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Spark Energy (NASDAQ: SPKE ) Q3 2015 Earnings Conference Call November 12, 2015 11:00 AM ET Executives Andy Davis – Head of Investor Relations Nathan Kroeker – President and Chief Executive Officer Georganne Hodges – Chief Financial Officer Analysts Michael Gyure – Janney Montgomery Scott LLC Operator Good morning, ladies and gentlemen. Welcome to the Spark Energy, Inc. Third Quarter 2015 Earnings Conference Call. My name is Shannon, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, there will be 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 will be posted on Spark Energy, Inc’s website. I would now like to turn the conference over to Mr. Andy Davis, Head of Investor Relations for Spark Energy, Inc. Please go ahead. Andy Davis Good morning, and welcome to Spark Energy, Inc’s third quarter 2015 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 CFO, Georganne Hodges. 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 yesterday’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 reconciliations to the most directly comparable GAAP measures, please refer to yesterday’s earnings release. With that, I’ll turn the call over to Nathan Kroeker, our President and Chief Executive Officer. Nathan Kroeker Thank you, Andy. I’d like to welcome our shareholders and analysts to Spark’s third quarter 2015 conference call. I will make a few opening remarks about our operating results and then our Chief Financial Officer, Georganne Hodges, will provide some detail on the financial results. We will then conclude with questions from our analysts. Georganne will give you the financial details of our third quarter results shortly, but I will tell you that we are very pleased with our results. We saw enhanced margins in both our Retail Natural Gas and Retail Electricity segments during the quarter, as wholesale prices continue to decline. We also saw increased volumes in our Retail Electricity segment, primarily as a result of our CenStar Energy and Oasis Energy acquisitions. I will talk a little more about those acquisitions, which we closed in July in a moment. With the help of our two acquisitions, we saw our customer count increased 17% in the third quarter, ending the quarter with 357,000 customers or 401,000 RCEs. Our two acquisitions added 53,000 customers, or 105,000 RCEs. The performance of both our CenStar and Oasis acquisitions have exceeded our initial profitability expectations on a combined basis. We have already taken advantage of the access we now have to 20 new markets in additional brands in several ways. We’ve expanded our existing broker relationships, adding commercial customers in new markets and in our new brands. We’re seeing success with our alternative brand wingback strategies, and we’re leveraging our channel management expertise and vendor relationships thus far to launch campaigns in several of the CenStar and Oasis markets. From an integration perspective, everything is on track. Our accounting, treasury, risk management, load forecasting, and supply functions are fully integrated at this time. While it’s still early, we are very encouraged by what we are seeing from these two transactions. We continue to see improvements in customer attrition in the third quarter, as we focused on sales, quality, and call center improvements, achieving a 23% decrease in customer attrition quarter-over-quarter. During the third quarter, we renegotiated our mass-market vendor commission structure to more accurately correlate commission payments with lifetime customer value and improve overall sales quality. What we expect to see higher lifetime value customers as a result of this change, this realignment has resulted in a slowing of organic customer additions, at least, in the short-term. We expect this trend to continue into the fourth quarter. On September 14, we paid a quarterly cash dividend for the second quarter of $0.3625 per share. More recently on October 22, we announced that our third quarter dividend of $0.3625 per share will be paid on December 14. We expect to pay this quarterly dividend on a go-forward basis, and we expect 2015 adjusted EBITDA to exceed our planned 2015 dividends and all required distributions and tax payments. And I want to reiterate that we do not anticipate any changes to the dividend policy. Thanks for your attention. And with that, I will now turn the call over to Georganne Hodges, our Chief Financial Officer for her financial review Georganne? Georganne Hodges Thanks, Nathan. Strong unit margins particularly in our electricity business, contributions from our acquisitions and lower organic customer acquisition spending resulted in adjusted EBITDA of $5.6 million for the third quarter. This represents a $10 million increase over our loss of $4.4 million for the third quarter of 2014. Retail gross margin was $26.7 million compared to $14.6 million in 2014. This $12 million increase is primarily attributable to expanded electricity unit margins and increased electricity volume. The continued low commodity prices led to favorable supply