Just Energy Group Inc.
Q4 2020 Earnings Call Transcript

Published: 8 Jul 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Just Energy Fourth Quarter Fiscal 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Scott Gahn. Sir, you may begin.

[Scott Gahn:]

Thank you, operator and welcome everyone. Joining me today is Jim Brown, our Chief Financial Officer and I need to preface the call by saying that the two press releases issued today potentially our answers to any of your questions will contain forward-looking information. That information may ultimately prove inaccurate. So, please read the disclaimer regarding the information at the bottom of the press releases. So, let’s get started. We got a lot to cover. Today, we issued our fiscal 2020 earnings results as well as issued a special press release regarding a recapitalization plan and board renewal. Jim and I will discuss the results for the quarter and our strategic priorities for the coming year as well as the recapitalization plan before we conduct a brief question-and-answer session at the end. I would like to begin my remarks by saying the past few weeks and months have been marked by unprecedented events from a global pandemic to record unemployment to destructive weather events across North America and in international dialogue on civil rights and racism. Through all of this, Just Energy’s mission remains unchanged provide essential utility services to customers, while ensuring the health and safety of all of our employees. I am proud of our team and the culture of inclusiveness we have worked hard to build at our company and I am honored to lead this organization during these challenging times. When I rejoined Just Energy as CEO last August, I thought to accomplish three objectives

[Jim Brown:]

Thank you, Scott. I will start with the recapitalization transaction. As far as our recapitalization, which will be undertaken as a plan of arrangement under the Canadian Business Corporations Act, we will raise $100 million through an equity subscription opportunity that is open to all security holders. Of that, a significant amount will go into the business and a portion will be used to pay down debt. This will provide increased liquidity, pay down our credit facility that allow us to be able to continue improve our operations and move forward driving sustainable growth over the long-term. We will convert approximately $420 million of convertible debentures and preferred shares to common equity, extend $335 million of credit facilities by 3 years to December 2023 with revised covenants and scheduled commitment reductions throughout the term, and we will extend our unsecured senior debt to March 2024 with interest to be paid in kind. In the investor deck that Scott referred to above, we have included a high level pro forma capital structure for the company post recap. We have also provided a description of the new equity subscription opportunity. In our press release this morning, you will find greater details about the plan. We expect our circular for the plan to be issued within approximately 2 weeks. Holders of record on July 23, 2020 will be eligible to participate in the equity offering. There is a table in our press release that tells you not only how many shares you will receive under the plan, but how many shares you are entitled to under the new equity subscription opportunity for shareholders of record as of July 23, 2020. Each share in the new equity subscription can be purchased for CAD$3.412. There will be a deadline for completing the subscription process on a date to be set in August. The backstop commitment ensures that any unsubscribed shares will be purchased and the company will see gross proceeds of approximately CAD$100 million. Our anticipation of this transaction will be completed in September, pending required approvals from stakeholders and court. We have indications of support from significant stakeholders, including our senior unsecured lenders who will be backstopping the equity subscription opportunity. And we are optimistic that upon reflection of our investors, the merits of this cap recapitalization will be cleared and we will be able to support – receive support to move ahead. Let me now shift to our – briefly to our 2020 financial results. Before I dive into the 2020 results, I want to direct you to our financial statements and MD&A that were issued this morning. Over the last year, following the Texas enrollments bad debt issue, we undertook an exhaustive review of our balance sheet to ensure all accounts are properly stated. As a result of this review, we have made restatement to our fiscal 2019 results and our retained – specifically, the first quarter of 2019 and our retained earnings as of March 31, 2018. Please refer to Note 5 in our financial statements for a more fulsome explanation. Turning to the key performance metrics, for the fourth quarter of fiscal year 2022 – 2020 sorry, base EBITDA for continuing operations, was $74.6 million, which represents an increase of 25% compared to the same period a year ago. This was primarily driven by higher base gross margin and lower non-commission selling costs. Base gross margin increased by 5% for the quarter ended March 31, 2020 primarily due to margin improvement initiatives and supply cost management partially offset by smaller, but higher quality customer base. I would like to emphasize that our base gross margin does not include $6.1 million of non-recurring charges associated with our strategic review restructuring costs or the costs related to the Texas residential enrollment impairment issue. Since Scott took it on, we have been keenly focused on shifting our focus to our core commodity business as opposed to international opportunities and value-added products acquiring higher quality customers. While our customer book is smaller than previous year, we are experiencing higher consumer renewal rates, significantly lower bad debt and acquisition margins exceeding fiscal 2019 by over 25%. Our embedded gross margin remains strong at $1.8 billion with over 1.1 million customers included. Our cash flow was significantly improved from this year 2019. As a result of our lower cost model and better management of bad debt, we finished the year with positive free cash flow of $25 million versus being $88 million negative in 2019. We are keenly aware of how important cost management is to our investors. This quarter and moving forward, we are also committed to providing more transparency to our selling and non-selling costs which you will see as an extended disclosure in our MD&A. For the year, administrative costs, excluding strategic review costs, decreased by 7%. Selling non-commission and marketing expenses decreased by 14%. And most notably, capital expenditures decreased by 58% from $43.6 million to $16.1 million. Our cost reductions and engagements with our vendors and suppliers allow us to end the year with about $80 million of available cash and credit facility. These actions should yield $100 million of savings in fiscal year 2021 relative to 2019. These figures also exclude improvements that have been made in bad debt. Finally, I would like to turn the discussion to our fiscal 2021 guidance. Given the uncertainty associated with COVID-19 and the impact it has had on our sales, we are providing a wider than normal guidance range between $130 million and $160 million base EBITDA for fiscal 2021. Additionally we also expect to see between $70 million and $100 million of un-levered free cash flow for fiscal year 2021. Before I turn the call back over to Scott, I want to say that we remain confident that our continued focus on the core business, cost reductions and return to customer growth will yield greater results in future periods. Now, I will turn it back to Scott.

