Eneraqua Technologies PLC

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Earnings Call Analysis

Earnings Call Transcript 2024-Q4

[Operator]

Welcome to the Eneraqua Technologies Full Year 2024 Results Webinar. [Operator Instructions] This webinar is being recorded.

I now hand over to Mitesh Dhanak, CEO; and Iain Richardson, CFO. Mitesh, over to you.

[Mitesh Dhanak, executive]

Thank you, Tamsen, and good morning, and thank you for joining us today there. Tam, is it possible to move on just a couple of slides? So I'd like to first of all start by thanking Iain. As you're probably aware, Iain is going to be stepping down at the end of this month. And I should thank him for the hard work across the past 3 years, and he will be missed as we go forward there.

Tam, we want to move. That's great. So just as a brief glance who Eneraqua are, what are we? Well, we basically work with clients' jobs and deliver their sustainability goals. We work in 2 areas, energy and water, which we'll talk about in a bit more there. And essentially it's around, probably we'll be achieving net zero goals and sustainability goals and addressing water stress. We predominantly operate in the U.K., but we also have businesses in the Netherlands, in Spain and in India, and we'll cover that in a short moment, as I'll give you a bit of a flavor of there.

In terms of our technology, you can see we are saving on 80 liters per household per day. We are a technology-led business there. And you can see the total tons of carbon that we've saved since we started, just over 1.2 million tons.

And in terms of the revenue split for last year, we're predominantly public sector at 72% to 77% there. But as you can see in terms of private element, that's a 23% in growth.

You can move on there, Tam. So in terms of FY '24, the year ended in January '24, I will have to say it is one of the toughest years that we've faced. So we'd issues at both sides of our business. On the energy side, our domestic clients in our domestic energy projects were affected because their capital budgets came under stress. And what they decided to do was to delay some of the projects they had agreed to do with us and pushed some back into this year and also into the following year, FY '26.

On our water side, we were struck by a surprise government announcement that came out by the end of August, which essentially delayed and potentially raised the issue where developers will not have to address an issue call water scarcity, on nutrient neutrality and so the development delays. And this is where there just isn't enough water in a local authority or a catchment area to allow development to go forward or there's too much nutrients in terms of pollution in that area.

And if you recall, Michael Gove, again, made the statement at the end of August. And basically, a lot of people criticized him. And essentially, in the end, the government delayed it and has reverted back to its previous policy before those announcements. But that created a problem of uncertainty, and it led to people delaying work that came with us there. So we ended up making a loss last year. And we'll show you the numbers in a moment there.

But despite those things, we did have some successes. We secured our first NHS contract of the year with Kingston NHS trust. And we will show how that's going in a moment there. And there was greater recognition of the benefits of our technology in terms of Control Flow HL2024 in terms of reducing water consumption and reducing both water and energy bills as well.

Tam, can we just move on? Let me turn this over to Iain to take you through key financials.

[Iain Richardson, executive]

Thanks, Mitesh. So as you can see there, revenue down from FY '23 levels by 2% to GBP 53.8 million. But as Mitesh mentioned, we did see an increase in the mix of work from the private sector up to 23% of that revenue in the year. Gross profit there of GBP 12.2 million. That really reflects the project mix during the year, dealing largely with a lot -- a higher volume of lower-margin contracts as well as the impact of those contracts being pushed to the right.

It is worth highlighting, though, that while some of those contracts did deliver lower than what we expected margins, none of them were loss making. So all of this resulted in an adjusted EBITDA loss of GBP 3.3 million and an adjusted loss before tax of GBP 6 million. However, we were still able to continue with our investment in R&D, and the total R&D spend for the year was GBP 2.1 million.

Despite this adverse performance, we did generate cash inflow from operations of GBP 7.7 million, which show our gross cash increased by GBP 3.2 million to GBP 6.4 million at the year-end. That overall gave us a net cash position of GBP 1.2 million compared to a net debt position of GBP 3 million at the previous year-end.

Back to you, Mitesh.