costs. These favorable supply costs coupled with our ability to optimize margins were key drivers to our elevated unit margins in the quarter. Additionally, our adjusted EBITDA and retail gross margins benefited from expanded spot margins from our acquisitions. G&A expenses for the quarter were $15.5 million, compared to $10.6 million in 2014. This increase is primarily due to increased billing and other variable cost associated with our customer portfolio, as well as increased cost associated with our acquisitions. Bad debt expense for the quarter remained flat at $1.9 million. Customer acquisition spending for the quarter was $5.8 million compared to $8.7 million spent in the third quarter of 2014. This decrease was primarily due to our decreased organic sales in the quarter, as well as recent changes to our residential vendor commission payment structure, which Nathan spoke about. Approximately 113,000 new customers came up less than a [ph] quarter, which includes 53,000 from our acquisitions. Our net income for the third quarter was $5.9 million compared to 400,000 in 2014. Our basic and diluted earnings per share for the quarter were $0.42 and $0.31 respectively, I’ll point out that our diluted earnings per share was impacted by the convertible subordinated debt with an affiliate of our founder. As of today, the balance of our working capital line is $26 million and the balance of our acquisition line is $21.2 million. As you look at our balance sheet, you will notice a few new line items this quarter, which are results of the acquisitions of CenStar Energy and Oasis Energy. Acquired customer intangibles with current and non-current, trademark, and goodwill are the result of business combination accounting. Please refer to the acquisitions footnote in our 10-Q for an extended commentary on the valuation of these assets. That concludes my prepared remarks. I’ll now turn the call over to Nathan. Nathan Kroeker Thanks, Georganne. In summary, I would just like to say that we are very pleased with the strong and adjusted EBITDA and retail gross margin we realized in the third quarter, which historically is a down quarter for us due to the seasonality of our business. As we move through the fourth quarter, we continue to see strong margins underpinned by lower commodity prices. We will now open the line up for questions from our analysts. Operator? Question-and-Answer Session Operator Thank you. [Operator Instructions] Our first question is from Mike Gyure with Janney. Your may begin. Michael Gyure Hi, thanks for taking my question. How should we think about your customer acquisition costs spending for, let’s say, the remainder of the fourth quarter? And then maybe directionally, as you move into 2016, whether that would be above or below, what’s your plan on spending for 2015? Nathan Kroeker I think what you’ll see in the fourth quarter, first of all, Mike, it’s good to hear your voice. This is Nathan. I think, what you’ll see in the fourth quarter is the slowdown that we experienced in the third quarter will continue through the fourth quarter. Some of the changes that I alluded to earlier in terms of improving sales quality have a natural effect of slowing sales down a little bit. But what you’re going to see is, you’re going to see us add better quality, higher volume customers that that are going to be more valuable to us in the long-term. My expectation is that those sales will pick up again in the first-half of 2016. It takes about three to six months for a change like this to kind of work its way through the system. In terms of our overall organic customer spend next year it’s probably slightly below what we spent in 2015. But I think we’re going to see as great as much value with the spend, as we did in 2015. And, obviously, all of that is predicated on what type of M&A opportunities are out there. If we decide that we find some excellent M&A opportunities, book purchases, or tuck-ins, we may divert some of those dollars to M&A throughout the year, as we optimize the growth strategy. Michael Gyure Great. And maybe a follow-up on that, as far as the customer acquisition spending, would you envision that being in pretty much the same geographies and locations that you’re in today as opposed to, I would say, new markets? Nathan Kroeker We’ve got 20 new markets between CenStar and Oasis, and we’re certainly incorporating that into the growth strategy. But, I think, we’re in about 66 markets today. We do not have to add new markets in order to realize organic growth. I think the vast majority of what we’re going to do next year will be within those 66 markets, yes. Michael Gyure Great. Thanks. Operator Thank you. [Operator Instructions] We have no further questions at this time. I’d like to turn the call back over to Nathan Kroeker for closing remarks. Nathan Kroeker All right. I’d just like to thank everybody again for participating in today’s call, and we look forward to seeing some of you in the near future. Have a great day. Operator Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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