NRG Energy, Inc.

Q1 2023 Earnings Conference Call


spk01: insights that we are uniquely able to generate regarding uses of energy in their home, for their EVs, and through their solar solutions. While we have only owned Vivint for one month, I want to provide a full first quarter statistics for comparison. Vivint grew customers by 9% and revenue by 14% compared to the same period last year. Like NRG, Vivint continues to experience strong retention and stable bad debt. The company was also busy in the quarter enhancing their products and introducing innovative offerings, two of which I want to highlight. First, the Vivint app now includes solar production data, so our customers can actively monitor their energy conservation and cost savings. They introduce a do-it-yourself product called Vivint Basics that makes it easy for owners and renters alike to get a starter system for less than $300. Having a viable DIY and single-point solutions is key to our strategy of creating more entry points for customers that we can later upgrade to our fully integrated smart home offerings. Now, with respect to synergies, we are reaffirming our cost and growth targets for both 2023 and the full plan. Cost synergies are primarily the result of the combination of two public companies and are expected to total $100 million in recurring run rate free cash flow before growth. Growth synergies of $300 million will be achieved through targeted cross-sell, Vivint organic growth and sales channel optimization. In total, we expect $400 million of recurring synergies to be achieved over the next three years. The synergy and integration plan is now fully underway and is led by the same team responsible for the transformation plan and the direct energy integration. On the right-hand side of the slide, you will see the scorecard for Vivint. We have now introduced 2023 growth targets and cost to achieve. We plan to update this scorecard in the coming quarters to provide further transparency and keep you informed on our progress. I know I have said this before, but we are very excited about the opportunities for the combined company moving forward. Vivint brings a complementary business that expands our customer network by nearly 40% and add smart home technology and infrastructure to strengthen our platform. Together, we create a leading essential home services provider in North America, serving a network of nearly 7.5 million customers, and the acquisition also accelerates the plan we laid out at our 2021 Investor Day and creates the opportunity to deliver significantly shareholder value. During the first three years of integration, this value will be created through both cost and growth synergies, which are laid out on the slide. In the medium and long term, I see even more opportunity to create value through growing customer count nationally, increasing the average number of solutions per customer, and materially extending the customer lifetime. So with that, I will pass it over to Alberto for the financial review.
spk00: Thank you, Maurizio. Energy experienced a good start to the year and delivered strong results during milder than expected weather conditions. We entered the winter season seeing high forward gas and power curves. Moderate weather and relatively geopolitical stability translated into much lower power volumes in Texas and in the East and much lower actual prices in most markets, with the exception of California. Additionally, energy liquidity has significantly improved due to lower collateral requirements after the winter season and the proactive management of our collateral utilization. We also completed the acquisition of Vivint Smart Home and have included Vivint March Performance in our financial statement. Before we continue, let me provide a little bit more detail about Vivint. At close, the EBITDA metric for the two companies was not identical. Therefore, we have harmonized it. I will go into more detail in the guidance section, but please note that all the figures, including prior here, reflect a consistent EBITDA across segments. Let's go now to the first quarter results. Energy consolidated adjusted EBITDA of $647 million is $137 million higher than the first quarter of 2022. As you can see in the chart at the bottom of the page, legacy energy results include the anticipated negative impact of asset sales and retirements in the second quarter of 2022, totaling $30 million. On a like-to-like basis, legacy energy EBITDA increased by approximately 67 million. Last year, transitory items including the limestone Unit 1 extended outage, coal and chemical constraints, and the temporary spike in ancillary costs impacted our profitability. Our Q1 2023 results show that these items have been fully recovered. We have also included VBINT March results in our first quarter financials, which contributed $73 million of additional EBITDA. The remaining $27 million increase is related to EBITDA harmonization. Going now to segment performance on the top left. Across the different geographical region, we have in general experienced an expansion of unit margins that have been mitigated by lower volumes and usage. Starting with Texas, adjusting EBITDA increased by 43 million versus prior year, and gross margin was 120 million higher. Opportunistic planned outages, insurance premium and pension cost