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Edited Transcript of JE.TO earnings conference call or presentation 15-Aug-19 2:00pm GMT

Q1 2020 Just Energy Group Inc Earnings Call

TORONTO Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Just Energy Group Inc earnings conference call or presentation Thursday, August 15, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Brown

Just Energy Group Inc. - CFO

* R. Scott Gahn

Just Energy Group Inc. - CEO, President & Director

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Just Energy First Quarter 2020 Fiscal Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Scott Gahn, Chief Executive Officer of Just Energy. Sir, you may begin.

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R. Scott Gahn, Just Energy Group Inc. - CEO, President & Director [2]

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Thank you, operator, and good morning, everyone, and thank you for joining our fiscal 2020 first quarter conference call. As the operator said, I'm Scott Gahn, Chief Executive Officer of Just Energy. With me today is our Chief Financial Officer, Jim Brown. Jim and I will discuss the results for the quarter as well as our expectations for the future. As the operator indicated, one difference on today's call is that we will not be conducting a question-and-answer session following our prepared remarks.

The strategic review process coupled with significant internal efforts underway to enhance our stand-alone financial performance and long-term strategic outlook are progressing well, and because they are ongoing, our ability to accurately answer your questions is limited. I look forward, however, to talking to you in the near future as the strategic review process progresses. Moreover, despite not being able to take your questions, we still have a full agenda for this call and plan on providing detailed perspective on our quarterly results.

But before that, I would like to provide a fulsome update as possible on the key strategic initiatives we are pursuing that will continue to drive performance and shape the future of Just Energy. But I'd like to begin by briefly introducing myself.

Most of you on the call do not know me, but I've been in this business since 1986, at the inception of deregulated energy markets. I have held positions in energy regulatory, utility, energy trading and origination and as a start-up entrepreneur in this business. My approach to the business is simple and straightforward: disciplined sales process, strong operational execution and conservative financial management. I speak for myself, the Board and the entire Just Energy management team when I say that we will restore these very simple and straightforward principles at Just Energy.

Having rejoined the Just Energy leadership team just last week, I'm excited and honored to help guide us through this critical junction in our history. Although new to my current position, I am not new to Just Energy having worked from 2007 to 2011 as the COO of the company, and of course, I've served on the company's Board of Directors since 2013. In addition to supporting the strategic review process, my focus is on North American energy operations, cost containment and pursuing efficient and profitable sales opportunities. Due to my experience with Just Energy, I have been able to hit the ground running to work with each of our critical business leaders to understand how we can better drive efficiencies, improve performance and ultimately maximize the inherent value in this business.

Before we discuss the financial results for the quarter, I would like to provide an update on several key developments that have been disclosed since the last earnings call as well as provide an update on the various ongoing initiatives that we believe are critical to maximizing shareholder value.

While we continue to operate the business aggressively, evaluating opportunities for further streamlining of our business, the strategic review process remains in parallel on track. The special committee overseeing this process feels the strategic review is progressing within their expectations, the macroeconomic conditions continue to support the process, and we're confident that whatever the result, it will be in the best interest of our shareholders.

The second thing I'd like to talk about is the improvements in operational controls, recognition of impairments and the continued focus on financial discipline. Given my level of experience at Just Energy, I've been able to quickly involve myself in the operational issues underlying the Texas AR impairment that was announced last month, leading me to expand our review and drive the resolution of similar issues in our U.K. business, quantifying on additional impairment taken in that business. Both of these impairments have been recognized in their entirety, and strict remedial actions and policies were swiftly put in place to prevent such operational breakdowns from occurring again, restoring the operational and financial discipline and integrity that Just Energy, the Just Energy I know, is known for.

Perhaps the most important thing I can say today regarding this matter is that these enrollment and nonpayment issues have been remediated. We have soberly assessed our opportunities for collection. We have made the difficult decisions, and we have booked the impairments. This means that they will not have a continued effect on future cash flows, and I, along with the entire management team and Board, are confident in the business and operational controls in place going forward.

The third item is the strategic realignment and disciplined North American focus and disposal of our noncore operations. We also announced yesterday our plan to dispose of our assets in the U.K. as part of a strategic transition to focus on the core business in North America. This was a difficult decision as the U.K. business was part of our plans for growth. However, this was the right decision given many factors, including relative financial performance, return on capital and the strategic review process. As we scrutinized the return on these investments in terms of time, resources and strategic direction of Just Energy, we felt this was the best decision, that it aligns with our strategic transition and our pledge to deliver exceptional shareholder returns in the near term. Disposal of these assets is expected to occur over the next 12 months.

