Just Energy Group Inc.
Q2 2021 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

Good morning, everyone, and welcome to the Just Energy Group’s Fiscal 2021 Second Quarter Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the call over to Michael Cummings with the Alpha IR Group.

[Michael Cummings:]

Thank you, operator. Just Energy released results for the second quarter of fiscal year 2021 ended September 30, 2020, on November 11, 2020 after the market closed. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at investors.justenergy.com.

[Scott Gahn:]

Thanks, Mike. Before we jump into an update on our recent performance, I'd like to acknowledge and thank our incredible team with dedicated employees and all our valued stakeholders for their hard work and perseverance during these unprecedented and difficult times. Through all this, Just Energy has continued to provide essential services while ensuring the health and safety of our customers and employees. Again, thank you all for your continued commitment. I'd also like to take a minute to welcome Michael Carter, our new CFO. Michael brings more than 20 years of industry and finance leadership experience. And the short month that Michael has been on the job, his calm, highly qualified presence is felt by all of us. He's already made key hires and I have the utmost confidence in Michael and his team. The second quarter was hallmarked by several important milestones, including reestablishing the company as a financially stable, more nimble and competitive retail energy provider. On September 28, 2020, we announced the closing of our recapitalization plan and the reconstitution of our Board of Directors. We believe the successful closing of this plan, the reconstitution of the Board of Directors and appointment of new management leadership were mission critical and position us to better meet our customers’ needs and ultimately deliver value to our stakeholders. We're moving forward as a stronger company that is positioned for sustainable, profitable growth as an independent retailer and industry leader.

[Michael Carter:]

Thank you, Scott. Before I discuss our financial results for the quarter, I'd like to express how excited I am to be joining Just Energy at such a pivotal time in the company's transformation. We completed our recapitalization in late September, which provides us with a sustainable capital structure in which to execute on our strategy. With this important step completed, we are strategically positioned to focus on the core tenants of our business with an emphasis on profitable growth and prudent cost management.

[Scott Gahn:]

Thank you, Michael. I just want to reemphasize the challenges we face in the COVID-19 environment as it relates to selling which as I said earlier, it's just an absolutely fundamental core business function for a business like us. We continue to navigate those challenges and make improvements in the context of COVID-19, we look forward to some of the advances in recent announcements regarding the vaccine and the possibility that we will get to the other side of the pandemic, that can return to some of our historic run rates and our direct selling activity. But all in all, I would like to thank the team for everything that they've done, as I said earlier, we've had our employees and our stakeholders have been highly committed to us through a very challenging time working from home, some working from the office, having to deal with social distancing, all the other protocols for COVID-19 safety. But I want to thank everyone for that. And I look forward to any questions that we have in the Q&A session. Thank you.

[Michael Cummings:]

That concludes our prepared remarks and I'll hand it over to the operator for the Q&A. Thank you.

[Operator:]

And our first question comes from Nelson Ng with RBC Capital Markets. Your line is open.

[Nelson Ng:]

Great. Thanks and good morning, everyone.

[Scott Gahn:]

Good morning.

[Nelson Ng:]

Just in terms of the $6 million of legal provisions, I know it's difficult to predict court processes. But like, when do you think that amount would be payable? Just kind of reading the background again and it looks like that court case has been going on since 2012. So I was just wondering if you see some closure in the upcoming quarters.

[Michael Carter:]

Well, as you'll see, we are going to appeal this to the Supreme Court. And with that appeal, we're not exactly sure when they will – if they don't accept it, then that money could be paid next year. If they do decide to take the case, then we'll just have to wait to see how long that process takes. But it could be as early as next year.

[Nelson Ng:]

Okay. Got it. And then in terms of the growth customer additions, we saw a pretty nice increase this quarter. Are you guys able to give a very rough background in terms of which sales channels you're seeing them from? I just wasn't too sure whether some of the face-to-face sales channels have started or whether they've been suspended again, can you just give a bit more color there?

[Scott Gahn:]

Yes. So it's been an interesting first six months of the year. We had suspension. We had the beginning of reopening and deployment of reps and then shutdown again over the summer. So it's been a little bit bumpy. We are deployed in retail or retail direct selling with sales protocols that limit effectiveness. In other words, selling behind a advisor with a mask on is not the same as being able to smile at a potential customer without a mask. So there, we are in certain regions where they have allowed us to come back in, for instance, Texas. We are selling in Texas. We are waiting in other of our important markets for states to allow us to sell face-to-face again. So it's really geography-driven, like I said, Texas is there, the Northern, Midwest and Northeast is more limited.