increases, and the return of debt to historical levels contributed to an increase in operating expenses compared to the first quarter of 2022. In the West and services and other segments, adjusted EBITDA declined $6 million versus last year, driven primarily by asset sales and retirement. Similar to Texas, gross margin increased year over year. A lower power supply cost more than offset the negative impact of a volume decline. As said, we have included much results in our Q1 EBITDA, and these results were better than prior year on a comparable basis. While we are not reporting full Q1 quarterly results for Vivid, we are very encouraged by the results. On a standalone basis, all major KPI, including profitability metrics, have improved compared to the prior year. We have began integration across selling activities, and targets have been confirmed. and are expected to be realized as planned. Energy free cash flow before growth was $203 million, in line with our expectation, but impacted by mild temperatures that drove power purchases up and power generation down, thus increasing fuel inventory levels. We have identified initiatives to reduce inventories, but expect to defer any action until after the summer season. On energy balance sheet, cash collateral received by counterparties of the market of the derivative portfolio and the account receivable and the account payables are all trending down. This is an inversion of the trend that we have seen in the last six quarters. Let's move now to slide 10 to discuss the guidance for 2023. As mentioned, we are providing additional detail for adjusted EBITDA. Prior to the acquisition, energy and dividend accounted for items within adjusted EBITDA differently, and we have now harmonized what will be included in this metric going forward. Capitalized costs can be split into acquisition costs and fulfillment costs. The amortization of capital customer acquisition costs, mostly sales commission paid by both NRG and Vivint, will be excluded from adjusted EBITDA. The amortization of capitalized fulfillment costs, mostly Variant product and installation expenses will no longer be excluded from adjusted EBITDA. Stock-based compensation expenses will also be excluded from adjusted EBITDA. There are no impacts to free cash flow. Moving to the work at the bottom of the page, legacy energy 2023 guidance is substantially unchanged compared to our Q3 earning calls. The only exception is a $120 million increase due to EBITDA harmonization. For Vivint, guidance includes pro forma 2022 EBITDA unchanged from December. This has been prorated for 10 months of ownership. We have added $65 million in expected 2023 synergies and growth, minus $35 million from the EBITDA harmonization. Overall, the net impact on 2023 is positive, and we have updated guidance accordingly. Freakish flow before guidance is simply the sum of the legacy energy guidance and the 110 million pro forma freakish flow number from December 2022. This has increased by the growth contribution and prorated for 10 months. As a reminder, the original 2022 pro forma freakish flow before growth for vivi included the freakish flow before growth, the impact of synergies, and the additional interest on the acquisition debt. Lastly, given the addition of EV into our guidance, we have incorporated a slightly higher range of plus or minus 120 million from the guidance midpoint on a consolidated basis. Now, turning to slide 11 for a brief update on our 2023 capital allocations. Moving left to right with blue shading indicating updates, 2023 excess cash equals $1,999,000,000. This includes roughly $250,000,000 of excess cash for 2022, including $209,000,000 in proceeds from the sale of Astoria. And the full year free cash flow below growth of $1,740,000,000. inclusive of energy standard on guidance of $1,620,000,000 plus $120,000,000 for VIVINT. This also capture the expected impact of the additional debt finance. There is no change to the $500,000,000 target of leverage neutral net inflow from asset sales. Moving on the cash utilized for VIVINT, this includes the additional requirement of $100,000,000 in the cash minimum balance about $250 million of energy cash utilization, net of dividend cash, $145 million in dividend integration expenses, and $900 million of expected debt reduction. Next, we have the remuneration of our equity holders and the dividends to the preferred issued in March. The allocation of cash to investments totaled about $190 million, including $90 million for growth initiatives. Now, moving to the far right bar, we expect a total of $506 million available for future allocation. This will fund the remaining share repurchase program upon full visibility of achieving our 2023 target credit metrics, which are detailed in the next slide. Quickly turning to slide 12, we remain committed to a strong balance sheet. This slide has not substantially changed since our last update. We just updated partially the – we updated the higher energy EBITDA, partially mitigated by lower adjustment, and the slightly lower debt in EBIT. We are focused on achieving our 2023 target credit metrics, which include a leverage ratio approximately 3.2 times net debt adjusted EBITDA. and we are on track for investment-grade credit metrics by late 2025 and 2026 through both debt reduction and growth. Back to you, Maurizio.
