Just Energy Group Inc.
Q1 2017 Earnings Call Transcript

Published: 12 Aug 2016

[Operator:]

Welcome to the Just Energy Fiscal First Quarter 2017 Conference Call and Webcast. My name is Vanessa, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. And I will now turn the call over to your host Deb Merril, Co-Chief Executive Officer. You may begin.

[Deb Merril:]

Good morning and thank you for joining us this morning for our fiscal 2017 first quarter earnings conference call. My name is Deb Merril, I'm the Co-CEO of Just Energy, and I have with me this morning our Executive Chair, Rebecca MacDonald; my Co-CEO, James Lewis; as well as Pat McCullough, our CFO. Pat and I will discuss the results of the quarter, as well as our expectations for the future. We will then open the call to questions. Before we begin, 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. Fiscal 2017 is off to a strong start. We are seeing the benefits of the many initiatives we put in place over the previous quarters and continue to make progress delivering on our strategic vision. Despite traditionally being our seasonally slowest quarter, as well as a very tough comparison to the strong first quarter of fiscal 2016, we are very pleased with the financial results. We achieved 8% year-over-year gross margin improvement, 7% on the consumer side and 10% on the commercial side. This improved profitability resulted in solid performance driven based EBITDA growth of 6%. What's also impressive is that when excluding the incremental expense for prepay commissions during the quarter, based EBITDA increased by 25%. We continue to have success in driving sales in our U.K. market, where we now ground the customer base by 38% over the past year. We are very pleased with the growth in that market and are actively pursuing other European expansion opportunities to support our future growth. On the other hand in North America we continue to see low volatility in prices while we still maintain our discipline around margins. This lies to negative net additions of 134,000 RCEs for the first quarter of this fiscal year. As the [products] [ph] talk about for well over a year now, we've taken action to change the business foundation and reposition the company to capture more accretive profit and cash flow. We are transitioning Just Energy into a company that delivers differentiated products that have superior value to our customers. This is an evolution that will have near term impact on our net RCE numbers but we feel strongly that it is the right path for long term growth and profitability. The evidence that we are on track is shown by a reduction in attrition year-over-year of two percentage points in both segments, as well as increasing margins on new customers. Declining attrition and increasing margin has a compounding effect on life-time customer value. We are very pleased with the progress we’ve made on the product line. We are focused on bringing energy related products and conservation to our customers. For example to-date we have installed well over 50,000 smart thermostat which give us the ability to help customers conserve energy, as well as giving them technology in their home to bundle the commodity. This is just one example of our value driven product structures and we are testing and rolling out others to support our growth initiatives. In summary we are off to a solid start to the year and we are confident that our strategy will continue to deliver in this fiscal year. With that, I will pause and ask Pat to provide some additional color on the quarter's financial results. Pat?

[Pat McCullough:]

