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spk02: Greetings and welcome to the SPARC Power Corporation investor call and webcast. At this time all participants are in a listen only mode and a question and answer session will follow the formal presentation. If you would like to ask a question during the presentation please click on the ask question box on the left side of your screen. Type in your question and hit submit. Please note this conference is being recorded. I will now turn the conference over to your host Mr. Richard Perry. Sir, you may proceed.
spk01: Thank you. Good morning. Welcome to our 2023 first quarter conference call. I am joined today by Spark Power's president and CEO, Richard Jackson. Rich will begin the morning with remarks on Q1 business highlights and a progress update on key strategic initiatives related to the rollout of our new three-year strategy. I will follow with a financial review of the first quarter, and then we will open up the call for Q&A. 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 CDAR.com. Further, these forward-looking statements are made as of the date of this call. 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 SPARC's President and CEO, Rich Jackson, for his opening comments.
spk03: Thanks, Richard. Good morning, and thank you for taking the time to join us this morning. In Q1, we launched Let's Grow Better, our new three-year strategy for 2023 to 2025. This was launched throughout our organization. The first wave of initiatives had focused on the new go-to-market strategy as well as maturing Sparks US operations. This strategy is designed to drive intentional growth with the goal of creating sustainable and long-term value for shareholders as a fully integrated platform company. I'm very proud of those who took a lead in the strategy development and grateful for our employees who are working to bring this strategic mission to life. A main characteristic of our Let's Grow Better strategy is in fact growing better. This requires our company to become more targeted in our approach to the addressable market. As Spark transitions out of the founder entrepreneurial stage of growth as a platform company, we anticipate a heavy focus on revenue and margin quality and less growth for the sake of growth. This intentional approach will take time through the strategic cycle as we execute on refreshing the mix of business and the markets we serve. While we naturally see a path with market tailwinds providing for continued organic growth, We also anticipate our revenue growth to become more modest during the shift, while at the same time improving our gross margins and scaling of our ST&A costs. We have already begun to experience the shift in revenue mix in the business starting with a reduction in larger scale fixed price work augmented with more time and material and smaller work order sizes, more conducive to what we do as a local service provider in the space. We have experienced growth in our U.S. solar operations and maintenance, improved mix in our US technical services time and material work, and have made investments in our commercialization efforts to ensure we address the market by focusing on the sale of repeatable and reoccurring services. As part of the strategy, we have also emphasized the need to focus on the enablers to execute the strategic plan. These include strategic pillars of people and operational excellence. While much of the Let's Grow Better strategy is centered on our customers, the revised go-to-market and US market maturity We also recognized that our business needs to be enabled by people in operational rigor and discipline. As part of the operational excellence pillar, SPARC is focused on the completion of our enterprise-wide technology and one SPARC business process integration initiative, Project Darwin. In Q1, we successfully completed the second migration for the renewables U.S. operations, and now all U.S. operating companies have been moved onto one platform with standardized processes and operating protocols. We expect the new system will offer a better customer experience, operational efficiencies in the field and back office, and create a scalable platform that supports future growth. Our new strategy will take the newly established integrated platform, once fully implemented, to the next level by finessing the systems and processes through the strategic cycle, culminating in what I call the Spark way. Indeed, by the end of our strategic cycle, we expect to have our operational excellence pillar and the associated strategic work streams drive the longer term operational excellence for the organization for many years to come. Following the divestiture of Bullfrog Power in Q4 of last year, we have now completed the transition plan to decouple and migrate the IT systems to the buyer, as well as back office support as part of a transition services agreement. I am proud to say that this work was substantially completed by the end of the quarter. I also want to acknowledge the work done with our lender to revisit our amended and restated credit facility signed on November 30th, 2022 to revise the financial covenants. The bank has been a strong supporter of our business and we have executed our growth strategy managed through various macroeconomic and social factors over the last several years in particular. Richard will provide more details in his financial update. I am proud and excited about the progress being made and the talented team we have in place. We have achieved some noteworthy milestones in relation to our Let's Grow Better strategy and our focus on pursuing more profitable growth opportunities. This, coupled with our growth margin expansion in our core business lines, sets the stage for an improvement in EBITDA margins. I am confident we are set to grow profitably and sustainably. And just as important, our team will continue to drive improvements in working capital management with targets for reduction and pushing our efforts to speed up our cash cycle, driving better liquidity and free cash flow conversion. Lastly, I want to commend our operating teams and our health and safety organization for their continued focus on the safety of our team members. We continue to improve our safety performance across the portfolio with further enhancements to our safety tools, leadership and training as we drive our zero incident safety culture. I will now turn the call back over to Richard to share our Q1 financial results. Richard. Thank you, Richard.