[Mitesh Dhanak, executive]

Thanks, Iain. So as I said, despite the headwinds and the challenges that we've faced, we did make some progress going forward there. We got success in winning NHS [indiscernible] Kingston NHS Trust with GBP 11.3 million contract. Despite the pressures of our domestic energy clients suffered in the year, we did also win a GBP 12.7 million contract with Royal Borough of Kensington and Chelsea. So this is where is the estate called Lancaster West, which is essentially the estate surrounding Grenfell Tower in West London there. However, despite that, we expect the domestic sector to not normalize completely until probably FY '26, next year.

We haven't lost any clients or didn't lose any projects and that's really testimony to the hard work of the team. And we still continue to win new ones as well. As I said, in the domestic sector, we won't come completely back on stream until 2026 there.

Post period end, our acquisition in Vriend has continued to grow. However, on course, we basically doubled the revenues in the first 12 months there. And similarly, in terms of the non-domestic sector, we also secured 4 major contracts, each of them being 4-year appointments. But within just this year alone, FY '25, we will deliver a revenue of GBP 14.8 million with future spend in the later years.

In terms of water, again, with stability on U.K. water policy -- government policy, we have not pushed around with our net water and net nutrient offerings into the marketplace there. We've won our first nutrient neutrality contract, and that's with Ashford Borough Council in Kent. And they are basically installing our products in 5,000 of their existing homes to unlock a 1,000-home development, but we have been stuck in planning for over 18 months there.

In Spain, we are, again, seeing demand across a range of sectors there.

And in India, it's quite exciting because they have actually realized the technology has benefits for them in their domestic programs. This year, they have got a scarcity of water and the need to make sure everybody gets a fair amount of water. So in that application, we just completed a trial of 1,000, and we've got a further trial with 3,000 homes coming up. At the moment, in India, of course, you got the elections going on, which will be completed end of June. But once those are completed, we expect to make further trials and further progress in this exciting sector.

Tam, if you go to the next slide. And back to Iain again.

[Iain Richardson, executive]

We'll move on to the -- so yes, so this slide, I've largely covered all of the points on the earlier slides. So if we move on to the next one to talk about the group revenue and the highlights. As Mitesh has mentioned, no contracts were canceled during the year, just pushed to the right. So we expect those to either start in the current financial year or FY '26.

And as with all of our years, whether they're good or bad, we will continue to see an H2 waiting to the delivery of those projects. As I touched on earlier, we have seen that growth in the private sector work. And in addition, we also saw growth in our international revenues. They grew by 138% to GBP 1.3 million, and we hope that -- and expect that growth to continue as we move forward.

FY '25 has started well so far, and we remain on course to return to profitability in H2 of this year. With regard to our order book, you can see there that it totals just over GBP 102 million, of which 88% we expect to deliver during the current financial year with GBP 18.5 million already delivered by the end of April. You can also see there, we have a potential pipeline of circa GBP 700 million. And if you remember, when we're talking about our pipeline, those are the projects where we believe we've got greater than 50% chance of winning.

Shall we move on. So to the income statement, you can see there the comparison against FY '23, touched on a lot of these points. So just worth highlighting that growth in admin expenses reflected the continued investment in our headcount, particularly within engineering and project management. We did, however, carry out a restructuring exercise towards the end of last financial year, and that saw us remove a number of heads and reduce other cost areas, all of which should give an annual savings of approximately GBP 1 million. And that's how we are going to take impact of this current financial year.

We are continuing to see a challenge around recruiting engineering resources. And this year, we're looking to utilize our colleagues in India, particularly within our engineering team. And that will allow us, just for our U.K. engineers, to supervise their work to ensure that the quality standards are maintained whilst providing a cost benefit to the group.

So we'll move on to the next slide. So here there, we have a net debt bridge. So you can see that we started the year with a net debt position of GBP 3 million. And we've -- the key drivers during the course of the year, we have benefited from the unwind of the FY '23 accrual income. And that's been partially offset by growth in contract assets. So that -- overall that gave us a GBP 5.5 million inflow bringing the movement in those trade and other receivables.