Thank you, Deb. We are pleased with the strong start to the year. The business is performing well and our consistency to deliver a bottom line growth continues to provide stable predictable earnings in just about any market environment. First, I’ll cover some of the highlights of the first quarter, and then provide some added color in certain areas. Our first quarter Base EBITDA increased 6% to $41.1 million, a strong performance offset $8.9 million of prepaid commission expenses during the period. If you exclude this additional expense item, Base EBITDA for the quarter increased by 25% to $48.8 million compared to the prior year. 25% increase is ahead of our guidance without prepaid commission of 17% to 21% improvement on a full year-over-year basis. This translates to a $9.9 million year-over-year improvement of which $1.2 million was due to foreign currency impact, and $8.7 million was driven by operational performance improvements. During the quarter, gross margin improved 8% to $162.7 million as we remain focused on delivering superior value props in the markets we serve, a disciplined approach to our sales and renewal process combined with strong customer growth in the U.K. Our gross margin improvement supported profitability throughout the consumer and commercial customer base. Consumer division gross margin increased 7% as a result of higher margin contribution per customer and the foreign exchange impact on U.S. based sales. While the commercial division gross margin increased 10% due to the operational improvements in place to increase the margin for new customers added, and the positive impact from the currency translation on the contribution from the U.S. customer base. Guiding a bit deeper, you can clearly see that the margin per customer improvement opportunities continue to exist. Average realized gross margins over the rolling 12 months, ending June 30 was $252 for RCE and the consumer division, well ahead of our previously reported design margins and $76 for RCE in the commercial division. This equates to year-over-year improvements of 19% and 27% respectively. If you take a look at our MG&A, you can also see these incremental design margin improvements between customers added and lost continue to hold true in the recent standalone quarter. Our strong customer value propositions are allowing us to price our energy management solutions competitively while enhancing customer satisfaction. This is evident in the attrition rate improving two percentage points year-over-year, and one percentage point sequentially in what we consider a highly competitive market. General and administrative expenses for the first quarter increased $7.1 million or 19% year-over-year. This was primarily driven by the impact from the exchange rate on the U.S. dollar denominated administrative cost and cost of serving our U.K. customer base. Selling and marketing expenses decreased 8% year-over-year, primarily due to lower commission costs associated with lower gross customer additions and decreased residual commission expenses. I’d like to turn to an update on our other key financial metrics and balance sheet items. Base funds from operations of $25.7 million decreased 14% from the prior year despite the increase in Base EBITDA. This was primarily due to a decrease in net cash proceeds from greater gas sales one year ago, as well as a year-over-year increase in maintenance CapEx associated with IT systems improvements. Additionally, this resulted in a higher payout ratio of 73% for the quarter. While on a trailing 12 month basis, the payout ratio is 56%. One year ago, the trailing 12 month ratio was 70%. So we've seen an improvement of 14 percentage points. During the quarter, we utilized previously accumulated free cash flow that continued to pay down debt. We remain committed to further reducing our debt until we reach our goal of 2 times net-debt-to EBITDA. Cash and cash equivalence of $87.4 million were down during the quarter due to the early repayment of $25 million of senior unsecured notes in June 2016 combined with normal working capital needs for the first quarter. Cash flow from operating activities was lower in the current period as a result of the seasonally warmer winter weather in the fourth quarter of fiscal 2016. As of June 30, Just Energy's book value net debt was 2.6 times Base EBITDA consistent with the net debt to EBITDA recorded in March 31,2016 and lower than the three times reported in the prior comparable period. Total debt was $637.2 million as of June 30, 2016 decreased 4% from $660.5 million as of March 30, 2016.This decrease was partially offset by the higher valuation of the U.S. denominated 150 million convertible bonds as a result of changes in the exchange rate to Canadian dollars. In addition as of June 30, 2016 the company had not drawn on its $277.5 million credit facility although letters-of-credit totaling $132.6 million remained outstanding. The company remains committed to refinancing its debt. Just Energy has evaluated multiple options with respect to the refinancing of its upcoming convertible debenture maturity. The Board has been briefed on the benefit of each of these options and have given direction to pursue a path that the company intends to execute in the short run. Turning now to our outlook, fiscal year 2017 is off to a strong start and places us squarely on the path to achieving our previously provided Base EBITDA guidance of $223 million to $233 million. This range reflects continued double-digit year-over-year percentage growth. Our guidance includes deductions to Base EBITDA of approximately $40 million for prepaid commissions which represents a $22 million increase over fiscal 2016 and reflects a go forward run rate for this incremental reduction in future years. With that I will turn it over to Deb for some concluding remarks.

[Deb Merril:]

Thank you, Pat. We’re off to a strong start and remained confident we can deliver on our previously provided Base EBITDA guidance for the full year while also achieving significant strategic milestones. We remain focused on restructuring our debt in a favorable manner in the coming months while also pursuing geographic expansion in Europe where we expect to expand into two new countries in this fiscal year. As we pursue international expansion we continue to be confident that our product and strategic vision will differentiate us in these new markets. As in U.S. and U.K., Just Energy can enter a mature market and still achieve strong margin and customer growth. We believe that our focus on the customer and value driven product is a differentiator in our industry and North America as well as the rest of the world. Beyond these initiatives we feel the consistent performance based results that have now become the norm that Just Energy will be accentuated as we continue to successfully embrace the customer and build longer term royalty program. We are very proud to announce that we’ve rolled out Just Energy perks a comprehensive reward program that gives our customers to benefit of Just Energy efficiency and broader conservation tools to make them more efficient users of energy in our home and business. Alternatively they may elect to arrange a gift card or Visa cash card to give them the ability to use it they see fit. This reward program is aimed at our entire customer base and gives them the ability to accumulate benefits as long as they are with Just Energy. This is intended to deliver benefits to our customers that will drive better conversion lower attrition and higher end of contract renewal rates. In addition to our Just Energy perks program we’ve previously talked about the many other products and initiatives such as the unlimited plan, Just Green, smart kind of tab, Just Solar and commodity bundled with energy efficient LED bulbs and air filters just to name a few. We feel we have a very well rounded set of value propositions to offer our many different types of customers. In summary, we’re off to a solid start to the year and we’re squarely on the best path to becoming a premier world-class provider of energy management solutions. Our business is healthy and growing even stronger. We are committed to delivering another year of double-digit earnings growth maintaining our stable dividend, pursuing prudent geographic expansion and further strengthening the company’s financial and strategic position in the coming years. With that, we’ll now open for questions.

