Just Energy Group Inc.
Q4 2018 Earnings Call Transcript

Published: 17 May 2018

[Operator:]

Good day, and welcome to the Just Energy Group Fourth Quarter Fiscal Year 2018 Earnings Conference Call. [Operator Instructions] Please note today's event is being recorded. With that, I like to turn the conference over to Pat McCullough, CEO of Just Energy. Please go ahead.

[Pat McCullough:]

Thank you, operator. Good morning, everyone, and thank you for joining us for our fiscal 2018 year-end conference call. I’m Pat McCullough, Chief Executive Officer of Just Energy. With me today is our Chief Financial Officer, Jim Brown. Jim and I will discuss the results of the year, as well as our expectations for the future. We will then open the call to questions. Let me preface the call by telling you that our earnings release and potentially our answers to your questions will contain forward-looking financial information. This information may eventually prove to be inaccurate, so please read the disclaimer regarding such information at the bottom of our press release. Today, we will offer some perspective on our results followed by a deeper dive into market trends and Just Energy's strategy. Let me begin by saying both Jim and I are excited to be in our new respective roles and our fortunate to have the support of our Board of Directors and employees who believe in our strategy and path forward for Just Energy. This is a pivotal time in Just Energy’s transformation and the entire organization is excited about our future. Fiscal 2018 was an important, albeit, challenging year for Just Energy. On the positive side, we successfully executed the very meaningful growth initiatives discussed throughout the year. We also implemented critical steps along our path towards transforming Just Energy from a pure-play retail energy provider to a consumer centric company that operates through the entire customer life cycle. We exceeded an aggressive goal in our retail channel expansion strategy having established a presence in over 500 stores across 18 different retail partners in fiscal 2018. Additionally, our positive customer addition trends continue and we have now achieved five consecutive quarters of gross customer growth in our consumer division and positive net RCE additions in total during each of the past three quarters. As an organization, we take great pride in the clear improvement with customers and brand loyalty. The momentum we are building is a result of our company’s significant investments and strategic sales growth initiatives throughout the fiscal year and we are well-positioned to build on this progress in fiscal 2019 and beyond. However, working against us during the year was the series of non-recurring one-time events and unplanned activities. You will recall some of those events from the first half of our fiscal year such as the mild summer weather from tropical storms and hurricane patterns, but I also want to walk you through a few rather complex one-time events that occurred in our recent completed fourth quarter. During the fourth quarter, we incurred charges totaling more than $10 million related to a one-time weather event in January and unplanned severance cost. To clarify, this weather event was driven by deep- freeze in Texas, which resulted in abnormal load shape, extreme price volatility and extra unexpected ancillary cost creating a unique event. Just Energy is exploring broad foreign insurance coverage options that would provide protection against one-time events such as one in a thousand-year Houston flooding and an unusual record breaking Texas winter-freeze patterns, which occurred during fiscal 2018 in addition to our present weather structures. The tailored insurance program being considered by Just Energy will complement the existing weather risk management activity and provide long-term earnings stability and predictability. Despite numerous challenges, our planned growth initiatives and the ongoing intense competitive pressures we were still able to achieve significant profit and cash flow laying the groundwork for a bright future. Now, to be clear, we did benefit from an important investment gain that helped us offset the adverse Q4 events. Let me add a little color, and I refer you to the MD&A for more detail. In our past, Just Energy has made investments into our strategic partners such as Ecobee where we hold an 8% equity interest, and other companies. During the fourth quarter, we were able to recognize those investments in our financials. These investments come with real value and continue to benefit our business and our shareholders moving forward. Other equity physicians that the company holds includes equity positions or warrants in energy, earth, Skydrop, big data and filter easy, all partners of Just Energy. A note about our overseas markets, our geographic expansion efforts remain on track. The UK continues to perform exceptionally well having grown RCE’s by 35% during the fiscal year. In our new markets, Ireland is setting up new customer growth every day and fully expected to contribute to our growth in the short-term and Germany and Japan have recently launched new products under the Just Energy brand. We entered into each of these new markets with very little capital investment, but we continue to provide operating expenditures to support their growth and seek to maximize the opportunity over time. As the new CEO of this organization, I want to make a few things very clear about our future. First, we’re growing again. Our product channel and geographic expansion strategy has traction, and we’re well-positioned to deliver sustained growth. We expect solid earnings growth in fiscal 2019 and our customer trends of deposit and poised to continue given our progress on transforming our consumer-focused portfolio of value-added products, including Just Energy perks, strategic partnerships, and an optimized channel strategy. Second, as I mentioned earlier, we are working very hard on solutions to reduce volatility and improve the transparency of our results and thus delivering stability to our shareholders. Upon the successful implementation of said solutions, we eliminate future financial risk surrounding any other event similar to the tropical storm's we have experienced in our fiscal Q2 and the January ERCOT event. In short, Just Energy will become a more conservative organization, resulting a much more stable and predictable results that better allow us to plan for our future of strong growth and performance and also protect our dividend. We recognize the importance of our dividend to our investors and remain committed to that dividend since we experience some non-recurring profit pressure in the second and fourth quarters of this year, the trailing 12-month payout ratio has stepped up and will remain elevated until those abnormal quarters role off next year. With that is mind, we do expect to move back to a more normal training 12-month payout ratio once this rolls off the calculation at the end of fiscal 2019. We expect that level will be below 80%, our internal goal as a company is a 75% payout ratio at the end of fiscal 2019 with less than 2.5 times net debt-to-EBITDA at the current dividend levels. Third, Just Energy is in the middle of executing a strategic shift from a retail energy provider to a consumer company. Historically, Just Energy was simply a retail energy provider viewed as offering price-based push driven, invisible products to our customers. Often these products are resolved through third parties that cause JE to lose the direct interface with the customer. Looking ahead, we believe in the convergence of the smart connected home, home automation, security, and energy and water. We are building a platform to seamlessly integrate energy efficiency, water conservation, renewable storage, and commodity products into any integrator of the broader convergence of this suite of products and services. Our strategy is to develop a more profitable offering as value-added products and services where Just Energy owns and controls the customer relationships through the entire customer experience. The markets are experiencing a ground swell of change in disruption. This presents opportunities for Just Energy as we pursue new forms of technology and innovation, develop new routes to accessing customers and stand prepared to protect our position from existing and new entrants seeking to participate in the rapidly expanding energy retail ecosystem. Our future at the consumer company centers on a real value creation and value delivery. You will hear us refer often to these two terms value creation and value delivery. To our company, the value creation centers on our ability to bring value-added products and services along with best-in-class customer experience to our customers. For our commercial customers, this includes current and soon-to-be added energy management solutions such as commodity lighting systems real time monitoring, bill audits, HVAC optimization, safety and security and other potential offerings. On the residential side, these include offerings such commodity, sustainability, efficiency, water conservation, smart home and wellness products to name a few key categories that really shaped the future of how energy is consumed and managed. We know that when Just Energy creates real value for our customers they are willing to pay more and stay longer and this paves the way for our sustained profitability growth. When we say value delivery, we are talking about an optimized channel strategy. We are currently adding captive broker and direct channels on the commercial side of our business to allow Just Energy greater customer ownership while also allowing us to continue selling into our existing commodity customer base. On the residential side, we continue to drive sales growth through our primary channels, while also developing additional strategic alternative channels. This includes continued pursuit of our successful retail partnership channel. We continue to believe this is a critical and relatively new growth area for us and demonstrates why we must continue to explore and invest in new sales channels. We anticipate that our focus on speed and resolve in the delivery of our strategy will result in a meaningful contribution to base EBITDA in fiscal 2019 and is what paves the way for our sustained profitable growth over many years. In summary, after you pass through all of the one-time weather-related items, our fiscal 2018 performance was strong and we are confident we can grow in fiscal 2019 and beyond. These are exciting times, but also critical times for Just Energy to execute at our very best with laser focus and commitment to real change and measurable results for our shareholders. With that, I would like to turn the call over to Jim Brown our Chief Financial Officer. Jim?