We also saw a benefit of GBP 8.1 million from the increase in trade and other payables over the period. And that's largely a result of the year-end where we accrued for a number of costs in relation to projects where we delivered at the year-end, but where we are yet to receive the invoices from suppliers. Those invoices have all now been received and paid post-year-end. And we currently have our creditor days running at 59 days, which is down from FY '23 levels of 66 days.

We did have some CapEx in the year, albeit it was Limited, totaling GBP 1.4 million. And of that GBP 0.8 million was intangibles, largely the goodwill on the acquisition of Vriend and the investment in the R&D projects that I mentioned earlier. So all of this resulted in a closing net cash position of GBP 1.2 million at the year-end.

[Mitesh Dhanak, executive]

Thanks, Iain. Tam, can we move on one more slide? So looking in terms of our strategy as a company what we do is we deliver solutions to basically our clients' needs. On the energy side, we're working both domestic projects, but also as you've seen in the non-domestic buildings there, so things like schools, hospitals, data centers and the like there.

On the water side, we did a lot of work in domestic homes for water companies and for private householders as well, and of course, for developers now. But we also have for commercial buildings such as schools, hospitals, care homes and hotels as well. Some of the numbers that you can see there. I'll just highlight a couple. So in terms of the energy work, typically our work deliver up to 70% reduction in the carbon emissions from buildings there with a 45% cut in people's actual energy bills there.

In terms of the water side there, the [indiscernible] University looked at our program in Crawley Council and determined that actually householders are saving up to GBP 365 a year on their energy and water bills as well. So these are sort of big numbers. And particularly on the water side, I already underpinned the -- underpinning the point that you may now understand actually, this technology is a bit of a game-changer.

If you move on there, Tam. So in terms of our technology, as to what it does, it gives you very precise flows coming into a property or coming out of a tap if you fitted near the tap unit there. And it takes away those fluctuations. So essentially it's saving people based on actual water meter data across the 5-year period around a range of 23% in people's water consumption without actually the residents having to change their behavior at all.

And in terms of client satisfaction, in terms of our satisfaction, it brings around 98.9% satisfaction. So people like the water supply. They just don't know that they're saving 23% over what they were doing before. And that IP, of course, is the main reason that we went to IPO in Kingston market to actually completely acquire the IP. And the R&D investment we've been doing is to build out our range of products. So we can offer solutions for any application in the building sector that we come across.

Tam, you can move on there. So in terms of our market sizes and the markets that we service there, so you can see in terms of energy, and because this is really the domestic energy market, probably you see that as being over GBP 4 billion per annum in terms of both Holland and the U.K., which is where we offer our energy solutions at the moment there. That number, of course, is increasing as we're now pushing into non-domestic sector.

In terms of the water side, it's, again, a similar story. So you can see that we estimate about GBP 2.4 billion. The fact that we are getting opportunities, particularly in India, in the domestic sector, are going to push that up substantially more. So both markets that we operate in the addressable markets for us, the total size is actually increasing.

Tam, we can move on. And what is our growth strategy? Well, in terms of energy, it's really around growing the non-domestic sector, particularly in the U.K. at the moment there. We've got new contract wins in the domestic sector. But as I said earlier, we don't expect this area in the U.K. to come back to normality fully until FY '26 next year effectively. We're still going to continue investing in international in Vriend, in Holland, and basically push on with expansion in that area in Holland.

In terms of water, we're building on the demand for water and nutrient neutrality solutions. One of the questions that people ask is what about the election? Well, actually, both parties want to get more housebuilding, want to get more construction underway. And that means the need to get development in the 74 local authority areas, where these 2 issues really apply. And right now, the solution we offer is regarded as the lowest-cost proven solution available. We also want to expand our offering in India, as I spoke about earlier and push on into the domestic sector more strongly.

In terms of R&D, again, we're growing and developing our capability. But again, we're looking at new applications, particularly in agritech, which saved our produce as well as protecting and finessing our core product sets as well.

In terms of merger and acquisitions, as you'd expect, this is something we just became a little slower on. But we are keeping an eye on where we can see new technology opportunities or when we come to look at new regions or countries who want to expand it.