Fourth is the suspension of the common dividend. As you saw in our filings yesterday, we suspended our dividend for the first time in the company's history. This was also a very difficult decision, but it too was the right decision for a number of reasons. The Board is dedicated to having a sustainable dividend policy and, as such, believes that the prudent action now is to suspend the dividend until further progress has been made on the key internal and external strategic and financial initiatives. Crafting a sustainable and attractive dividend policy is core to our mission of delivering value to shareholders. Indeed, we are proud to have returned to our shareholders almost $2 billion in total dividends since our inception in 2001.

The dividend issue and decision as well as other of these issues could not be happening at a worse time. We were in the middle of a strategic review, but they are the right decisions. And we hope that the transparency we have provided and the decisions that we made can restore the trust between Just Energy and the market, Just Energy and its owners, and Just Energy and the potential bidders in our strategic review process.

Finally, I'd like to talk about the addition of Walter M. Higgins III to the Board of Directors. I am very excited that Walter has agreed to step onto our Board, especially during a period of time when we were running a strategic process. Walt has a long history and deep knowledge of our industry. He is currently the Chairman of the Board of South Jersey Industries. Prior to that, he has been the CEO of a number of utility companies, including the Ascendant Group in Bermuda; Sierra Pacific Resources; and AGL Resources, the parent company of Atlanta Gas and Light. Walt is an excellent addition to our Board, strengthening the industry knowledge and insight of the company.

With that update, let's turn to more specific discussion related to the first quarter results. Base EBITDA from continuing operations for the quarter, which reflects the decision to dispose of the U.K., was $24.2 million. Jim will walk you through more on the accounting treatments and reconciliations that affected the results later. In short, though, the results for the quarter missed our expectations. However, it is our seasonally slowest quarter. And once you peel back some of the nonrecurring events and accounting adjustments, we feel the core committed book remains strong and stable with embedded gross margin from continuing operations increasing 12% to $1.9 billion year-over-year and remaining a focal point that continues to drive the majority of our near-term earnings and cash. We are also able to mitigate some of the declines in the quarter through the improvement initiatives that continue to drive performance from margin and supply optimization efforts and improve internal controls. I'll touch more on those efforts shortly.

In the quarter, the average gross margin per RCE for customers added and renewed in the Consumer division remained strong at $357 per RCE. This is a significant increase year-over-year and continues to exceed the margin associated with the customers lost during the period. This reflects the improved margin enhancement and continued risk management of our weather hedging and derivative costs.

The combined attrition rate for the quarter was flat at 14% for the trailing 12 months, consistent with the prior comparable quarter. The Consumer attrition rate improved 1 percentage point to 22% as a result of Just Energy's focus on margin optimization and providing a variety of energy management solutions to our customer base to drive loyalty. The Commercial attrition rate increased 2 percentage points to 7%, reflecting a very competitive market for commercial renewals, with competitors pricing aggressively and Just Energy's focus on improving retained customer profitability rather than pursuing low-margin growth. The renewal rate for the trailing 12 months was 59%, a 4 percentage point improvement year-over-year. The increase in the overall renewal rate is evidence that the company's loyalty-building tactics are taking effect and improving customer retention. It is important to point out that we are consistently maintaining low levels of total attrition and improving renewal while also pursuing margin optimization. This success is the result of strict actions taken by our team over time to cultivate a strong fit customer base that appreciates the level of service and the value-added products offered by Just Energy.

As I look at where we exited the quarter, I believe we are returning to sales run rates that are in line with our initial expectations for the year. Our objective for the remainder of the fiscal year is clear. We must sign high-quality customers who utilize our suite of value-added products and services while we simultaneously reduce our cost by eliminating redundancy and improving processes. We will be more decisive regarding our business initiatives as well. What we sell, where we sell, how we sell and to whom we sell, all of these attributes and more will be evaluated at as close to customer-level returns as possible, keeping only the combinations of products, markets and customers that meet our threshold returns on invested capital. This will be my focus as we continue to undergo a rigorous performance improvement review and will allow us to identify the very specific actions we will take in fiscal 2020 that will result in greater sales optimization through a focus on data analysis and maximizing internal rate of return on each sales campaign, improved margin activities, additional cost efficiencies and further strengthening of our capital structure.

And now I'd like to turn it over to Jim Brown to give you some specifics about our financial results.

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James Brown, Just Energy Group Inc. - CFO [3]

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Thank you, Scott. I'd like to start by expressing my pleasure in the opportunity to work with Scott, who I've known for many years and is a well-known expert in retail energy.