[Jim Brown:]

Thank you, Pat. Let me begin by saying, it’s an honor to be part of this management team at such a pivotal exciting moment in our future. I look forward to getting to meet as many of you as possible. First, I’ll begin with an earnings update on the fourth quarter and full-year, then I’ll provide additional color on some key performance metrics, the balance sheet, and our outlook for fiscal 2019. Gross margin during the fourth quarter was $170 million, a decrease of 3% from last year. For the year, gross margin was $641 million, declined 8%. The gross margin declines reflect the one-time weather-related events, including reduction of consumption arising from abnormally mild weather in the summer in North America. Customer disruptions caused by Hurricane Harvey and higher supply costs due to brief January deep-freeze in Texas. The average gross margin for RCE per customer ad isn't during the quarter, but the consumer division was $216 per RCE, an increase from 192 per RCE added in the same period last year. The average gross margin per RCE for commercial customers signed during the quarter was $87 per RCE, a slight decrease from $88 per RCE added in the same period last year. Looking more closely at gross margin, the results are very positive story within both divisions. As we are adding and removing customers and average gross margin per RCE well in excess of those wells. Additionally, the quarterly aggregation cost per customer continue improving both divisions. Management will continue its margin optimization efforts by focusing on ensuring customers added meet profitability targets in fiscal 2019. Turning to expenses, administrative expenses increased $17 million to $49 million during the quarter and increased 16% to $195 million for the full-year. The increase was attributable to strong growth in the UK and costs associated with new strategic growth initiatives and in addition during the fourth quarter of fiscal 2018, we incurred unplanned severance cost of approximately $4 million. Selling and marketing expenses increased 13% to $61 million, during the quarter and 3% to $233 million for the full-year. These increases were due to planned investments in sales growth initiatives. Financing costs, net of non-cash financing charges improved 6% during the quarter and improved 25% for the year. All of this resulted in base EBITDA of $68.9 million, a decrease of 8% for the quarter and base EBITDA of $174.4 million, down 22% for the year. Again, there were several pieces to this performance in the addition to the topical weather effects of quarter two. First, we had a planned investment strategy, sales growth initiative, channel expansion, and diversification efforts throughout the year. We also added very unique issue in higher supply cost during a brief, yet extremely cold weather pattern in Texas in January of 2018. This resulted in $10 million expense during the quarter. The adverse conditions were offset by an investment gain related to the company's equity investment in Ecobee during the quarter. Now, turning to some other key performance metrics for our business and the balance sheet. As discussed earlier, our positive net customer add trend continues. Fourth quarter gross RCE additions of 312,000, improved 37% year-over-year with strong double-digit improvements in both the consumer and commercial businesses. Net RCE additions of positive 49,000 during the quarter improved 74,000 from a negative 25,000 net RCE additions in the same quarter for last year. The combined attrition rate for Just Energy was 12% for the year, an improvement of 3 percentage points, compared to last year and remain here at historical lows for the company. The consumer attrition rate improved four percentage points to 20%, and the commercial attrition rate improved 3 percentage points to 4%. The continued attrition improvement is from director result of Just Energy stress advisor strategy and long-term loyalty programs. The renewal rate was 55% for the trailing 12 months, a decline of 10 percentage points year-over-year. The decline was driven by very competitive and aggressive pricing in the commercial markets, combined with consumer renewals being challenged by regulatory changes in Alberta and Ontario, which prohibits the selling of products door-to-door, energy products door-to-door, bans contracting with consumers in their home and disallows the automatic renewal or extension of expiring contracts. For the full-year, base FFO was $91 million, down 28% for the year. The payout ratio of base EBITDA on a trailing 12 months basis was 95%, up from 60% one year ago. Because we experienced some nonrecurring profits pressure in the second and fourth quarters of the year, the trailing 12-month payout will step-up for the abnormal quarters and roll out next year. Managing our balance sheet remains a top priority, long-term debt decreased 15% to $422 million at year-end. Book value net debt to the trailing 12-month base EBITDA was 2.8 times higher than the 1.8 times reported for March 31, 2017, as a result of lower base EBITDA in the current year. With that, I’ll turn it over to Pat for a fiscal 2019 outlook and final comments.