[Nelson Ng:]

And is Texas, I guess, fully open from a retail perspective, or in various select stores?

[Scott Gahn:]

I – again, it's – there are two things that are affecting us. One is, of course, what the policies of the governments. When Texas were opened and the stores are actually open, but then the stores themselves have to make a decision about how they feel about it, potentially exposing their customers to direct selling activity. So there are some stores that are – have taken a different position than others. But most of our store partners, our retail store partners have allowed us back in. The thing that we are finding that is important to consider as we look forward to and project our sales rep is that, when you have a commission-based salesforce that is shut-down for four months, they've had to find something else to do. And so we are rebuilding that salesforce through recruiting with our partners and it's taking time. So even though we’re – we have stores that are available for us, when we are not staffed in every store yet. So we have not gotten back to the staffing levels that existed pre-pandemic, and we are in the process of doing that, but it's taking time.

[Nelson Ng:]

Okay. That makes sense. And then in terms of the admin costs of about $44 million, if we take that $6 million of legal provisions off and go down to $38 million, would that be a fair run rate going forward for G&A? Or is there further cost reductions you're expecting to realize in the coming year?

[Scott Gahn:]

At this point, given our strategy, I believe that's a fairly fair run rate going forward.

[Nelson Ng:]

Okay. Got it. And then just one last question, in terms of working capital, I believe there is a big positive working capital this quarter, I know it's probably seasonal. So do you expect some of that to reverse in this coming quarter, as we head into the winter?

[Scott Gahn:]

I think typically, it’s the same seasonal pattern that you would have seen in prior years. We would expect it to be very similar type.

[Nelson Ng:]

Okay.

[Scott Gahn:]

Not as much as last year because of certain things, but definitely, there is a seasonality as we go back into the winter.

[Nelson Ng:]

Okay, great. Thanks. I'll leave it there.

[Operator:]

Thank you. Our next question comes from Mark Jarvi with CIBC Capital Markets. Your line is open.

[Mark Jarvi:]

Thanks. Good morning everyone.

[Scott Gahn:]

Good morning.

[Mark Jarvi:]

Just a question with the rising gas prices in recent months, I'm just curious what that's doing to your sales and margins. It looked like there was some positive commercial or an addition to the commercial gas segment, so wondering how you guys are seeing that segment shape up?

[Scott Gahn:]

Yes. So we – our supply team is bullish on natural gas prices and believe that we will see some tightness. And that is a good thing for our business, particularly commercial. One of the things, it’s hurt us on the commercial side is the customers are uncertain about the future of their businesses and are not signing term contracts. Price volatility and the potential for rising prices will encourage them to lock up, despite that uncertainly about their business. And so we do hope that, that will help us, it's generally a positive for selling when we can get some volatility in our energy markets.

[Mark Jarvi:]

Have you seen any indication of that yet or increased activity, or is there somebody you think going to pick up in the coming months?

[Scott Gahn:]

We think it'll pick up in the coming months.

[Mark Jarvi:]

And then just – maybe just historically, how do you see that showing up also in the residential in consumer segment? Is there a lag or any sort of relationship there in terms of timing of this commercial first and then consumer?

[Scott Gahn:]

Commercial sees it first, because it's just so much more contestable market. And the consumers in the commercial market are just a little more astute in paying attention. I think there's a bit of a lag. Generally, you could almost see a lag that could be in entire sort of winter season, lag where once we go through the winter, coming out of the winter, we might see the impact of customers wanting to take action.

[Mark Jarvi:]

Okay. And then, obviously, you guys took up the guidance and the business is performing pretty well and more resilient through COVID, sort of fairly resilient. So if you do exceed your plan and hit the top end of the guidance on free cash flow and EBITDA, where does the incremental dollar go in the next couple of quarters? Is it towards faster deleveraging? Is there some incremental processes or technology investments you'd like to add on or just maybe just kind of see where you think that incremental dollar goes, if results do better?

[Michael Carter:]

Well, I think there's two parts there. You do have plans on the digital side. As we said, we are investing in that platform. We see that as a growth platform. So there's – to the extent that continues to show promise that we expect it will, then we will continue to invest in digital. As far as you can see in our documents we have, restrict – requirements as far as step downs in our commitment and our senior secured credit facility. So to some degree, we have over $200 million borrowed under that facility. So generally, we'll pay that down if we have extra cash.