spk01: Thank you, Alberto. Turning to slide 14, I want to provide a few closing thoughts on today's presentation. We deliver strong results for the first quarter and are well positioned for the balance of the year. With the Vivint acquisition complete, we turn our focus to integration, growth, and synergies. Our efforts are well underway, and it is now all about execution. I look forward to providing you a comprehensive update on our home business and strategy at our upcoming investment. So with that, I want to thank you for your time and interest in NRG. Sean, we're now ready to open the lines for questions.
spk03: Thank you. And at this time, we will conduct the question and answer session. As a reminder to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced to withdraw your question. Please press star 1 1 again to withdraw the question. Please stand by while we compile the QA roster. And our first question comes from Julian Dumoulin-Smith with Bank of America.
spk02: Hey, good morning, team. Thank you guys very much for the time. Appreciate it. Nicely done here. Hey, good morning, Julian. Good morning, Mauricio. Pleasure. Just wanted to follow up on the synergy scorecard here and just thinking through Vivint here. I mean, you're laying out, you've got the 300 and 100 in revenue and cost synergies, respectively. How do you think about that translating back to consolidated EBITDA for Vivint here again? And or how does that fit with the 12% to 15% FCF targets as well? Just want to try to tie it out at least through 25 as best you can today, if we can be a little bit more specific.
spk01: Yes. So, Julian, I'm assuming that you're talking about the target that we provide on a free cash flow per share that supports a 15% for 20% growth and When you look at the EBITDA and free cash flow generation capability of NRG and then you lay on top of that the $400 million of cost synergies and revenue synergies, we feel very confident that we're going to be on path to achieve that 15% to 20% free cash flow per share return. As a matter of fact, the acquisition of Vivint now gives us a little bit more control on achieving that. Remember, before we have tremendous financial flexibility and we generate excess cash well beyond what the traditional energy needed. That we have used to reduce the denominator. the one variable that we cannot control there is at the price that we can buy back our stock. Now with the Vivint engine and the opportunity to create these $400 million of incremental value, we just increase the tools that we have to increase the numerator and put more in control, you know, the achievement of this, you know, $12.50 that we have laid out for 2025. So I feel very comfortable that with what we laid out today and, you know, and in previous call that we are on track to achieving that, you know, $12.50 a share by 2025. Right. Sorry. Yeah, clearly 15 to 20.
spk02: And more to the point, as you think about layering on additional assumptions, rolling out potentially updated guidance with this analyst day, any initial thoughts on what else can be done with the Vivint platform to continue to grow it? I'll note that the commentary here at the outset is really focused on synergies. You talk about revenue and growth here. You know, in the first couple of years, how do you think about compounding that beyond the 25 period that you're providing here today and maybe any initial thoughts of how far you can go at this prospective analyst deck.
spk01: Right. Well, the first thing that I will say is when I think about the Vivint business, there are three big leverages that we're going to be focused on. The Vivint business had high leverage. It has a high acquisition cost, and there was also an opportunity on the consumer financing side. So these are three specific buckets that we're focused on optimizing, and for me, it creates an opportunity for value creation. Now, right now, we're focused on optimizing the seven and a half million network customers that we have. We have opened the lines of communication across our sales channels. We're going to continue to optimize them. We have introduced bundling we now are doing cross-sell between our call centers and our digital assets we are testing in the market bundle so that is the focus right now when I think about 2025 and beyond it's really about how do we bring the energy experience that we currently have with the smart home experience that we have and we create a best-in-class product for customers that is going to drive the growth on 2025 and beyond. This is something that we're going to be talking more about on our investor day on how this vision comes together with the two offerings that we have, one in energy, one in a smart home. So we will make it more tangible and real for all our investors at the upcoming investor day. Wonderful. All right. I'll leave it there. Thank you guys very much. Have a great day. Thank you, Julian.
spk03: At this time, I would like to turn it back to Mauricio for closing comments.
spk01: Okay. Well, thank you. Thank you for your interest in NRG. I look forward to, you know, hosting all of you in our upcoming investor day that we should have in early summer where, you know, we're going to be talking about The smart home strategy, we're going to provide additional details on our growth plan and provide you more transparency on our key performance indicators that will help you better model the business. So with that, I want to thank you for your interest and look forward to speaking with you soon. Thank you.
spk03: Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program.

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