[Pat McCullough:]

Thanks, Jim. In fiscal 2019, we will continue our focus on the entire customer life cycle built upon the strategic growth initiatives made over the past year seek to drive sales growth through our primary channels, while developing additional strategic alternative channel and deliver solid earnings growth. As part of our outlook for the business, we remain focused on capital stewardship. We feel our cash generation capabilities are stable and fully support our commitment to the dividend and our needs to grow the business. Over recent years, we have taken swift action to dramatically improve our balance sheet and debt ratios, we are committed to maintaining this discipline, while continuing to generate superior returns on our invested capital. We can do this and remain responsible in how we consider our optimal overall capitalization. As I discussed earlier, we’re also committed to taking further actions to remove weather-related volatility from our results. We understand the importance of transparency and stability to our shareholders. Just Energy will become a more conservative organization and deliver on that promise with more stability and predictability in our results. Importantly, we intend to do all of this, while growing our business. In-line with all of this, we expect to deliver fiscal 2019 full-year base EBITDA in the range of $200 million to $220 million Canadian. Please refer to our press release and disclosures within our MD&A for a compatibility reconciliation. We will also continue to monetize some of our strategic investments such as our Ecobee investment in the interest of generating additional shareholder value. Before we go into Q&A, I want to address a couple of items. Let me tell you about my style and approach as the CEO of Just Energy. When it comes to daily operations or long-term strategic planning, I stress transparency, performance, accountability, and shareholder value creation. In the near term, you will see Just Energy transition emphasis to cash created for the benefit of common shareholders in operating metrics and executive compensation. Creating accretive cash returns for our shareholders is my job number one. You will have noticed after 68 consecutive quarters that our Founder and Executive Chair, Rebecca MacDonald is not presenting on today's call. While she is active, leading delivery of shareholder value, she has entrusted this call to the CEO and CFO on a go forward basis. With that, I would like to open the call up for questions. Operator?

[Operator:]

[Operator Instructions] And our first question today comes from Nelson Ng with RBC Capital Markets. Please go ahead.

[Nelson Ng:]

Great, thanks. Hi Pat. Quick clarification on the fiscal 2019 guidance, I presume it was positively impacted by the adoption of IFRS 15. I was just wondering what was that positive impact? And I guess separately, is it safe to assume that your guidance does not bake in any unrealized investment gains in 2019?

[Pat McCullough:]

Thanks for the question Nelson. Yes, the first answer your question, as we reported for fiscal 2018, the difference between pre-IFRS 15 upfront commission expense and the amortization of those commission expenses in post-IFRS 15 was the difference between $188 million for fiscal 2018 with post-IFRS 15 treatment and 174 in pre-IFRS 15. So, the difference of 14 million or what is that, roughly 7% of absolute EBITDA. Our guidance for fiscal 2019 is 200 to 220 off of the basis of 188, so that it is an apples-to-apples comparison and that’s about 11% year-over-year growth, and while we haven't calculated a guidance the old way, we do have more growth assumed in fiscal 2019 and fiscal 2018, we are expecting the quarterly run rate of about 50,000 net adds to continue in fiscal 2019. So, you could assume that 14 grows a bit, but on an apples-to-apples basis this is still 10% plus and you are correct to assume that we are not forecasting any fair value gains on any investments in fiscal 2019. And if anything like that happens next year, we’ll be picking up that up as upside the guidance.

[Nelson Ng:]

Okay, thanks. And then just touching on the retail kiosks. I think you ended the quarter with 543. I guess when do you expect this level – like when do you expect the number to start leveling off or are you still aggressively adding kiosks?

[Pat McCullough:]

Yes, it is a great question Nelson. We think we have the opportunity to grow stores and kiosks in fiscal 2019, but we are starting to get to a level where we will start to switch out before performing stores for the new stores that we can bring on, which means we will be stabilizing at a level in fiscal 2019. I think we can get to a couple hundred more stores, but I think you will see us go flat at that point. So, I think from a modelling and a projection perspective, to think about us on a 700 slightly more stored basis and kind of going flat from there and then really trying to bring more products through that channel and expanding horizontally will be the strategy with our retail channel.

[Nelson Ng:]

Okay. And then just on like modeling it, I think in the past you talked about two customer adds per day per kiosk, but I think in the quarter, was it closer to one customer per day per kiosk?