spk01: In the first quarter, SPARC's ongoing efforts to improve gross margin realization and rationalize our cost structure contributed to the strong year-over-year earnings growth in the core business. We continue to make progress in improving our invoice cycle time as evidenced by a further reduction in contract assets, which we expect will convert to cash in the second quarter. and we worked with our lender to reset our financial covenant to reflect the sale of Bullfrog from historical comparatives, as well as the impact of higher interest rates. With the amended credit facility in place, we are focused on operational execution and free cash flow generation through the second quarter and into the second half of the year. In Q1 2023, revenue from continuing operations was $65.8 million. as compared to $66.2 million in Q1 2022. This represents a decrease of 0.6% year-over-year, reflecting the ramp-up of our new go-to-market strategy to pursue higher margin service work and prior period comparatives that include large project work in the technical services segment. In our technical services segment, revenue this quarter was $45.2 million, a decrease of 0.8% year-over-year. This consists of strong growth in our Eastern Canada low voltage segment, our Western Canada utility segment, and the U.S. high voltage segment, offset by lower volumes in our Western Canada low voltage segment and prior year comparatives, which included a significantly higher large project mix. In our renewable segment, revenue in Q1 2023 was $20.4 million, in line with prior year. We continue to capitalize on strong solar demand in both the US and Canada, with growth of 28% in the quarter. This was offset by lower volumes in our BES segment as a result of large projects in the prior year comparatives. Gross profit margins from continuing operations, not including depreciation and amortization, were 25.1% in Q1 2023, up 460 basis points from Q1 2022 and up 20 basis points compared to prior quarter. The year-over-year improvement reflects the benefits of the gross margin enhancement initiatives executed through 2022 and the improving revenue mix. We anticipate gross profit margins to steadily increase as volumes ramp up through our busy season and revenue mix continues to improve as our new go-to-market takes hold. Selling general and administration expenses from continuing operations including depreciation and amortization, were $11.8 million in Q1 2023 or 17.9% of revenue, down $1.3 million or 10.2% from Q1 2022 SG&A of $13.1 million and reflects the impact of the cost actions executed in 2022. More specifically, staffing costs were down $1.1 million or 14.4% as compared to Q1 2022, reflecting the ongoing benefits of the restructuring actions executed through the prior year. With the ERP go-live of our renewables U.S. segment, we will continue to run dual operations for the back office through 2023 as we plan for the Canadian conversion at the end of the year. We anticipate additional operational efficiencies to be realized in 2024 as part of steady state. Also note corporate SG&A includes certain IT related end user network and mobile costs related to field operations, which will be reclassified into business unit expenses beginning in Q2. Adjusted EBITDA from continuing operations excluding foreign exchange losses was 5 million or 7.7% of revenue in Q1 2023. This compares to adjusted EBITDA of 0.7 million or 1.1% of revenue in Q1 2022. The significant year-over-year improvement in the core business reflects the positive benefits of the targeted gross margin and cost actions implemented over the last 12 months to counteract the headwinds of cost inflation in the prior year and the impact of large project revenue mix. Cash flow from operations was $1.9 million in the quarter. compared to cash used by operations of $13.7 million in Q1 2022. This represents the third consecutive quarter of positive cash flow generation from operations, as supported by lower contract asset balances tied to improving invoice cycle time. We did not see this fully convert to free cash flow in the quarter due to the impact of the U.S. Renewables Go Live at the start of the year, which resulted in delayed billings through the first month of the quarter a portion of which remain in accounts receivable at the end of the quarter, which we estimate to be approximately $3.5 million. We do anticipate these receivables converting to cash in the second quarter. As a result, net working capital in Q1 2023 was relatively flat as compared to Q4 2022. Capital expenditures in the quarter were $2.3 million as compared to $0.9 million in Q1 2022. The majority of the increase relates to leasehold improvements for office buildings, in particular, our new head office. We expect such costs to moderate moving into the second quarter. In the quarter, the company paid $2.3 million of debt repayments to its lender under its term debt facility and principal payments of $2.1 million for vehicle and premises lease liabilities. As a result, the total change in bank indebtedness was an increase of $4.6 million for the quarter. Subsequent to March 31, 2023, the company worked with its lender to revise the financial covenants per the amended and restated credit facility signed on November 30, 2022, to reflect the divestiture of Bullfrog Power from historical comparatives, as well as the impact of higher interest rates over the last six months. The new terms of the amendment come into effect in Q2, 2023, and include an option to extend the maturity date into 2025. The revised covenants are as follows. Minimum fixed charge coverage ratio of 0.85 for the quarter ended June 30, 2023, increasing to 1.05 and 1.15 for the quarters ending September 30 and December 31, 2023, respectively, and 1.25 for each fiscal quarter thereafter. maximum total debt to EBITDA ratio based on the most recently completed four fiscal quarters of 4.25 to one for the quarter ending June 30th, 2023, decreasing to 3.75 to one for each quarter thereafter. Interest margin over prime rate on all facility advances up to December 31st, 2023 shall accrue and be added to the principal amount of the term loan. In closing, I am pleased to report the strong earnings growth year on year in the first quarter and the solid start to the year. Although we did not see a tangible reduction in working capital in the first quarter, we are executing our plans and anticipate good progress in Q2. Operationally, moving forward, we will continue to execute against our 2023 business plan to improve revenue mix, enhance gross margin realization, and generate positive free cash flow from operations. I am confident that we have the capabilities and operational discipline to execute the next stage of our strategic initiatives to continue scaling for a creative earnings growth and delivering shareholder value. I want to acknowledge the team for their hard work and commitment to Spark's Let's Grow Better strategy, and we look forward to sharing updates on progress against our strategic plan and performance against our financial objectives in the coming quarters. This concludes our prepared remarks. I will now turn the call over to our operator for questions. Operator please go ahead.
spk02: Thank you. At this time we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. And you may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
spk00: Okay, we currently have no questions from the telephone lines at this time. Once again, if you have any questions, please press star 1 on your telephone keypad at this time. Okay, so as we currently have no questions on the telephone lines at this time. Okay, this concludes today's conference and you may disconnect your lines at this time.
spk02: We thank you for your participation.
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