[Scott Gahn:]

Thanks, Jim. So, I will conclude with a few final thoughts on our plan to strengthen and de-risk the business recapitalization as well as board renewal. I recognize the actions we are taking through the recapitalization are tough if you are an equity holder. However, as I said earlier, the capital structure we have currently is not sustainable. We need to fix it. So we can put management’s full focus on driving our underlying business in the markets focused on the really positive attributes of Just Energy. Furthermore, this recapitalization follows from an extensive strategic review process that has been termed to be the best alternative for the company. This is also a good time for board renewal to set us up for that future as a leader in our business and we will be proposing changes to our Board of Directors at our upcoming shareholders meeting. The board size will be fixed at 7 directors with at least 4 new directors joining the board. The [indiscernible] of nominated directors, including the relevant skills and experience will be outlined in the information circular, which we sent out to shareholders in the near future. The result of these actions will be accompanied with a stronger balance sheet, a revitalized board and a management team that no longer has the distractions that come with trying to deal with our liquidity and leverage, run a strategic review, while – all the while also running the business. We will have a clear path forward as an independent leader on our business, strong board oversight on behalf of our stakeholders, and a balance sheet that gives us the flexibility we need to drive the business. Now, let’s turn it over to questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Nelson Ng of RBC Capital Markets. Your line is open.

[Nelson Ng:]

Great. Thanks and good morning everyone.

[Scott Gahn:]

Hi.

[Nelson Ng:]

My – the first question relates to the reorg, could you just walk us through what approvals are required from which security holders?

[Scott Gahn:]

The recap, correct, it’s on the reorg.

[Nelson Ng:]

Yes.

[Scott Gahn:]

Yes, correct. So, we filed a – I need to be careful about playing lawyers, because I am not a lawyer, but we filed an interim order this morning to set the record date and we will be seeking stakeholder approval through a vote and final court approval by September.

[Nelson Ng:]

And then in terms of the stakeholder approval, does that include like equity preferred shares converts or is it mainly the senior lenders that vote?

[Scott Gahn:]

No, the senior lenders and the unsecured lenders have been – are obviously prearranged in this deal. The layers below that, the converts and the preferreds and the commons will be voting.

[Nelson Ng:]

Okay. And would it be like is the – like a simple majority required, in terms of those – in terms of converts, preferreds and common?

[Scott Gahn:]

Generally, there is more to the rule than a simple vote, but the simple rule is 60% – 66% of the people who vote need to vote yes.