[Pat McCullough:]

Yes, within the quarter you have to recognize there was a ramping of stores. So, where we hit the end of the quarter well above 500 as you mentioned, we weren't there at the beginning of the quarter. The other thing that’s happening is when you launch a new store, there is a learning curve or you're going to start selling at a lower rate and then you can get up to higher rate. We're not going to be able to hold two sales per store per day when we get to the 600, 700 store level, we’re planning something above what we – based on our financial returns on which was one sale per store per day and something less than two. We honestly don't have full clarity yet, until we get stabilized and fully launched, it generally takes a couple of months per store until you really know what it can do on an ongoing basis.

[Nelson Ng:]

Okay, got it. And then just one last question on, I guess capital structure and capital allocation. So, you mentioned deleveraging. You flagged that the dividend is a priority. How are you planning to use your excess cash flow, it would be towards, I guess growth, debt reduction or I think in the past year, you bought back some shares. So, I was wondering whether you can prioritize – tell us how you're prioritizing your free cash flows?

[Pat McCullough:]

Sure. So, when it comes to the free cash flow, we expect to create in fiscal 2019. We have got 75% payout ratio that I projected. We’re really focused on the balance sheet still, we don't expect to be buying many shares back in the short-term. We do not expect to be raising the dividend. We like the dividend where it's at. It is at very high yield right now as you know. So, we will really be focused on building up the balance sheet, most importantly though we see tremendous volatility in the Texas market right now, and we see some smaller books already running into headwinds with potential liquidity concerns. So, in an ideal scenario, we will be looking at acquiring books at lower cost than our customer acquisition cost on organic growth. So that would be one potential use. The other potential use would be, a continued expansion with products that support our customer or a consumer centric vision. So, if you think about the moves that we made in the commercial business in the last 12 months buying EdgePower and Intel latter care, which we are monitoring in controls companies in commercial and LED retrofitting, and energy efficiency type of place. We’re looking for those opportunities in both the consumer and the commercial segment to really enhance our product portfolio so we can really bring a suite of value products and services to our end customers.

[Nelson Ng:]

Okay, thanks. I’ll get back in queue.

[Pat McCullough:]

Thanks, Nelson.

[Operator:]

The next question comes from Carter Driscoll with B. Riley. Please go ahead.

[Carter Driscoll:]

Good morning guys.

[Pat McCullough:]

Good morning, Carter.

[Carter Driscoll:]

So, first question just following up on Nelson's, within the consumer space, I mean you have a lot of partnerships or broad number is smart energy management solution, could you maybe elaborate on some of the targeted types of follow-on or additional pockets that you don't have just specific types of technologies where you think it really makes a difference?

[Pat McCullough:]

Sure. It’s a great question because it is such a moving target and such a complex range of outcomes here. So, we're looking at the integrators, if you think about some of the digital dives, think Amazon on think Google think dividends, we see those guys as being necessary partners as we go forward. We see home service providers. So, the people that call on individual residences or small businesses, think of those and national footprint home service companies, we see financiers as partners and we see things outside of our core, think fulfilment, think R&D, think manufacturing. We see all of those areas as partnership strategy. Other items like energy efficiency, like water conservation that manage that utility commodity in a conservative or conservation focused away, those are areas we think that fit our core competencies and we can bring great value. Things like storage that bring time-based pricing arbitrage opportunities to our customers, managing commodity risk and product structures, we see that as our core competencies and we really want to focus our build-out of products and services around utility management or the utilities that you think of electricity gas and water as our domain. We feel that if we have the best plug in place suite of products and services that we will be the go to company in this space. So, when the Googles, the Amazons of events want to go into any market regulated or deregulated, we feel like we will be the choice if we are best-in-class at that.

[Carter Driscoll:]

So, is it fair to assume that you are trying to be almost the gatekeeper, but you will still be tech equipment agnostic and develop fulfilling partnerships, but again you want to be the go to person to manage the customer relationship, is that a fair characterization?

[Pat McCullough:]

Yes, that is. We have done a very successful pilot with [indiscernible], and we are in the process of scaling that nationally right now and we are, we are essentially a co-branded solution. [indiscernible] is the marquee as they are selling the fully integrated smart connected home, but Just Energy is the energy management solution. And I think that’s the best way to think about it. We want to own the customer when it comes to delivering commodity or arbitrage or efficiency opportunities on the commodity. We want the customer to know that we’re delivering that value, but we’re happy to sit within somebody else's platform if there is a greater value proposition for the customer. Does that make sense?

[Carter Driscoll:]

Yes. Could you talk about, so obviously you are not forecasting any of the unrealized gains in your fiscal 2019 guidance, could you talk about what that potential could be if you were to monetize say the entire portfolio and not own any interest and then you acquire the companies?

[Pat McCullough:]

Yes, it’s really hard for us to say because we are not actively managing those companies or raising capital for them. What you will know is one thing, material event happens to the value of our holdings will be reporting it. And that’s what really happens here in the fourth quarter. There was an upraise of Ecobee that many companies participated in an oversubscription and that raised the value of the shares that held and we had to take back to the books, but I don't expect something in the short-term Ecobee will be probably the highest potential upside for us in the future, but I don't expect that to impact fiscal 2019 unless like something happens inside of my preview [ph] but don't have any expectations for any material in the short-term.

[Carter Driscoll:]

Just so I understand correctly Pat, this was a mark-to-market, unrealized gain you didn’t actually reduce your position, did you?

[Pat McCullough:]

No, as change in the fair value of the existing investment.

[Carter Driscoll:]

So, you didn't actually monetize it by selling into that private round?

[Jim Brown:]

No, we're still holding our share. We did not sell any shares.