[Operator:]

[Operator Instructions] We have our first question from Carter Driscoll with FBR. Please go ahead.

[Carter Driscoll:]

Good morning, folks. How are you? Thanks for taking my question. First question is, is there a metric that you can share with us or maybe tracking internally in terms of kind of the attached rates for some of these services, the additional services that you’re trying to upsell that has helped lower your attrition and obviously lead to what you’re hoping is better customer or better lifetime value for the customer overtime? And then maybe kind of give us an update of where you stand in terms of rolling out these products across various territories in which you operate?

[Pat McCullough:]

Yes, thanks for the question Carter. This is Pat. Yes you are right. We are starting to think about our customer base and amount of products that we sell per customer differently. We’ve begun internally calculating total customers products per customer and profit per customer versus the RCE metric which only captures our commodity business. We’re going to run with that set of internal metrics for a couple of quarters refine them make sure that we've got accuracy. And then we intend to deliver that transparency to you and the market by the end of the fiscal year.

[Carter Driscoll:]

Okay, all right. Maybe shifting gears, can you talk about you’ve had a couple of quarters now of net customer attrition and you talk about what – no, obviously you're really focused on margin per customer and that probably plays out for some period of time, can you talk about when you think you could grow net customer additions again and is that wrapped up with some international expansion obviously the low price volatility isn’t helping people from switching perspective, give me your thoughts about when you think it is may be able to flatline or maybe grow again?

[James Lewis:]

Hi, Carter, it’s James Lewis here. Well, we are looking at the overall customer experience, we’re looking at increasing the net promoter score and that impact making diligent product with better value. So that’s the big thing for us and as we look at those things we’re seeing a benefit due to the lower attrition and higher customer satisfaction. One of the things that we’re doing a lot more is more advertising a lot of our customers come to us to push the margin channel. So as we get out there and communicate more of these factors even better reacting to our product. But that’s the way we’re looking at the going forward.

[Deb Merril:]

And may be just to add a little bit Carter, you mentioned international expansion I believe that that is one that we know based on our experience in the U.K., we can grow our businesses and grow our customer base profitably over there. So again we’re looking and optimizing kind of the entire geography and knowing that we can get better margins from that that’s probably the best types for us to put our time and effort.

[Carter Driscoll:]

Fair enough. Maybe Pat, could you remind us again you talked about maybe in the near term addressing the converts that are maturing in the next year, you run us again the options that you're looking at and maybe if any more specificity of when you think the Board might give you the go ahead to pursue a particular path?

[Pat McCullough:]

Yes, thanks for the question, Carter. The second half of your question, let me start with first. The Board has given us direction to go towards implementation gap. So we’ve moved from the planning and marketing activity to execution. So we’re not saying any more than that we will be talking about this further publicly in the short run matter of months not our previous end of calendar year guidance we're ahead of that schedule. And what we've always thought is that working capital improvement pure debt convertibles are the likely places that we’ll look to get our entire long term balance sheet refinanced overtime. Working capital financing is specifically payment terms extensions third party payables financing we’d like to find debt if it was competitive without a potential stock warrant or convert dilution. But we know that convert market is strong and there for us. And we will be going through that range of instruments as we put together a plan to refinance the whole balance sheet. In the short term though we will be addressing a 330 secured.

[Carter Driscoll:]

Okay. And would that potentially include the remaining debt for CPP?

[Pat McCullough:]

It could. Yes.

[Carter Driscoll:]

Okay. I’ll get back in the queue. I appreciate you answering my questions.

[Operator:]

Thank you. Our next question comes from [Oren Eldrof] [ph] with RBC Capital Markets.

