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Spark Energy’s (SPKE) CEO Nathan Kroeker on Q2 2015 Results – Earnings Call Transcript

Spark Energy (NASDAQ: SPKE ) Q2 2015 Earnings Conference Call August 13, 2015, 11:00 AM ET Executives Andy Davis – Head of Investor Relations Nathan Kroeker – Director, President and Chief Executive Officer Georganne Hodges – Chief Financial Officer Analysts Selman Akyol – Stifel Operator Good morning, ladies and gentlemen. Welcome to the Spark Energy, Inc.’s second quarter 2015 earnings conference call. My name is Shannon, and I’ll be your operator for today. [Operator Instructions] 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. second 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 second quarter 2015 conference call. I will make a few opening remarks about our operating results and the two acquisitions we closed recently. And then our Chief Financial Officer, Georganne Hodges, will provide some detail on the financial results. We will then conclude with questions from analysts. Georganne will give you the financial details of our second quarter results in a moment, but I will tell you that we are very pleased with these results. We saw enhanced unit margins in both our Retail Natural Gas and Retail Electricity segments during the second quarter. This was a result of margin expansion, coupled with declining wholesale prices and our ability to capture higher margins on our variable book. In terms of customer count, we saw organic growth of 4% in the second quarter, driven by strong success with our electric sales campaigns in PPL and NSTAR as well as consumers in PG&E on the natural gas side and dual fuel offerings in [indiscernible]. I will discuss our two recent acquisitions in a moment, but I will say that I’m very excited about the addition of 20 new markets from these acquisitions. In the first few weeks, we have launched several dual fuel products where, for example, we are now selling Oasis electricity combined with Spark gas in the same customer sales experience. In addition, we are in the process of broadening our broker relationships, providing brokers new electric and gas markets, leveraging our suite of brand. As we signaled last quarter, we continued to see the heightened level of attrition in Southern California, as a result of our more aggressive collection efforts in that market. In line with our expectations with the closing of the Entrust acquisition, we saw higher attrition as a result of required customer communications, as those customers came on flow in the second quarter. We have taken a series of steps, aimed at reducing attrition, and we are already seeing success. If you dig into the second quarter, attrition was at its highest point in April, and has been trending down through June, and we’re seeing this trend continue in the early part of the third quarter. While I expect our attrition to continue to improve over the next few quarters, I don’t expect it to return to the levels of a few years ago, as the composition of our business has shifted overtime at higher-margin lower-volume customers that tend to experience higher attrition levels. All of this attrition is factored into our pricing strategies and our customer likes on value analysis. On July 8, we acquired CenStar Energy, a retail energy company with approximately 75,000 RCEs across 20 utilities in New York, New Jersey and Ohio. CenStar provides us with the access to 13 new utilities service territories as well as several new products to support our continued organic growth efforts. Censtar has a strong brand as well as a number of broker infinity relationships that we intend to leverage, as we grow this business. On July 31, we completed our Oasis Energy acquisition. Oasis operates in six states across 18 utilities and has approximately 40,000 natural gas and electricity customers. Oasis provides the seven new utilities, providing additional organic growth opportunities for Spark. As discussed on the last call, we intend to maintain the Oasis brand in sales and marketing operations, given their ability to add customers at a competitive cost, and realize electricity unit margin that are significantly higher than our historical margins, while only experiencing slightly higher attrition rates. We expect both businesses to be accretive through adjusted EBITDA in 2015, inclusive of integration costs expected in the third and fourth quarters. On June 15, we paid a quarterly cash dividend for the first quarter of $0.3625 per share. More recently, on July 23, we announced that our second quarter dividend of $0.3625 per share will be paid on September 14. We expect to pay this quarterly dividend on a go-forward basis. And as we have previously communicated, we expect 2015 adjusted EBITDA to exceed our planned 2015 dividends and all required distributions and tax payments. And now with our two recent acquisitions, our adjusted EBITDA should be further increased by a meaningful amount. And I want to reiterate that management does not anticipate any changes to the dividend policy in 2015. Thanks for your attention. And with that, I will now turn the call over to Georganne Hodges, our Chief Financial Officer, for more financial review. Georganne? Georganne Hodges Thank you, Nathan. Strong unit margins underpinned by lower supply costs across several of our market led to an adjusted EBITDA of $4.6 million for the second quarter. This compared to $1.4 million for the second quarter of 2014. Retail gross margin was $23.1 million compared to $17.9 million in 2014. This increase was driven by increased unit margins across both our retail natural gas and electricity segments. Although, customer account was 17% higher in the second quarter of 2015 as compared to 2014, our gas volumes were slightly