Tam, time to move on. I mentioned some of the success areas we have this year. So I just mentioned those there. Kingston, of course, is the first NHS trust that we won. This is driven by the fact that we made the acquisition of Mathewson previously who has a track record of working in the NHS, and it allowed us basically to bid for NHS contracts. Now this contract when we originally landed was GBP 11.7 million contract. And the client in the first few months of our work is so pleased with us has actually increased it by a further GBP 1.1 million.

In terms of Islington, this is a 4-year appointment to essentially go through a decarbonization of their public buildings. And the first year, we'll see us basically installing heat pump solutions in just 10 sites there. And then you can see the second phase of works, which were now surveying, et cetera. We'll see that growing furthermore into further years later on.

In terms of Kensington and Chelsea, this is a domestic project, the estate around Grenfell Tower. And again, that's going really well. They're a very happy client.

So these 3 projects this year, we are going to be having in terms of revenue terms, of what, just over GBP 20 million. And if you look at the overall in terms of the lifetime of these contracts, price, we estimate they can go up just over GBP 60 million there.

Tam, we can move on to the next slide. In terms of water, again, the first one is in Holland. It's a hospital site, where essentially, they installed our products. And what they found is they're going to get a recoupment of their cost investment in the first 12 months. The middle one is actually the domestic trial that we've completed, and that's going to now for the further 3,000 homes. And again, the results are very good. So what they're talking about is [indiscernible] supply needed. It means that everybody gets a fair amount of water. And essentially, what they found with our technology is this is what happens. To the extent, when they have surveyed the residents at the beginning of this month about what they felt, the residents said to them actually we're prepared to pay for our water because the water actually comes out of the taps and everybody gets a fair shake.

Crawley and Stonewater, of course, are the 2 that we've got on water neutrality. These are projects that we started last year. Crawley is the larger one there, and that's going extremely well. So we've completed 2,400 installs for them and unlocked 750 new build housing with a target that they've got to unlock, it's actually 2,000 new build properties. Along the way we've also unlocked a Taco Bell and a KFC as well. So as you can imagine, we made healthy [indiscernible] there.

Tam, if we move on there, please. In the next slide, so as I said, the snow getting away, FY '24 was an extremely difficult year because of the issues around government and the water, but also in terms of our local authority plants having serious pressures on their capital budgets. And basically, those 2 things really hit us hard. One major achievement is actually, we met that revenue and adjusted PBT as the final consensus numbers came out.

And in terms of cash, we were slightly stronger than expected, and we've finished, as Iain explained, with GBP 6.4 million of cash, representing $1.2 million net cash there. We signed our contract with Crawley during the year. And then suddenly, the commercial energy projects really started to emerge, and that continued to grow this year there -- for FY '25, I should say, this current year, so kind of stepping up in a really good place in the first 4 months that have gone through. And again, our international expansion continues there. And we talked about India and why it's exciting for us.

Tam, we can move on there, please. So the final slide before we move on to your questions. We would like to just reiterate in terms of looking ahead, the demand for Eneraqua's’ solutions remains strong. Our net zero targets haven't gone away. Water stress has certainly not gone away at all. At the moment, because of that and the projects we see, we are on course to meet our targets that we set ourselves for FY '25. We can see good growth opportunities internationally going forward, particularly in Holland and in India there as well. Our domestic energy market is not going to come back to normal until next year versus say for our non-domestic that's probably returned to normal, is growing very, very strongly there.

In terms of normalization, the legislative environment, despite the election has normalized. And I think it came in terms of water. We have confidence and some of our clients can have confidence about the solutions that they need to use. So our expectation is the same, is to return to profit in H2 of this year. And in terms of revenue growth, we've returned to a growth trajectory.

So let me pause there and give you the chance to ask your questions.

[Operator]

[Operator Instructions] And we've got a few questions. First one, do you expect the large working capital improvement as a result of the payables/accruals at the year-end to be maintained in full-year '25 or to unwind, thereby putting significant pressure on cash resources during full-year '25?

[Iain Richardson, executive]

No, I would expect it to be able to maintain the position. So for example, as we sit here today, we currently have gross cash of GBP 4.6 million and an unused overdraft position of GBP 2.5 million. So whilst, working capital management remains a key focus, I don't expect it to come under undue pressure during the course of the year.