[Unidentified Analyst:]

Hi, guys. Congrats on a good quarter. Yes, so just wanted a more of a big picture question for you. So with respect to commercial business I know you guys want to set yourself up as a differentiator and show the value proposition. I think on the residential side there is multiple ways you guys can do that and Just Energy Perks program is probably an attractive way to do that as well. On the commercial side though it seems like the business is more commoditized if you know what I mean, and over the last couple of quarter I think the gross margin spread has been sort of narrowing. So how do you guys look at that moving forward, would you just accept kind of losing customers if it doesn't meet your profitability threshold or is there any strategies in place to kind of mitigate the attrition in that business?

[James Lewis:]

I’ll answer your question, two ways here. First, on the Perks program it is developed on the commercial side so we feel good about that and then when we look at the approach, we talked about the financial it applies to commercial as well. We look at a constant usage whether it’s residential or commercial, we’re looking up how to help that customer use less or more efficient or to help them with their renewable plans and so we feel good that we can apply that same concept to commercial as well.

[Unidentified Analyst:]

Okay.

[Rebecca MacDonald:]

I just want to add something, it's Rebecca. We have been saying quarter-after-quarter that this management team is incredibly focused on the financial metrics in the business and we have been seeing quarter-after-quarter that as long as it takes, we will clean up the book from a very small margin customer particularly on the commercial side and something gets negative, we are prepared to take the pain, on the short term for the long term gains. But the commitment is around margins and long term commitment that we have in the organization is generating margin per customer from different products. So that is plan that we have till 2020 and we are not going to change our view.

[Pat McCullough:]

Oren, this is Pat. Thanks for giving Nelson a much needed day off. We spoke in the past about highlighting battery storage within commercial account, that’s something that’s working in our industry. The other value props that are unique to commercial customers are LEDs with control system. We see our industry doing some of that. Those are type of energy efficiency or even potential energy savings type of opportunities that we can bring to the commercial accounts more than just commodity.

[Unidentified Analyst:]

Okay. And then on the solar rollout program can you guys provide some additional color. I know that some of the peers have seen a decrease in the value proposition given the decline in utility rates and sort of low energy prices. Have you guys seen any of that or is there any update on how that's doing?

[Rebecca MacDonald:]

Yes, so as you the solar market right now a lot of the players, the direct players are struggling quite a bit. The good thing about us is that we’re not out there putting panels on roofs ourselves. We’re partnering with others that are doing all of the work for us which is good for us because the slowdown that we’re seeing in that market isn’t necessarily impacting us maybe just from a sales perspective. So we’re seeing a bit more headwind in getting, in ramping up than we expected but continue to be optimistic that it will work itself out and we’ll be able to grow that business.

[Unidentified Analyst:]

Okay.

[Deb Merril:]

And I would add to it that we’re definitely analyzing markets as it is shaping out and we are figuring out how we can possibly structure different products and sale to customers that is going to differentiate us from others. And as soon as that is figured out which is going to be hopefully within the next quarter we could rollout the detail.

[James Lewis:]

And Oren as Carter knows well while covering so many solar stocks the equity cost of capital and the equity returns are under pressure right now. So there is a little bit more margin pressure on everybody in the solar space and it has slowed down a bit.

[Unidentified Analyst:]

Okay. All right thanks for the color. And I have one more question before I get back in queue. You mentioned Europe, in terms of the competitive landscape there how does this sort of compare to North America, is it as tight there, is it as competitive or would you maybe see an incremental uptick in gross margins if you’re successful at really expanding it in that space?

[Rebecca MacDonald:]

Are you talking about our expansion or our current U.K. operations?

[Unidentified Analyst:]

Well, I meant the new ones that you’re thinking. You’re thinking of entering two new geographies correct?

[Rebecca MacDonald:]

Yes, so that’s one of the criteria in our evaluation is to look at margins and look in determine whether or not it’s a return better or as good or better what we can get somewhere else. So the answer is yes. We expect to get as good if not better margins in these jurisdictions we’re looking.

[James Lewis:]

Oren we generally look for three things in new markets, wholesale, liquidity, price volatility and underserved customer and while most European markets are more mature they have a fuller form of deregulation so we can bring differentiated value to underserved customers in a much easier way than some markets in North America that don’t have the same level of deregulations, take like New York as an example. So we’re pretty keen to replicate the U.K. successes in other markets despite the fact that there are lot of competitors. There remain very little innovation and quite underserved customer base. So we’re pretty excited about the opportunities there.