lower reflecting a shift in our overall geographic mix. G&A expenses for the quarter were $13 million compared to $9.7 million in 2014. This increase is primarily due to increased billing and other variable costs associated with customer account growth and increased costs associated with being a public company. Customer acquisition spending for the quarter was $6.2 million compared to $6.4 million spent in the second quarter of ’14. Approximately, 82,000 new customers came on flow in the quarter, which includes approximately 25,000 from our Entrust acquisition, which we closed in the first quarter. Our net income for the quarter was $4.6 million compared to $200,000 in 2014. Our EPS for the quarter was $0.23, which was positively impacted $0.02 by an unrealized gain on our hedges of future supply positions. In the second quarter, we paid down our working capital facility by $11 million, ending the quarter with a loan balance of $9 million. On July 8, we amended and restated our senior credit facility to include a $25 million secured revolving line of credit to be used specifically for the financing of permitted acquisitions, along with our revolving working capital facility of $60 million. As of today, the loan balance on the revolving acquisition tranche is $21.2 million, while the balance on the working capital facility is $20.3 million. I would point out that the balance on the working capital facility reflects the purchase of working capital for both CenStar and the Oasis acquisitions. Additionally, on July 8 and July 31, in conjunction with the closing of these acquisitions, we executed a total of $7.1 million of convertible subordinated debt with an affiliate of our founder. That concludes my prepared remarks. I’ll now turn the call back over to Nathan. Nathan Kroeker Thanks, Georganne. In summary, we are very pleased with the strong adjusted EBITDA and retail gross margin we realized in the second quarter. As we move through the third quarter, we are very focused on the integration of our two new acquisitions, taking advantage of the new market opportunities for organic customer acquisitions. We will now open up the line for questions from our analysts. Operator? Question-and-Answer Session Operator [Operator Instructions] Our first question comes from Selman Akyol with Stifel. Selman Akyol As we sit there and look at the gross margin, and I know represented in your early comments that you had, I guess, favorable supply contracts on as well. How long do those — is the gross margin due to the acquisitions, higher selling prices? Is it due more to the favorable acquisition prices of energy? And if so, how long do those contracts run for? Just trying to get a feel for how durable those margins are? Nathan Kroeker Let me make sure I understand your question, Selman. So you’re asking how much of it is due to us increasing revenue and how much of it is due to us having lower costs and how long can we expect that to continue for? Selman Akyol That’s a very good summary of it, yes. Nathan Kroeker It’s really a combination of both. So on the supply side, we saw commodity prices coming down through the quarter. And when we see commodity prices coming down like that, it gives us the opportunity to expand our unit margins in that period of time. Similarly, we do have a pretty significant portion of our book that’s on variable price contracts. With milder weather in the quarters, smaller builds for consumers, we were able to have slightly higher variable margins, raise the revenue on those customers. So it’s really a combination of both. I don’t think it has much to do with the supply hedges out into the future as it is the situation in the quarter. That said, I mean I think we’ve proven that we can achieve higher unit margins than what we had last year, and we expect to continue to manage the business in a similar way going forward. So I definitely think you’re going to see higher unit margins even through the balance of the year than we had last year. Selman Akyol And then, can you talk about attrition within the quarter? Georganne Hodges We saw attrition numbers — you saw attrition numbers, they were higher than we would like. Within that, it has been trending down throughout the second quarter. And as I said a moment ago, I mean also trend it down even in the first part of the third quarter. Full quarter number was 7.7. Our June attrition, on a standalone basis for the month of June, was actually 6.8, and we see that trend continuing in July. I don’t necessarily see attrition getting all the way back down to the historical levels that we had a couple of years ago, because the makeup of our customer book has changed, really shifted a lot of our focus to higher margin, lower volume customers. And those customers tend to have inherently higher attrition. But as I also said a moment ago, I mean all of that attrition is factored into our pricing decisions, our pricing models and our lifetime value strategies. So I think we have done a pretty good job of managing it. Selman Akyol And then last one from me, just on sort of the acquisition outlook. So are you seeing lot of opportunities out there? Nathan Kroeker Absolutely, I mean I will say the management team is very focused on integrating the two deals we just did in July. But we do have a founder that’s very committed to helping us grow through M&A, willing to continue to leverage his balance sheet in order to do that. So we’re absolutely continuing to look at additional opportunities. Whether there would be something we do directly in Spark or whether it’s something that we do with the parent company and then leverage subordinated debt in order to drop those down at a later date, but we’re willing to look at pretty much anything that we think is on strategy for us. Operator We have no further questions at this time. I would now like to turn the call back over to Nathan Kroeker for closing remarks. End of Q&A Nathan Kroeker Thanks everybody for participating in today’s call. And we look forward to talking to you soon. Operator Ladies and gentlemen, this concludes today’s conference. Thanks for your participation and have a wonderful day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. 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Stocks And ETFs To Reflect Top Sales Growth