[Carter Driscoll:]

Got it. Okay. If, maybe just a couple of exogenous the insurance program that you are pursuing to couple the volatility, can we talk a little bit about what the practical effects are and then, you kind of estimated cost on an ongoing basis, I mean is this a one-time cash outlay, is this an ongoing margin share, just trying to get a sense of the practical financial impacts, and then want to be implemented if you're able to do so?

[Pat McCullough:]

Yes, I'm going to talk to you about volume metric volatility management in a holistic way to answer your specific question Carter. So, in the past Just Energy has been very good at a full weather hedging model. We go much further than our competitors using reinsurance products. So, if you think about what the company has done historically we have bought back off peak and peak block. We bought shapes to match the parabolic low-profile curve, and then we’ve also gone out with shape swing products and ultimately weather-related costs with college swabs to really and extremely mild weather. Those instruments are good, they are not perfect. So, they are seasonal or monthly settlements. They are genuinely saying they can help us in times like polar vortex, but they cannot avoid every challenge that comes our way. What we're looking at now is, two incremental steps to cover the potential leakage that we saw this year. We really did satisfy with the fact that we had two earnings blips associated with whether that’s not something we expected, but at the same time there has never been mild weather this past summer like there was push up into the north-east, where you are getting into markets that you would normally not be hedging mild weather in the summer. Additionally, we are talking about winter freeze in Texas were normally the volatility worry is in the summer. So, what we are planning in fiscal 2019 is roughly $10 million OpEx investment, that has already built into our guidance to insure that we can take tens of millions of dollars of incremental risk beyond our weather structures of the board. We're looking at multiple ways to do this. We would include reinsurance, would include insurance products and a whole bunch of broad other competitive alternatives, we feel like we will get something done here in the short-term. And then in addition to that, we’re looking at being a bit more aggressive passing through some of the unintelligible ancillary cost to our customers. We have been very conservative doing that in the past year or two and to be honest, we’ve been more conservative in our competition. So, we are not at market when it comes to passing on some of the incremental costs that happens with the items like the past because and ancillary cost that you can’t hedge. So, our intention is to add the second few layers to our existing structure to ensure that we have coverage that will really be tens of millions of dollars or even push closer to 50 to 100 if we get maximum support from that fourth and fifth layer that I desired. And that’s the difference in our past. Both have insurance ideas and the pricing is not activity that we had in place over at least the four years I have been at Just Energy.

[Carter Driscoll:]

All right. That dovetails into my question about guidance. So, do you have a range of net RCE additions that is built into the 200 to 220 to reach that?

[Pat McCullough:]

We view. It roughly reflects the fourth quarter net additions run rate on a quarterly basis through fiscal 2019. We think we will be net positive close to a couple of hundred thousand net proceeds.

[Carter Driscoll:]

Okay. And just following up, just a clarification, so the 200 to 220 for fiscal 2019 includes the changed IFRS, so I mean, I guess on an apples-to-apples basis you’re still looking at double-digit, but if, I mean optically it looks like a much bigger again, but it’s at least a 10% gain at the mid-point…

[Pat McCullough:]

Yes, it’s not the 174 to the mid-point 210, it should be excess to 188, which we mentioned in MD&A [indiscernible]. So, if you look at last year's business with the amortization with upfront commissions, we would have reported 14 million more earnings then that 188. So, the apples-to-apples comparison with the way we're going to report ongoing profit is 188 to mid-point of $0.02 [ph]. Now that is definitely more appropriate way to look at profitability of this business, because in the past those upfront commissions were expense day one and not matched the revenue, which is basic accounting principles. So, now we’re looking at what the true underlying long-term profit or eventual cash recurring ability at the company is. So, I think it does not impact any operational cost, but effect their cash item, but it does show we feel our shareholders with the real underlying profitability this business looks like.

[Carter Driscoll:]

Right. I mean it’s about increasing transparency that you have been talking about and reducing volatility that makes sense. Okay, a couple more from me if I may. So, the UK spending is it, is UK getting a little more competitive and you have had very good growth, but are you having to spend a little more on on-going basis in that market?

[Jim Brown:]

In case of the competitive market, we did see a little bit of margin pressure this past year, little bit less than we had forecasted, but it obviously did not stop our growth. We still received very nice uptick in 35% year-over-year growth at very acceptable margins, but we did see some compression there, but UK is a very open, very mature, very tough market. We differentiate ourselves with service and value-added products in different product structures, we expect to still be able to get better than North American growth in fiscal 2019 in the UK, but you are right, there is a bit of margin pressure there at least as we sit here today. Meanwhile in North America, the pricing power is coming back to us in terms of the ERCOT forward pricing on the summer. It’s really becoming uncoupled. It is the highest level we have seen. We’ve gotten off to a hot May, we have full weather hedges in place protecting us in our cost, but we are seeing the ability to price because we have competitors who are not growing and stopping sales right now over concerns of amplifying their position this coming summer.

[Carter Driscoll:]

The size of the books that you think might be – become available or become attractive and obviously accretive, could you kind of frame rough idea of, how many are looking averages the ranges, some of the opportunities there?

[Jim Brown:]

A couple of the little ones that have come across our radar, I don't know if we will get them done, it is too early to say, but we are seeing 10,000 to 50,000 RCEs, but to be honest the ERCOT trends, the volatility that people are worried about right now you're going to see everybody's book at risk if they are not hedged naturally or through weather structures like us.

[Carter Driscoll:]

Okay. Definitely, little scary times at Texas right now. And then just, you did not include obviously the mark-to-market gain in the – base FFO what have then if you had included it? Would that have pushed you back to your target by out range?