[Deb Merril:]

And what excites us more than anything is that we’ve proven and over the years we’ve set timing on the gains. It’s not about geography graph. We actually feel way more comfortable going in more mature market because we know our ability to manage the whole process better than anyone else and one of the reasons we’re looking to these two new markets is the level of maturity, the level of penetration and as Pat said we do firmly believe we can satisfy customer needs better than players that are operating there at the moment.

[Unidentified Analyst:]

Okay, thanks. That will be it for now.

[Operator:]

Thank you. Our next question is from Kevin Chiang with CIBC. Please go ahead Kevin.

[Kevin Chiang:]

Hi, thanks for taking my question and I got on the call late so apologies if these have been asked or discussed in your prepared remarks but maybe just turning back to the commercial segment when I look at the performance in Q1 is about half of your revenue but a de minimis percentage of your base EBITDA. How do you look at that business – do you look at that business from a return on investment perspective or return on capital, I know there is a allied capital in your business today but it does generate significantly lower returns than your consumer division. Just wondering how you think of that commercial moving forward and if you really view it as a necessary distribution channel for what you are trying to do more broadly here?

[Pat McCullough:]

Thanks Kevin, this Pat. Certainly with us pushing the prepaid commission expense within that EBITDA calculation we’re giving we think a better view of the real returns in the commercial business and as you’ve noted they are smaller. Let us give you a little bit of thinking about the commercial business and why we’re committed to it. number one, that scale that it provides us does give us incredible leverage as we’re going to large counterparties like Shell, BP and Exelon negotiating pricing to support both the consumer and the commercial business. The ability of running larger accounts like commercial accounts is very efficient on our back office. So if you look at our cost of serving per unit of energy it’s much, much lower on the commercial business and fundamentally while the commercial business has largely been a brokered business with a lot of competition on low prices we see the opportunity to position ourselves as trusted advisors and differentiate and deliver new value props to customers, commercial customers and grow that bottom line margin. Specifically how we think about it is we do think about it on a return on operating investment, we look for cash on cash returns. One of the reasons you’ve seen those smaller margins grow over the last two years since the C-suite change is we’ve really been focused on walking away from the truly commoditized space of our commercial accounts and that’s why you saw 106,000 less commercial client this quarter is - we could have taken those customers, we could have made a small incremental profit but it wasn’t commensurate with the risk and the return we were looking for.

[James Lewis:]

And Kevin when you look at it compared to competitor our margins typically on the commercial side are bigger sometimes two or three times because we’re going after that small to medium sized commercial not the largest sized. So we do look at it and that return on invested capital and the benefit that Pat laid out.

[Kevin Chiang:]

That’s helpful. And then I believe in the last quarterly call you had highlighted a target of net adds of roughly 300,000 this year, loud and clear that the focus in more on profitability versus just customer adds but an update on where you think that number could end the year at, I presume it will be less than 300,000?

[James Lewis:]

No, that was medium. When you look at it we were looking at the number with our targeted budgeted gross margin in a 180 to 200 there. When you are looking at the margins that we’re getting now we feel good that we can deliver on at the EBITDA and gross margin numbers and like we said before, not only focusing on the RCE number that much and open the modeling is it’s easier to have a RCE number but I think when you look at the value we’re driving towards the continued profitability per customers that’s an important thing that we’re looking at.

[Kevin Chiang:]

That makes a lot of sense. And maybe just last one from me. I think you mentioned it earlier, looking at your net promoter score it sounds like in the U.K. that’s a positive score and it probably helps you sell more product there. When you look at the history of your net promoter score in your various geographies do you see that moving higher and if I presume that the newer markets have a higher a net promoter score for Just Energy because of this new energy advisor strategy you have, do you think you can see convergence over time to drive that as a distribution network for you.

[Rebecca MacDonald:]

Kevin we’re on a journey really in the last two or three quarters really pushing that promoter score so we’re just kind of doing the first stage of understanding what it is in all these markets and then it’s driving all of our behavior. So we in a bit of a discovery stage still seeing where we stand as a starting point but I would say as we look net promoter score based on, it’s not just based on geography, it’s also based on products. So it’s more product driven I would say than geography driven. So as we rollout the different products like flat bill like some of these other Just Energy Perks and things like that we’re seeing and we’re measuring every single customer and looking at based on product, based on service territory, based on length of how long they’ve been here, what are the trends we’re seeing which helps us measure how effective our products are as well. So in that drive new product development and new bundling strategy so it’s a bit of a cycle that we’re in. So to answer your question we’ve had great reviews in the U.K. from consumer advocates and so that’s definitely true but we’re also seeing good consumer feedback from our newer products that really focused on value in North America as well.