[Nelson Ng:]

Okay, got it.

[Scott Gahn:]

There is other factors to consider, but that’s the general rule.

[Nelson Ng:]

Okay. And then just touching on the fiscal Q4 results, was there – I was just wondering the results were pretty good. I was just wondering whether the mild winter had any impacts on results whether positive or negative?

[Scott Gahn:]

Yes. I take the – in terms of weather event, we – I would say that we are – that we were middle of the road on weather. We didn’t see a bump or a detraction based on weather.

[Nelson Ng:]

Okay. And then was there anything recognized for the Filter Group in fiscal Q4, I know there are some recognized earlier in the year in terms of the lower contingent payments?

[Scott Gahn:]

Yes. The $22 million was from prior periods. It was not Q4, better that was part of Q4.

[Nelson Ng:]

Okay. And then just moving to the fiscal 2021 EBITDA guidance, could you just tell us what the main drivers are for the kind of year-over-year reduction? I guess given that I guess roughly $100 million of cost savings and initiatives were implemented, I am just wondering what’s offsetting a lot of that in the coming year?

[Scott Gahn:]

So, Nelson, we suspended all face-to-face selling, which is the majority of our selling in March. And it is yet to come back to a run-rate anywhere near what we are accustomed to. We do expect to get there, but the primary driver for our – I will say subdued guidance is the risk we see in what I call the growth wedge for fiscal ‘21 which is the new customer additions. Every month that goes by that we can’t get back to our normal run-rates on growth makes it harder for us to make up for it in the current fiscal year. And so we are expanding, we are moving into some of our Mid-Atlantic and Northeast markets as they open up. Unfortunately, the surge in COVID-19 cases in our biggest market in Texas has caused some of our key retail partnerships to pause on their reopening of our sales kiosks. So, really, the reason that we have got the guidance where it is and the reason for the range has to do with – all with the uncertainty regarding our ability to get our retail sales back. Digital is it’s doing well and we really plan on – we are investing a lot in our digital and inbound telesales as a channel that’s largely unaffected by COVID-19, but the face-to-face selling we are trying a lot of different things, we have got our kiosks look a lot different today than they did 3 months ago, there is a big clear plexiglass sneeze guard and our sales are have to be done in a touch less way, which was not the prior method. So lot is going to be learned this year, but I think I am comfortable with the guidance that we have got out there, but it is impacted largely by COVID. The biggest impact on us was not what we were worried about which was a bad debt and customer payments at least not yet. We haven’t seen an impact of that. It’s been on our face-to-face selling.

[Nelson Ng:]

Okay, got it. And then maybe this is a question for Jim, in terms of bridging from the $130 million to $160 million of EBITDA to un-levered free cash flow, could you just flag a few items there like, first of all, can you just clarify, I presume the un-levered free cash flow, I mean, there is no – it’s before interest payments, if you can clarify that and whether it assumes that the recapitalization happens like in September or can you just talk about some of the assumptions underlying the free cash flow calculation?

[Jim Brown:]

Yes. So to answer your question, because of the recap we switched to giving un-levered free cash flow because it’s not affected by interest. So the capital structure change would have been confusing we thought. So that is the answer to question one. And bridging from EBITDA, I mean, the three big things that drive that and we don’t necessarily give specific guidance on the three items, but is taxes, capital and changes in working capital. Taxes, I think you can expect to be similar in terms of cash taxes as they were in the prior year. We expect CapEx to remain consistent with prior year as well. We do have some repayment of working capital financing that we have done in prior years and we expect that to unwind during the year as well. So, we expect some use of working capital.

[Nelson Ng:]

Okay.

[Jim Brown:]

Nelson, sorry, one of the thing and there again, like I said, not the legal guy for sure, but senior unsecured do vote on the deal. My apologies I misspoke there.

[Nelson Ng:]

Okay, got it. And then like so I think in previous periods just in terms of this free cash flow includes some capitalized commissions, but obviously any I guess capitalized commissions would be a lot lower this year given COVID?

[Jim Brown:]

Yes, it’s pretty flat. We had a big increase in this ‘19 of capitalization, which is why you see the higher expenses coming through 2020, but it’s pretty flat.