[Jim Brown:]

Close to 80%, if you took the 20 million in cash.

[Carter Driscoll:]

Got it. Okay, and then I think you referred to the severance as unplanned, but I thought the kind of the transition was, it was a planned transition having to take the range, but can you just square those two?

[Pat McCullough:]

Yes, what we are trying to say is, when we contemplated the year in our original guidance, we [indiscernible] those executive severance cost and in fact there was a point where we thought [indiscernible] fiscal 2019. So, that was our view of the fact that we thought it was unplanned.

[Carter Driscoll:]

Got it. Okay. And then I'm sorry, just from, the factors that you get you from 200 to 220 like a high level, is it spending, is it hitting the 200,000 net RCE edition just trying to understand the wiggle room between the two figures roughly?

[Pat McCullough:]

Yes, going forward unlike the past, net additions dropped directly through day one on profit, right. So, we always had this dilemma in our company where we grew sales and we backtracked on profit. We shrunk sales and we grew profit and was really sending a difficult message to shareholders in the outside world. So, definitely that customer growth is part of that nice step-up in fiscal 2019. We also see pricing opportunity around revenue management and you heard me say, if pricing power is coming back we will be more productive on our overhead, so G&A and nontraditional selling cost are expected to grow in the 5% range where gross margin we’re looking at growing well above 10% right now. But then I think importantly, you have to recognize that we have a capacity cost of step in our gross margin and we have [indiscernible] the other major items that we were – the $10 million on insurance lock. So, we have those wins planned in our cost in addition to those growth opportunities and we’ve included net of those main drivers is why we are seeing a net growth in ours.

[Carter Driscoll:]

And the capacity costs are largely confined to Texas, confined to Texas, is that correct?

[Jim Brown:]

The capacity cost, Carter this is Jim Brown. They are driven in PJM capacity costs have stepped up over the last two years and then dropped down dramatically in the playing year there is an overlap with our fiscal 2020.

[Carter Driscoll:]

Got it. Appreciate you guys taking on my questions, we will take the rest off-line. Thanks guys.

[Jim Brown:]

Thanks Carter.

[Operator:]

Next question comes from Kevin Chiang with CIBC. Please go ahead.

[Pat McCullough:]

Hi, Kevin.

[Kevin Chiang:]

Hi, how is everyone doing? I just have one question actually. When I looked at the composition of the puts and takes for EBITDA in fiscal 2018, it seems to net out to at least for fiscal 2018, a negative roughly 18 million of call it unique expenses that you probably didn’t model in or forecast originally. So, if I had to look at that 188 IFRS 15 adjusted 2018 EBITDA you put out there, why shouldn't I add back that $18 million of let’s say unique weather cost and things like that, which gets me closer to about $206 million of EBITDA let’s say run rate you could have done last year, which already puts me within the guidance that range that you have for this coming year, for EBITDA, I just lost, why is your EBITDA growing even faster than the guidance adjust, based on a lot of unique events you saw last year?

[Pat McCullough:]

Yes, I think the story is, the second half of the answer to Carter's question, which is we are planning an incremental $10 million on whether protection and the incremental capacity cost of about $15 million to bottom line. So, we have got a big headwind in fiscal 2019, but we have growth and we have these one-timers going away. The math we ran on fiscal 2018 just to put in perspective, we took the 174 and be backed out the Ecobee gain, which would take you down to 155, then if you took out the net effect of Q2 weather, exactly as severance and January ERCOT 3 million [ph] to 10 million, we were at, call it a pro forma 190 million in fiscal 2019, so we put that 190 and then modified for the post-IFRS $14 million [indiscernible], so we are all over what we are talking about, but then we have competitor headwinds and some growth going after that.

[Kevin Chiang:]

So, does the stuff role off and I know, I am pushing the years out here, but at some point, I guess these events, these various headwinds rollover and let’s assume it’s or should I assume it’s fiscal 2020, is that the year that we should see accelerate or step-up in your earnings growth because you don't just get the better base and these unique events aren’t there anymore, but you don't have to have these additional spend or is that pushed up further or am I not even thinking about this correctly in terms of earnings trajectory for this company over a multi-year horizon?

[Jim Brown:]

Yes, sure. Let me give you some color here. So, the first thing that has happened here is we don't like how we went through this year and missed expectations. So, we're going to under promise and over deliver, and we're going to get that done in fiscal 2019. You heard in fiscal 20 that step up on capacity cost goes away so we have a cost advantage in PJ and rolling into 2020 and we have the continued traction of product channel and geographic growth, so I would expect 2020 would look very strong on the profit basis, but obviously we have not built a detailed plan on 2020 yet, a lot of that would be an output of what happens in the short-term. We are planning an Investor Day in the fall though where we want to get a longer-term outlook in five years. So, we will be able to address the years beyond fiscal 2019 in the next quarter or two for you and lets you deep dive with our team into a channel of products and the strategies. So, more to come on that later Kevin, but I think you're thinking is right, it’s aligned with how I think about fiscal 20 and beyond.

[Kevin Chiang:]

That’s all from me and congratulations for the two of you to your new roles there.

[Pat McCullough:]

Thank you, Kevin.

[Operator:]

Next question comes from Ammar Shah with National Bank. Please go ahead.

[Ammar Shah:]

Hi, good morning guys. Thanks for taking my questions.

[Pat McCullough:]

Good morning.

[Ammar Shah:]

I was just wondering if you could speak to the 2019 contract maturity, I think there is like 30 odd percent and if you think that these present opportunities to boost margins?

