to continue to manage through that the best way we can in the best way to do that. Obviously it’s through pricing that through to the market. I don’t know Richard, if you want to expand on that at all.

Richard Perri — Executive Vice President and Chief Financial Officer

Yeah, I would just add that we continue to see higher costs for some of our key cost inputs, which is of course, tied to what is happening I would in the broader marketplace. We would anticipate that those will continue through the early part of 2022 and in response, we are aggressively sort of positioning price actions, introducing surcharges as well as sort of working with some of our suppliers and partners right on opportunities to manage the increase as moving forward and ensure that we are recovering, those cost increases from a pricing perspective.

Maria Ripps — Canaccord Genuity — Analyst

That’s great. And if I may, just a last question maybe like a bigger picture question. Now that the rate is behind you. Can you maybe help us understand what the use of those funds is going to be and where you see the ability to invest in growth.

Richard Perri — Executive Vice President and Chief Financial Officer

Yes, good question. So in terms of the rights offering and the proceeds from the rights offering, we absolutely look to reduce debt and in satisfying some of our outstanding vendor notes are to [Phonetic] obviously bolster and strengthen the balance sheet. And thirdly, was to earmark some of those dollars towards working capital to support the needs of the day-to-day operations and also to be able to execute on our 2022 operating plan. I think in the course of some of our prepared remarks, we updated on the work that is underway on our new ERP platform, so that will continue to be a focus through 2022, which really starts to sort of help us become a fully integrated business moving forward into 2023 and unlock some of the intrinsic value in the business.

Maria Ripps — Canaccord Genuity — Analyst

And that’s it, that’s all the questions for me. Thank you.

Richard Jackson — President and Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]