[Nelson Ng:]

Okay. And then one last question before I get back into queue. And so as part of the recapitalization, there is a $100 million of cash. So could you just fly like, is that $100 million there to act as the buffer or I was just wondering what the plan to use for that is or is it there to pay down the credit facility?

[Jim Brown:]

Yes, a smaller part. I mean, the way we look at is when we look at our company oscillates during the month between low liquidity points and high based on when we pay our suppliers. And we looked at the base level that, that comes down to and felt that, that was unacceptably low. So, the majority of the money that’s coming in is going towards raising liquidity for the company and a some portion of it will go towards paying down the credit facility.

[Nelson Ng:]

Okay, thanks. I will get back into queue.

[Jim Brown:]

Thanks, Nelson.

[Scott Gahn:]

Thanks, Nelson.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Mark Jarvi of CIBC Capital Markets. Your line is open.

[Mark Jarvi:]

Thanks. Good morning, everyone. Maybe I will just continue on with the equity subscription and opportunity, just maybe you can walk though how the pricing was set for that between whether or not, so just maybe the backup of how that became with the people that are backstopping that equity offering?

[Scott Gahn:]

Yes, that was the pricing that was required to acquire the backstopping, that’s correct.

[Mark Jarvi:]

But maybe just kind of maybe logic around how you came to that $3.41?

[Scott Gahn:]

Well, there is – I don’t mean to repeat myself, but that was the price that was required to get the backstopping. The backstopping is important to the overall recapitalization transaction. And one thing I do want to reiterate is that the subscription is available to all shareholders. So, every existing shareholder or new shareholder under the plan will have the right for that subscription at that price as well.

[Mark Jarvi:]

Fair enough. Looking at that pricing is not bad, so wondering why you would cap it at a $100 million, why don’t give yourself even more buffer on the leverage and take down some of the different debt facilities?

[Scott Gahn:]

I will go back to the point I said before. We looked at the liquidity we thought the business needed and we also looked at the opportunities pay down some of our short credit facility debt and. Yes that was what felt like the right number and that's what we're able to achieve.

[Mark Jarvi:]

Okay. Maybe if you can just kind of go to the senior secured debt that should be extended if you can get the recapitalization done any details on what sort of considerations were made by them to facilitate that with a higher effective interest rate? And maybe walk through the pre payment terms of those quarterly or semiannual prepayments and if there are any other key restrictions like a cash repayment like that on the potential extension of that facility?

[Scott Gahn:]

Yes. Generally speaking, the cash it’s mandatory repayments over the next 3 calendar years they occur every 6 months and the interest rate was increased across all the different tiers at 150 basis points.

[Mark Jarvi:]

Is there anything else in terms of else in terms of either liquidity or covenants in terms of cash rebranding that or is mandatory repayments kind of come from more of the restrictions they put in place?

[Scott Gahn:]

With respect to covenants we had relaxed covenants as compared to what we had in the past that will accommodate what we expect to do in terms of performance in the business.

[Mark Jarvi:]

Okay. And then going back to the questions around approvals and support, are there any lock up agreements with any large shareholders? I mean it sounds like you are saying that the senior unsecured lenders of essentially sort of a lock up are there anyone else from the common equity side or anything else you can comment?

[Scott Gahn:]

No I cannot comment at this time.

[Mark Jarvi:]

Is it a no, there is not or you just cannot disclose that?

[Scott Gahn:]

No, I need to follow back up with you on that, Mark.

[Mark Jarvi:]

Okay, fair enough. And then maybe just on the comments where we're talking about that. You got it relief with Q4. You also announced a couple of weeks ago some relief again for fiscal Q1 obviously COVID kind of plugged in near term result but would that be the covenant relaxation was higher after Q4 than fiscal Q1 or Q1 fiscal 2021 may be can you help me reconcile the differences of what you needed back in April verses what you announced at the end of June early July and in how we think about that in terms of Q1 Q2 sort of outlook for the business?

[Scott Gahn:]

Sorry. Are you asking is your question what you expect our senior leverage to look like?