[Pat McCullough:]

Sorry, could you repeat a question, I did not hear the beginning of it.

[Ammar Shah:]

Yeah, sorry. I was just asking with regards to the 2019 contract maturities I think in the MD&A it is like 30 odd percent let’s say, just wondering if you think these present opportunities to boost margins?

[Pat McCullough:]

Yes, so it’s interesting. Fiscal 2019 commercial contract renewals are well below what we walked into 2018 with. 2018 if you remember the first quarter was a challenge for the company, but we have lot of commercial contracts renewing and we have a lot of price pressure with competitive markets. Two better things are happening to us in fiscal 2019, there is less contracts coming up for renewal, so let’s risk those big bulky customers who are looking for better price leaving them and pricing power is coming back to us. Based on the volatility in ERCOT and also some of the changes that we’re taking to revenue management. So, I do expect that the fact that you're looking at actually helpful to us on a relative basis prior to the headwind that we saw in Q1 of fiscal 2018.

[Ammar Shah:]

Okay, great. Thanks for that disclosure. And then with regards to that 50-K run rate, this quarter was really good from the UK, just wondering is that something that you would expect to continue in 2019 or is some of those net adds going to come from elsewhere in the portfolio?

[Pat McCullough:]

Yes, I think a lot of those net adds are going to come from that retail channel that’s getting to full capacity and full share because if you think about the 500 plus stores we achieved in fiscal 2018, it really started in the second quarter and it was a linear ranch. So, we were at 500 stores at the beginning of the quarter, we were at 100 quarter before that. So, we have that in the fully effected that retail channel platform, yet. So that is the largest driver of net adds. One of the great deal of success with our commercial growth right now, our commercial sales team is on fire during [indiscernible]. We have more products to offer there now, that is just being scaled for the first time. And we expect the UK to continue to outpace the average growth in the rest of the company. They won't be able to hold 35% in fiscal 2019 over 2018 like they did this year. I would expect something about half the size of that on a percentage growth basis.

[Ammar Shah:]

Okay, great. That’s all from me. Thanks for taking my questions.

[Pat McCullough:]

Thank you.

[Operator:]

Your next question comes from Raveel Afzaal with Canaccord Genuity. Please go ahead.

[Raveel Afzaal:]

Thank you [indiscernible] for hosting the call. A couple of questions relating to your guidance. First of all, with respect to your gross margin for RCE for Consumer division, it was close to 236 in 2018, how should we think about that in 2019 because, obviously, the – if we take out the weather impact and then you are also adding time customers from U.K. and your kiosks strategy, so where can this 236 per RCE number go to in 2019?

[Pat McCullough:]

Thank you for the question, Raveel. This allows me to win it back. I betted you would ask us this question this morning. So, thank you for making me winner of that. 260 is the place that you should think about. A few quarters ago, we were in the 255 to 260 plus a range and we had to deal with Q2 weather and that January freeze reporting assurances in place that we don't have those big blips on board, which means that as we get to the end of fiscal 2019 and those two quarters roll off, we expect we will be realizing on a trailing 12-month to 260. And I think you see with the incoming design margin this quarter as it was 216 that normally ends up rolling through a 20%, 25% improvement when you get all the fees and the cross-selling opportunities added on to that.

[Raveel Afzaal:]

Got it. And then just a follow-up on that. So, if you just look at your 2018 gross margin for RCE for the Consumer division and then you exclude the impact of the weather impact, where would those gross margins be, just like you do a more apples-to-apples comparison by, excluding the weather.

[Pat McCullough:]

Yes. The easiest way to view it is take the Q2 year--ver year impact of weather, which I think we recorded 18.6 or 19 roughly, and then the 10 million on January ERCOT, and you know that the majority of that actually impacts consumer. Now there has been an averaging down. If you remember in Q1, we have recorded a switching side aggregation sale, I believe was 71,000 customers and those who are at gross margin, it was half of normal. But if you remember our explanation back then, the customer acquisition cost was covered in just over two quarters. So, while it wasn't impressive from a gross margin for RCE perspective, it was some of our best business because it paid back the upfront cost for paid back in two quarters, which is about half the time of, let’s say the door-to-door channels. So, gross margin for RCE is a good thing to watch, it is not perfect though when you think about EBITDA because there is difference in customer acquisition cost by channel and it’s really over watching. Remember our explanation in the past, we care about the annual gross margin as it covers our direct acquisition cost. That’s really the return on OpEx that we're managing every day. When we have our Investor Day later this year, we’re going to give you more visibility into the channel economics and how they’re made up, but you have got to adjust for a bit of that as well, we're probably at 100,000 sales like that in total across the year and consumers drag that average down a bit.

[Raveel Afzaal:]

Great. Thank you for that. And now looking at the administrative expenses, will they also be amortized using IFRS 15? Or will it only apply to sales and marketing expenses?

[Pat McCullough:]

Which expenses did you ask about?

[Raveel Afzaal:]

Yes, administrative expenses.

[Pat McCullough:]

No, those will not be impacted. Those are the expense as incurred.

[Jim Brown:]

The best way to think about it is, would the expense exist without the deal. There is a big long hurdle that explains how the whole standard works, but that is the easiest way to think about it.

[Raveel Afzaal:]

Got it. And so, if I look at your Q4 run rate, and I'm talking about the Consumer division, Q4 run rate with respect to administrative expenses, we take out the severance expense, can we assume that is the run rate for 2018? – for 2019?

[Jim Brown:]

It is a pretty good assumption. The company did hit its goal so the bonus targets which were planned were not incurred, so we had a slightly lower admin cost associated with the reversal majority of our bonus accrual.