Our focus will continue to be on operational excellence and optimization of shareholder value. As Scott noted, while this is a seasonally soft quarter for us, we fell short of expectations. Notwithstanding that, our core North American operations remained strong with embedded gross margin of $1.9 billion, an increase of 12% from the same period last year as a result of margin optimization and down 8% from fiscal '19 year-end due to decreasing customers' book size and weaker U.S. dollar.

As we continue to focus on North American business, we are announcing the disposal of our U.K. assets effective June 30, 2019. As a result of this decision, our financial results for fiscal Q1 are reflective of continuing operations on a year-over-year basis and updated to reflect discontinued operations. We expect to complete this process within the next 12 months, and we'll update the market when it makes sense to do so.

Gross margin from continuing operations for the quarter was flat to prior year and $132 million as a result of margin -- unit margin optimization offset by a smaller book and unfavorable prior period adjustments associated with winter delivery periods. As Scott mentioned earlier, unit margins remained strong. The company continues to focus on customer-level analytics and to maximize return on invested capital and obtaining the right customers.

Base EBITDA from continuing operations, which reflects the decision to dispose of the U.K. business, was $24.2 million, a year-over-year decrease of 31%, with gross margin flat to prior year and higher amortization of customer acquisition costs in the quarter. It is worth noting the base EBITDA does not include the impairment of accounts receivables in Texas and the U.K., which has been called out separately in our financial statements and is expected to be nonrecurring.

During the quarter, management identified operational issues with customer enrollments and nonpayment for accounts receivable in Texas residential markets, resulting in an aggregate adjustment of $58.6 million. Management also proceeded to identify collection issues in the U.K. market, resulting in aggregate adjustment of $74.1 million. As a result, the company recorded additional allowances for doubtful accounts, which is included in the company's restated third quarter and year-end financial statements for the fiscal year ended 2019 and for the company's first quarter results in fiscal 2020, as referenced within the respective management discussion and analysis for each period. As previously stated in our press release dated July 23, the enrollment and nonpayment issues have been remediated, and management is confident in the business and operational controls currently in place.

We've taken steps to enhance liquidity and cash flow optimization. These actions include exercising the accordion option associated with our existing credit facility, refinancing and extending the remaining portion of the eurobond debt and taking operational measures to decrease negative cash flows associated with bad debt. We feel we have -- can continue to have positive liquidity momentum due to higher cash receipts, lower selling and administrative expenses and more efficient capital expenditures. All of these will equate to increased buying power between our cash and our credit facility and add flexibility to the business.

Returning to the income statement. Administrative expenses from continuing operations increased 2% in part due to higher U.S. dollar and increased professional fees in the first quarter, offset by our planned cost-savings initiatives announced at year-end. I'd like to reiterate that the company is committed to operational excellence and efficiency and driving down the base operating costs of the company.

As noted earlier, selling and marketing expenses were $61.7 million, an increase of 47% to the prior year as a result of the ramp-up of amortization of previously capitalized costs. The company continues to perform campaign-level IRR analysis to ensure the maximum return on customer acquisition costs.

Financing costs amounted to $23.5 million, an increase of 44% due to higher interest from increased utilization of our credit facility, higher interest rates and collateral costs related to the Texas electricity markets and supplier credit extension terms.

Finally, I'd like to discuss our updated fiscal year 2020 guidance. While Just Energy remains focused on best-in-class service to its customers, the previously announced strategic review has provided necessary insights to understand how to best unlock additional value from the business through a comprehensive review of capital expenditures, streamlining the organization, enhanced internal controls and further refinement to our geographic footprint.

Furthermore, our robust hedging program and new insurance wraps significantly mitigate the risk of our future gross margin. With the disposal of our U.K. assets, further reductions in process improvements and the first quarter fiscal 2020 performance, we now expect base EBITDA from continuing operations to be in the range of $180 million to $200 million and free cash flow to be between $50 million and $70 million.

With that, I'll turn it back to Scott for concluding remarks. Scott?

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R. Scott Gahn, Just Energy Group Inc. - CEO, President & Director [4]

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Thank you, Jim. So moving forward, I will be laser-focused on our strategic review, the direction of the business towards a North American core, which is a very good business that needs some work that we will take care of as well as our ability to achieve the necessary improvements to our operations that I described earlier. We expect the margin enhancements, expense control measures and our risk management activities and improvements to elevate our performance. We also remain hyper-focused on capital stewardship and liquidity. This commitment to balance sheet discipline, generating superior returns on invested capital and improving performance will set the stage for predictable, prolonged and stable growth that this business is capable of.

Thank you, everyone, for participating in today's call, and I look forward to updating you further as our strategic initiatives and review process progress. Thank you.

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Operator [5]

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Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.