[Operator]

Great. And can you expand on developments in the non-domestic area and what traction you're seeing?

[Mitesh Dhanak, executive]

Absolutely. So what we're seeing in that is that we've got clients coming forward who essentially want to decarbonize and want to move to an 8-month solution there, as their plant terms are coming to end of life there. The solution that we have and the approach that we take and the quality of service that we provide is really attracting attention there. And when we're putting into proposals and tenders and the like, people are noticing that and are asking us to come forward with solutions. So we see the non-domestic sector being a very strong growth focus for us.

And again, in terms of the election that's going on right now, both parties and to both major parties because both Conservatives and Labor are committed to really driving forward in this area. So Labor is committed to actually doubling the amount of incentives being offered to public sector organizations to decarbonize. And again, Conservative Party is maintaining a current program, which again has expanded substantial. So we really see that as a major growth opportunity and a growth area.

[Operator]

Tremendous. And that's covered another question about the election that just come in. So that's brilliant. What opportunity do you see in water in the short and medium term?

[Mitesh Dhanak, executive]

Sure. That's a very good question there. So in the short term, we're seeing growth in terms of traditional markets where you will need to save water and then all companies have water-saving targets they need to achieve. So we've got that sector there.

We've also got private developers in terms of unlocking development going forward, both developers and local authorities are looking at our solutions going forward there. We are also seeing applications for hotels, residential care homes. And again, then it's just a multiple sector. But, again, people are recognizing that they can save water and save bills very, very efficiently without any impact on their care or customer experience.

In the medium term, we expect those growth curves to continue, but this is international opportunity. Water is an international growth area for us, so we do expect to expand our offering into other territories going forward.

[Operator]

Do you expect to be cash flow positive in full year '25?

[Iain Richardson, executive]

Yes is the short answer. We don't doubt there'll be fluctuations during the course of the year as we deal with some of those larger projects coming on stream, but we expect to end the year in a net cash position again.

[Operator]

Great. And 2 elements, the same question really. Do you expect gross margins to recover in full year '25? And would you hope to be back to 2023 levels of profitability in '26? And what do you need to happen to get there?

[Iain Richardson, executive]

To deal with the margin point, yes, we expect those to recover to -- in line with the forecast from the analysts. And that's probably going to come through in the second half of the year for us. So in terms of returning to the profitability levels in '26, I think that really will depend on the normalization of the domestic energy market that Mitesh talked about as those projects do tend to be a higher margin than the non-domestic sector.

[Operator]

Tremendous. And would future M&A be in filling into the U.K. offering or overseas expansion?

[Mitesh Dhanak, executive]

We'll be looking basically at M&A to probably grow our international part more than going and filling into the U.K. there. And we'd also be looking at potentially around technologies because there are other complementary technologies that we may look at acquiring those going forward.

[Operator]

Great. And a little bit of confusion about the R&D spend in full year '25. Can you confirm what you expect the spend to be? The question says it was GBP 2.1 million in today's R&S versus GBP 0.5 million in the Liberum forecast.

[Iain Richardson, executive]

So that's -- the GBP 2.1 million is the total figure. The GBP 0.5 million is the R&D that we were able to capitalize under the balance sheet, so the balance is essentially costs we've incurred in R&D that we've expensed through the P&L account.

[Operator]

Great. That's very helpful. And that's the end of questions. So, Mitesh, do you have any closing remarks?

[Mitesh Dhanak, executive]

Thank you there, Tamsen. Well, time to say thank you for joining us today and asking some very good questions. It has been a rocky year for us last year. But as I said, we've recovered, got through that, and we will return to profitability in H2 of this year. And we're turning back to our growth curve there as we expected. So thank you again for your time this morning.

[Operator]

Many thanks, Mitesh and Iain. And to everyone listening, you'll be taken to a web page to give feedback now. If you're unable to complete it at this time, you'll get a follow-up e-mail. We'd be really, really grateful if you could take a few minutes to complete. Many thanks for joining. This is the end of the webinar.