[Raveel Afzaal:]

Got it. And then one more question with respect to the sales and marketing expense for the Consumer division again. We were at $47 million in Q4 2018. Now just looking at it, excluding IFRS impact, should we think about this number going higher on a per RCE per customer basis? Of course, it might – it should go higher because you're adding more customers on a cash basis, but should it also go higher on a per RCE basis? I'm just thinking about whether you're going to be using door-to-door marketing a lot as well in 2019 and how much cost this kiosk channel might add on a per customer basis.

[Pat McCullough:]

Yes, so as we report customer acquisition cost per RCE. There is two major things happening in fiscal 2019. First of all, to your question door-to-door shrinking, so door-to-door is going to be helpful to the average because it is the high cost channel. However, the retail channel is also high-cost similar to door-to-door and that’s growing. So, to some extent has retail become the larger percentage of our sales, you're going to see both the absolute and the gross margin for our – customer acquisition cost for RCE go up. However, there is an offset to – in fact there are some fixed cost which get absorbed as you grow. So, as you bring more sales in you will see that the numbers shrink. And that’s what’s been happening a bit recently to us. It also explains why customer acquisition cost for RCE grew in years past where we had a decline in book.

[Raveel Afzaal:]

Thank you. And two more quick questions. With respect to a natural gas profitability, those gross margins have been shrinking, especially on the consumer side. Can you help me think about how to model it out for fiscal 2019?

[Pat McCullough:]

In terms of gas margin, I really think we are – can be similar to what we are experiencing in fiscal 2018. Those gross margins have been challenged. What we are doing to counteract it is include things on the gas products like JE perks and then try to upsell things like a Skydrop water conservation device or and Ecobee energy efficiency device, but that is going to come slowly and that is going to be low penetration, so I think while we see some pressure there, we have got some good gains coming which will help with a bit, but I think a flat assumption on that is probably pretty good one for us.

[Raveel Afzaal:]

Perfect. And just finally, with respect to the payout ratio, I understand that the target here is 75%, but just based on the guidance, can you give me what the payout range could look like based on your 2019 guidance?

[Pat McCullough:]

Yes, so if we are at [indiscernible] midpoint, we think we're going to be significantly under 80, maybe not quite the 75. So, if we are down and the 200 range you are quick enough to 80% or maybe 81%.

[Raveel Afzaal:]

Perfect. Thank you so much.

[Pat McCullough:]

You're welcome. Thank you, Raveel.

[Operator:]

Our next question comes from Sameer Joshi with H.C. Wainwright. Please go ahead.

[Sameer Joshi:]

Thanks for taking my questions. Most of the questions have been answered, but just wondering if you are seeing any more customers stickiness from the customers that are availing you of your value-added offering as against the regular retail customers. Is there any more customers stickiness in that?

[Pat McCullough:]

We sure do. So, if you look at our overall attrition rates and that’s shown within the tender of the contract, meaning before we get to that economic decision at the end of a contract, we’ve had great improvement in the last six quarters, but if you were to actually pull out these value-added products, which are the minority of our business, and things that have Just Energy Perks on them, which is about half of our residential business today, you see a big difference in attrition. In fact, we generally see an improvement in sales conversion, an improvement in attrition, an improvement and renewals higher profit and higher customer net promoter score or customer loyalty score. So, those are the five metrics we watch very closely with value-added products or none commodity products or commodity products with those complement and we are very encouraged. That’ why everything you hear us talking about is going full course into those value-added products. Now, it is not me who are existing exiting the commodity business. In fact, the commodity business is the bread and butter and the cash cow and really the funding for everything we are doing. So, with great respect determination and focus we’re trying to optimize our work commodity business, but we do see us slowly diversifying away from complete dependency on it.

[Sameer Joshi:]

Okay. And this other topic has been discussed a lot on this call related to price colder weather, but in addition to pricing management and also in addition to insurance, are there other plans like having storage facilities or something like that to hedge against fluctuations?

[Pat McCullough:]

No, the primary five methods where what I described earlier. Three forms of, we will come up direct commodity hedging, weather structures, hopefully reinsurance or insurance product and then more pastoral contract pricing or price increases where we have pricing power.

[Sameer Joshi:]

Okay. And then just last one clarification on the guidance, does, do you envisage any meaningful revenues from Japan and Germany, and also maybe Ireland in the 2019 forecast?

[Pat McCullough:]

We would bid revenue coming in from Ireland right now. We are in the thousands of customers. We hope to be in the 10,000 of customers in fiscal 2019, Japan and Germany are more still seeding the product seeding the business and will come later. So, we're not expecting any meaningful contribution from Germany or Japan in fiscal 2019, which means we're carrying some OpEx cost in our guidance to support the future opportunity there. But Ireland, we believe we will be breakeven or profitable at the end of fiscal 2019.

[Sameer Joshi:]

Understood. Thanks for taking my questions. And congratulations on your new roles.

[Pat McCullough:]

Thank you very much.

[Operator:]

At this time, this will conclude our question-and-answer session. I would like to turn the conference back over to Pat McCullough for any closing remarks.

[Pat McCullough:]

Thank you, operator. Thank you again for joining us today. Before we conclude today's call, I wanted to extend my deepest gratitude to the employees of Just Energy. Their dedication to building our business through innovation and commitment to our customer service organization is the backbone for our success. We know that we can't win with the customer unless we win the hearts and minds of our employees, which greatly appreciated. And we look forward to updating you on our fiscal first quarter results and progress on our strategic initiatives in August. Thank you very much.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.