Just Energy Group Inc.
Q1 2020 Earnings Call Transcript

Published: 15 Aug 2019

[Operator:]

Good morning, ladies and gentlemen and welcome to the Just Energy First Quarter 2020 Fiscal Results Conference Call. At this time, all participants are in a listen-only mode. Today, there will not be a question-and-answer session following prepared remarks. [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.

[Scott Gahn:]

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

[Jim Brown:]

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 2019 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 non-recurring.During the quarter, management identified operational issues with customer enrollments and non-payment 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 non-payment 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?

[End of Q&A:]

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 equip 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.

[Operator:]

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