[Kevin Chiang:]

Okay. That’s helpful. And maybe on that from, in this discovery stage is the idea that if there is a product because you are doing it by product if there is a product there is a low net promoter score maybe it’s not conducive to bundling are those on the flip side products that you potentially get rid of as part of the portfolio you have there?

[Rebecca MacDonald:]

Absolutely. Yes, so we’re adding price all the time, this is not an investment curve that don’t keep it just adding and maintaining everything so the idea is to test, see what the customer feedback is. If it works, great. If not drop it and move on to the next one. So yes for sure.

[Kevin Chiang:]

Perfect, that’s it from me thank you.

[Rebecca MacDonald:]

So Kevin, I do want to put in perspective, next year the company is going to be celebrating 20th anniversary. We have been in this space for 20 years and we have seen many changes and as a corporation and the way we look at the business and our customers and our approach towards the customer has changed because we want to be very relevant 20 years from now. The transparence around product we’re now offering is increasing with time and we want to be ahead of that curve. So bundling of those product is definitely the answer and Pat mentioned that we’re analyzing net promoter scores of the different lines we are taking that very seriously because ultimately we all want to have a all happy customers but that might be unrealistic but we want to come as close as possible to satisfy individual needs instead of blanketed everyone with the same product.

[Kevin Chiang:]

That makes a lot of sense. Thanks a lot Rebecca, Deb, Pat, thank you very much.

[Operator:]

[Operator Instructions] And we have our next question from Sameer Joshi with Rodman & Renshaw.

[Sameer Joshi:]

Yes, thanks for taking my question. Most of this has been answered but have a question that is sort of that is multiple areas. One is in the Base EBITDA guidance you have given, what portion of that is from the U.K. operations, what portion of that is from Just Green and Just Solar initiatives and what foreign exchange assumptions have been made in getting to this guidance?

[Pat McCullough:]

Yes, thanks for the questions Sameer, this is Pat. We have not provided segmented guidance as you are looking for that. The one segment that we did pull out is $10 million from solar and other renewables that kind of new space that we have entered into. We are assuming a 1.25 rate so obviously we are getting some support around guidance reached here recently but on an average year basis we are thinking 1.25 between the USD and Canadian dollar.

[Sameer Joshi:]

Okay. And the U.K. exchange rate?

[Pat McCullough:]

I don’t have that top of my head but I can get back to you with that.

[Sameer Joshi:]

Okay. I think that's all I had.

[Operator:]

Thank you. We now have a follow up question from Carter Driscoll with FBR.

[Carter Driscoll:]

You talked about the flat bill roll-out particular maybe in markets like Texas that have around specific regulatory agenda, for lack or better term.

[James Lewis:]

In Texas specifically we have taken an approach there where we rolled out, actually we just launched a campaign on Monday. So we have billboards and radio with the launch of our flat bill in Texas that we are talking about, we rolled out in Ontario, we talk about the Midwest and North East as well. So Texas was one of - and U.K., but Texas was one of our last markets there just to roll out that profit.

[Carter Driscoll:]

Did you see it as a really a differentiated product and one which you could also potentially up-sell or use it as an entry point to up sell?

[James Lewis:]

Absolutely, we have seen great response, great discussion, talked to us whole lot and even the discussions the higher conversion rates across the board. So on that part as well, the consumers are appreciating the differentiated product, appreciating somebody not trying to overprice it. We do a really good job, our management team is phenomenal, did a really good job of pricing the product and customers see that and they also see a bit of our other products as well.

[Pat McCullough:]

And I think, this is Pat, just to add a few things, we haven’t seen a lot of volatility in the last two years. So as we have rolled this product out customers aren’t experiencing that bill shock that they can during volatile times. The fact that we have got it now into Texas, which is the largest deregulated market we plan and we have got the advertising campaign to the top 25 radio stations, the billboards right now in Houston got a 100 degrees plus 15%. We are heating the expressway and Dallas is at 105 this week, it’s a pretty exciting experiment because we are watching very closely to see the prices change. They have been pretty stable to date, but we are in the right place at the right time with the right product.

[Carter Driscoll:]

Okay. And then maybe this last, obviously there has been noise in New York State regulatory changes [indiscernible] retailers, can you talk about your exposure there obviously well diversified but any potential other geographies, maybe some regulatory headwinds that we should be aware of?