[Mark Jarvi:]

Yes, I mean because I was a bit that the results are pretty solid here, but I think the covenant on the senior debt to EBITDA was relaxed at a greater level, so higher than what you needed most recently at the end of June. So I was just trying to reconcile what look like okay numbers through Q4, you are implying with the guidance that you are facing bit of a headwinds in the start of fiscal ‘21 but doesn’t seem like the covenant relief, the magnitude of those kind of match to what we have seen with Q4 and what they are intimating on start of fiscal 2021?

[Jim Brown:]

Yes. Well, we do have some U.S. denominated dollar debt. And there has been considerable amount of FX volatility. So we try to give a little extra room, but then to calculate the number which I don’t have right in front of me, we probably could have asked for less, but that is what we ask for and we had to ask for it going into the end of the quarter with some…

[Mark Jarvi:]

Okay. And then – and just on that reduced selling opportunity with some restriction of the COVID-19, help us understand sort of the lag, is that something you start to see here in Q1 or is it more of a Q2 Q3 effect where you are not bringing those new customers in some of the people that exit through Q1 are not replaced, I am just trying to understand how much of a lag it might be from the reduction in sign activities than what we actually see on the financial impact?

[Scott Gahn:]

Yes. So, it’s very dynamic situation as you can imagine, especially with the recent surge in really our largest market which is Texas. And so we have in our – our plan as we look at COVID impacted would have us beginning to ramp back up in Q2 which would mean July, August, September which see us it’s beginning to come back to run rates that we are accustomed to in our face-to-face selling. That may not – there is some risk for that as we look at the market today. There has been a pause in certain of our retail channels. They are uncomfortable with putting kiosks in and increasing the amount of contact that their customers may have with people. So, the ramp up as we are – we had assumptions that we are going to be able to ramp up, we have a fairly resilient team in our retail sales group and they are already pivoting though, Mark, to staffing and expanding in markets other than Texas in order to make up for the slots in Texas. So, because we are in multiple markets and we can make decisions of where to staff kiosks, where we have really pivoted to fix some of that into PJM markets where they are begging to open up and they are not having the spikes that we are seeing in Texas. And so we do have some levers. As I said in addition to that, we are investing heavily in our digital and inbound telesales teams so that they can make up for some of this. So, this is despite the fact that COVID may hurt our retail expansion, particularly in Texas. We are finding other places where we think we can make up for it, which is part of the reason why we even with the pause that’s happening in Texas and the resurgence in cases, we still feel comfortable with the guidance that we have estimated prior to this recent surge.

[Mark Jarvi:]

That’s helpful. And then maybe my last question here is just on load and demand and how that’s evolved and the trickiness of trying to hedge in your customer books and what that could mean from any margin pressure in the near-term besides just customer levels?

[Scott Gahn:]

Yes, that’s an excellent question. But it’s one that we very early on began to monitor very closely, because we had some concerns with our commercial business, which is significant. It actually makes up 60% of our volume and we have a lot of concerns about the commercial business load shrinking and which it did. And we saw reductions in our commercial volume and we made adjustments to our hedging strategy on the basis of that. Conversely, we saw expansion of our residential consumer conception. So, you had some offsetting volumes across we manage – our supply team manages a combined portfolio of commercial and residential load. So we had some offsetting with a net reduction in volume. The commercial volume dropped by more than the consumer volume went up. Consumer margins are substantially greater than commercial margins. So, on a net basis, it was, I would say within the range of you could say, a wash estimate on gross margin. But we are continuing to watch it as business is coming back and as we have to adjust the way we hedge for the restoration of business in markets as they open up.

[Mark Jarvi:]

Okay, thanks for that. Appreciate it.

[Scott Gahn:]

Thanks, [indiscernible].

[Operator:]

Thank you. I am showing no further questions at this time. I would like to turn the call back over to Scott Gahn for any closing remarks.

[Scott Gahn:]

Thank you operator. As Jim and I mentioned on earlier remarks, while we have a lot of work to do, we have the right plan, the right team and the resolve to ensure our organization is not only on the right track, but also coming from the position of strength, deliver greater sales optimization and drive improved profitability over the course of fiscal 2021 and beyond. We look forward to updating you on our progress on our next earnings call later this summer and thank you for joining us.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you for participating. You may all disconnect. Have a great day.