[Mark Jarvi:]

So debt first, then further investments in digital, is kind of how you…

[Michael Carter:]

No, I wouldn't say that. I think we are definitely going to fund the growth initiatives as we view them profitable and they're meeting our requirements that we talked about. And then to the extent, once we've done that then we'll be looking to keep that cash and we'll pay down that – keep that debt and pay down to make sure we're within our – within the commitments.

[Mark Jarvi:]

Okay. Now obviously a lot has changed in recent quarters with the recapitalization, reconstituted board and Michael, you joined in the company. So I'm just curious, the Management Information Circular, in some of those sort of performance and compensation metric, maybe are quite stale. Can you guys share with us in terms of how you now are being sort of measured and judged, in terms of compensation metrics and targets?

[Scott Gahn:]

Can you – I'm sorry, I didn't catch the last bit of what you asked?

[Mark Jarvi:]

I'm just curious, like what is specifically in terms of compensation metrics, is it free cash flow generation? Is it EBITDA, is it total shareholder return, like sort of what you guys are seeing from a short-term and long-term compensation targets, what you guys are being benchmark till now?

[Scott Gahn:]

Absolutely. Yes, I can share that with you. So what we're – there are two things that are really important for us right now. And I think you guys have – you've written it, it is consistent financial results. It's stabilizing the customer base. So what we're telling our teams, what we're compensating our executives and other key employees on are EBITDA, it's a combination of EBITDA and customer growth. So because those are both important, right. I can meet my EBITDA by blowing the company down, right. I mean, we can just shut sales and then we can meet our EBITDA targets, but we need to grow. We need to bring back the consistent growth that the company has seen historically. And so we're compensating our – incenting our executives on both of those metrics in parallel. So we're – it's what you've written, consistent performance on EBITDA and stabilizing the customer base. That's what we're trying to do.

[Mark Jarvi:]

Okay. And then my last question, just, now that you don't have the dividend, the leverage has come down, I think in the past, there's been sort of indication that you can maybe take on a little bit more on the margin of risk, reduce your hedging costs. Have you guys done a bit more on that, and can you give us any sort of qualification of how you've been able to save any hedging or risk management costs?

[Michael Carter:]

Well, I think there's two – there's more than one major way. Historically, we had purchased an insurance policy that we paid a significant premium too, and we didn't need it, we get some of that money back. So that would really limit the amount of variability, due to weather and other things, overall to our EBITDA. And so, we're not going to pay that insurance premium going forward. And we didn't do that this year. We're not going to do it in the future years because it's risk that we can wear as a company because we have that liquidity. We have that capital structure to handle that. So that's one way that we're doing it. The other, look, part of the hedge cost is – the wholesale markets are not as volatile in power like they were this summer, where they weren't, we did see that volatility. That does give us an opportunity to make a little bit of extra margin on overall, just from optimization around the positions we have during the – especially during the summer and potentially in the winter when we have the weather exposure.

[Mark Jarvi:]

And we have seen any of those cost reductions in this quarter or is that coming in the subsequent quarters?

[Michael Carter:]

I mean, as we talked about, one of the things that was a driver, it's not a huge driver, but it was a driver, as we said, our base EBITDA did benefit from lower weather hedge costs. So we did see some of that benefit in the summer. And at this point, I think we'd continue to expect us to see some of that benefit in the future.

[Mark Jarvi:]

Okay. And then just one last question, in terms of any severance or any sort of compensation for Oakland people, is that all taken care of now with all the cash at the door. And is there any more remaining costs or cash outflows around a turnover?

[Michael Carter:]

Yes, I believe, we disclose that in our financial statements, if I'm recalling correctly, it's about $2 million of additional cash payments that are still left to be paid on the severance side so not immaterial.

[Mark Jarvi:]

Okay. That's great. Thanks guys.

[Scott Gahn:]

Thank you.

[Operator:]

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Scott Gahn for closing remarks.

[Scott Gahn:]

Thank you, operator. So we continue to be optimistic about the prospects of our – effectively turnaround with the recapitalization and with the rebuilding of our direct sales and digital. We continue to wear significant risks of COVID-19 but we'll look forward to get to the other side of it and have the company back to historic growth rates and financial performance. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.