[James Lewis:]

Yes, you look at New York and what they are trying to do there on, one side making sure you have product of value to the consumers. We believe we are doing those things. The things that limit you in New York and some of the other jurisdictions is your build exactly deliver the product and services because the market structure there. Those markets are utility competitive billing markets. We believe that markets look at restructuring, there if they allow us to deliver innovative products there like Michigan, and Texas, Alberta, Georgia, and U.K. We think we can deliver compelling products that end use customers look to you first that. But you see some headwinds there in U.K. you had some in the Midwest and the few places, evaluating, but we think across the board the regulation here to say and as we talked about earlier, we think really the world is our oyster as we look to expand this year, but also the following, we got Japan, we've been talked about Mexico, so there is turn off lease around the world for us.

[Carter Driscoll:]

Excellent, I appreciate that color. Congratulations on the solid quarter.

[Pat McCullough:]

And a follow-up, this is Pat, the brands of our - my corporate controller Lisa O'Connor texted me, our GDP to CAD rates for the budget this year was 1.9. So, that’s what we're working our guidance off.

[Operator:]

Thank you, Carter. Did you have anything further before I release your line?

[Carter Driscoll:]

No I am all set, thank you very much.

[Operator:]

Thank you. [Operator Instructions] And we will now take a follow-up question from Oren Eldrof with RBC Capital Markets.

[Unidentified Analyst:]

Hi guys, just a quick follow-up just driving deeper into the numbers here. I noticed there is a bit of an uptick in the commercial customers lost gross margin per RCE, is that sort of a time thing that you're large customer leaving or not, renewing or, how should we look at that, moving forward?

[Pat McCullough:]

Yes, I think one of the things that we're watching very closely is which you're talking back here and this is Pat obviously. So, as we've increased margins in general over the last eight quarters, the commercial book is a shorter duration book. So we're going to start seeing the exiting customers at those higher margins as they trick or fail to renew depending what you're looking at, starting to come through. We did have an abnormally large quarter of renewals. And, we'll watch that closely, what we're really caring about most is can we continue to grow that incoming design margin and then can we experience that or better on a realized basis which we feel very confident. So, we're doing a good job right now.

[Unidentified Analyst:]

So I guess it is fair to say that given that the customers leaving, what, move forward will higher margins, you're going to be focusing on improving attritions as well as rates.

[Pat McCullough:]

Absolutely. One of the reasons that we are so keen to see the attrition improvement in both commercial and consumer as we think the strategies really starting to stick with customers. And then, what you've got as Deb mentioned - you have this compounding effect of higher margins per customer staying with you longer in that embedded margin expectation has to go up versus the normal trends and attrition renewal rates we put.

[Unidentified Analyst:]

Okay. And just a quick follow-up on that, I guess, in terms of duration of commercial customer book, is that sort of going to stay the level that is right now, or is there a plan to sort of extend the cycle or, what are your thoughts on that.

[Pat McCullough:]

We're generally, offering two and three year contracts with commercial accounts, but they have the opportunity go longer if they would like. We're not going to be changing the trading period that we buy wholesale, or sell to our customers. We'll go as long as five years right now. We do notice commercial customers are bit savvier. So when there is relatively low market prices like they are today, you do see them going a little bit longer, but it's not material to what we've been living with historically. Generally speaking your residential contracts of 3.5 years to 4 years on average, the trade at higher rates, the commercial contracts attribute three years, they trade at lower rates. Your average customer life cycle today, real customer life is 2 to 2.5 years, however, our goal is to lengthen that without renewals.

[Unidentified Analyst:]

Okay. Well, that will be it for me. Congrats again on good quarter.

[Operator:]

Thank you. We have no further questions at this time. I will now turn the call back over to Deb Merril for closing remarks.

[Deb Merril:]

Great, thank you everybody for joining us. It was pleasure talking to you today. We again very excited about our first quarter, looking forward to talking to you again next quarter. I want to take a quick minute to make sure on behalf of the management team, we want to again thank our employees to have Ben at the helm of making a lot of these things possible. We have a great team to make Just Energy successful quarter in and quarter out, and we want to make sure that we appreciate them. So again, thanks to all the employees. Thanks for joining us, and we’ll talk to you next time. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference and webinar. We thank you for participating and you may now disconnect. Speakers, please stand by for your post conference.