The Q2 earnings season is now about to end with 83.1% of the S&P 500 companies having reported already. The overall picture was not quite bright as growth for both earnings and revenues was negative in the quarter. Earnings fell 2.4% year over year while weakness in revenues was more acute with a 4.1% annual rate of decline (as per the Zacks Earning Trends issued on August, 2015). Companies found it hard to even match the already conservative top-line estimates. When everything points toward utter sluggishness, investors must be looking for specific stocks or sectors that somehow managed to outperform, snapping the downing trend. Though the entire season is all about earnings, how about looking at sales more precisely? After all, sales are harder to influence in an income statement than earnings. A company can end up scoring decent earnings by adopting cost-cutting or refinancing its credit facility which in turn lowers interest expenses. But investors should note that these activities do not represent the companies’ prime purpose – sales generation. So, it appears more analytical to assess through a company’s sales per share rather than earnings per share. This is truer given the fact that it is harder for a company to shape up revenue figures by some other measure. MarketWatch recently highlighted 10 S&P 500 companies that exhibited the speediest sales growth in the last reported quarter. To do so, the author calculated sales per share of the latest quarter and then measured its rate of growth from the sales per share in the year-ago quarter. While this approach surely presents investors a set of stocks to keep a close eye on, they can also consider the ETF or basket approach for risk minimization purpose. For that, we highlight ETFs considerably invested in those stocks. Housing D.R. Horton (NYSE: DHI ) , one of the biggest and well-known homebuilders in the nation, topped the list provided by MarketWatch having recorded 37% growth in sales per share. This Zacks Rank #2 (Buy) stock has Growth and Momentum Style Score of ‘A’. On the other hand, Lennar Corporation (NYSE: LEN ) a Zacks Rank #1 (Strong Buy) firm in the Residential Construction space, recorded 30% sales per share growth in its most recent quarter and occupied the sixth spot. Both stocks have considerable exposure of at least 11% in the iShares U.S. Home Construction ETF (NYSEARCA: ITB ) . Another housing ETF SPDR Homebuilders ETF (NYSEARCA: XHB ) also invests over 3% in each stock. In any case, the housing sector shaped up well in recent months. The Key constituents’ sturdy sales performance makes these funds worth noting. Both funds have a Zacks ETF Rank #3 (Hold). Health Care Who does not know about the robust health of the health care stocks and funds? Merger and acquisition frenzy, encouraging industry fundamentals and promising new drugs sent the sector on cloud nine these days. Quite expectedly, stocks from health care sectors will hit the list of ‘fastest sales growth’. The Zacks Rank #1 Gilead Sciences (NASDAQ: GILD ) put up 36% sales growth. The stock, with Growth and Value Style Scores of ‘B’ has hefty shares in the Market Vectors Biotech ETF (NYSEARCA: BBH ) and the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB ) with about 16% and 8%, respectively. Though biotech stocks and ETFs recently fell out of investors’ favor possibly on overvaluation concerns, the space should bounce back after the correction. BBH has a Zacks ETF Rank #1 while IBB carries a Zacks ETF Rank #2. Technology Though the tech sector was on a roller-coaster ride this earnings season and some major tech companies were badly beaten down post earnings, much of the downside was largely the result of lofty expectations. At least for the tech monster Apple (NASDAQ: AAPL ) , the scenario looked like this. The company had some issues with some of its key products and their sales momentum, but still saw sales per share growth of 36%. This Zacks Rank #2 (Buy) stock has compelling indicators of Growth and Value scores of ‘A’ and Momentum score of ‘B’. Investors can easily play this stock via the iShares Dow Jones US Technology ETF (NYSEARCA: IYW ) , the Technology Select Sector SPDR ETF (NYSEARCA: XLK ) and the Vanguard Information Technology ETF (NYSEARCA: VGT ) . All three are Buy rated. Link to the original post on Zacks.com

Canaries In The Investment Mine Have Stopped Serenading

In an effort to boost the U.S. economy, the central bank of the United States has used higher stock prices as a weapon of perceived wealth creation. Here’s the downside. When you implicitly and explicitly suggest that rates will remain lower for longer, people begin to count on risky assets being safer than they are. With all four of the classic canaries unable to serenade, the historical probability of a sharp correction for the broader U.S. market increases significantly. Eleven months ago, I talked about four classic canaries in the investment mines: (1) commodities, (2) high yield bonds, (3) small-cap stocks, (4) emerging market stocks. I explained that when all four of those canaries stop singing, riskier ETFs tend to break down. Indeed, in September of 2014, commodities were tanking, high-yield bonds were plunging, small-cap stocks were faltering and emerging market stocks were plummeting. The canaries were losing their voices. Not surprisingly, the broader U.S. markets eventually followed suit in rather dramatic fashion. In fact, everyone’s favorite large-cap benchmark (S&P 500) had nearly pulled back 10% from a record high. Then came the 16th of October. Stocks had coughed up yet another 1% through mid-day. With the broad-market benchmark pushing the 10% correction level, the president of the St. Louis Fed, James Bullard, suggested that his colleagues at the U.S. Federal Reserve could always rethink the use of additional bond buying with an extension of quantitative easing (QE). And at that time, Bullard talked about worldwide economic uncertainty being a reason for continuing “QE3.” Here’s what happened next: Today, the “Bullard Bounce” still reverberates off the walls and ceilings of the New York Stock Exchange. Why? Investors believe the Fed is willing to do whatever it takes to preserve higher stock prices. Keep in mind, in an effort to boost the U.S. economy, the central bank of the United States has used higher stock prices as a weapon of perceived wealth creation. When you pressure investors to take on risks that they would not normally have taken by pushing interest rates to ‘rarely-before-seen’ lows – and when you entice consumers to finance gratification through credit rather than through savings – asset prices rise precipitously. Higher home prices and higher stock prices make people feel wealthier. Here’s the downside. When you implicitly and explicitly suggest that rates will remain lower for longer, people begin to count on risky assets being safer than they are; similarly, the size of debts can become some so large that those who trusted the policy makers lose the ability to service the debt (let alone pay it back) when borrowing costs go up. Now let us tie together last year’s four classic canaries with the subsequent Bullard bounce and today’s financial markets. The PowerShares DB Commodity Index Tracking ETF (NYSEARCA: DBC ) has accelerated its decline since July and currently seeks depths that haven’t been seen since the heart of the Great Recession. That’s one canary that cannot sing. Meanwhile, high yield bonds via the SPDR Barclays Capital High Yield Bond ETF (NYSEARCA: JNK ) is accelerating its decline that began in June. Canary #2 has a bone its throat. Circumstances are not much better for small-cap stocks and emerging market stocks. The iShares Russell 2000 ETF (NYSEARCA: IWM ) sports a P/E of 20.6 according to Morningstar. It has fallen 6.3% from its late June pinnacle and sits slightly below its long-term 200-day moving average. In another words, Canary Numero 3 is having difficulty vocalizing. The Vanguard FTSE Emerging Markets ETF (NYSEARCA: VWO ) may provide value-du-jour with is P/E of 14, yet China’s recent currency devaluation and Russia’s oil price losses make it difficult for investors to see a forest for the trees. After all, VWO is sitting near 52-week lows and has been in a steep downtrend since May. (The fourth of the four canaries isn’t singing.) With all four of the classic canaries unable to serenade, the historical probability of a sharp correction for the broader U.S. market increases significantly. What’s more, just like the September-October pullback of 2014, market internals have been deteriorating at a noteworthy pace, whether one is looking at waning breadth of bullish stock participation or widening credit spreads between investment grade and higher yielding corporates/junk corporates. It follows that a sell-off not unlike the one that occurred in September-October of 2014 is extremely likely to transpire here in 2015. However, there are several differences this time around. For one thing, revenues have declined for two consecutive quarters, making valuations even more questionable than in 2014. In a similar vein, earnings have gone flat. Historically, stocks tend to fade when corporations are less capable of producing top-line and bottom-line results (as opposed to merely beating the analyst estimates). What’s more, this time around, there’s less certainty of the Federal Reserve defending stocks at the 10% correction level. Granted, Bullard employed a “do whatever it takes” strategy to send stocks skyrocketing last year by bringing up global economic uncertainty. It would be extremely easy for the Fed to use an excuse that economic weakness in Europe, Asia, Australia, Latin America – pretty much everywhere – requires that they tighten at a sloth’s pace. For example, they raise rates at one-eight of a point rather than one-quarter, or they execute a one-n-done quarter-point for 3-6 months. That would likely encourage risk assets to get back on track. Nevertheless, until there is clarity on Fed policy, all of the signs point to “risk-off” outperforming “risk-on.” Downside risks remain elevated until the Federal Reserve shines light on its game plan going forward. Even if the path for tightening is described as ultra-slow and measured, investors will need to weigh just how much the higher costs of borrowing might adversely impact the cost of debt servicing for corporations; that is, we may see further erosion of profitability from an earnings picture that is already flat. People, companies as well as countries tend to forget that debt is still debt. If the overall cost of servicing debt is lowered through rate games, and the debts are increased because families/corporations/nations are taking the worm on the fish hook, it does not mean that the hook itself won’t cause severe damage or death. Again, non-financial corporations are more leveraged at 37% than they were in 2007 at 34%. Higher borrowing costs from the U.S. Federal Reserve? That’s going to be more than an inconvenient challenge. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.