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Just Energy Group Inc (NYSE:JE)
Q2 2020 Earnings Call
Nov 7, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good after ladies and gentlemen. And welcome to the Just Energy Second Quarter Fiscal 2020 Results Conference Call. [Operator Instructions] Later we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder this call is being recorded.

I would now like to turn the conference over to your host Mr. Scott Gahn CEO. Please go ahead sir.

R. Scott Gahn -- Chief Executive Officer

Thank you operator. Good morning everyone. Welcome to the 2020 second quarter conference call Just Energy. With me today is our Chief Financial Officer Jim Brown. Jim and I will discuss the results for the quarter as well as our expectations for the future. And then we'll conduct a question-and-answer session following our prepared remarks I need preface the call by saying that our earnings release and potentially our answers to your questions will contain forward-looking statements information. Information may ultimately prove inaccurate so please read the disclaimer regarding that information at the bottom of the press release.

Let me begin by saying that the strategic review process coupled with significant internal efforts to enhance our stand-alone financial performance and long term strategic outlook continued throughout the quarter and are progressing well. The special committee overseeing the strategic reveals the processes progressing within their expectations. macro economic conditions continue to support the process and we're confident that whatever the result it will be the best interest of our shareholders. Last quarter I was clear with you that we were moving forward with a new resolve to improve operational controls and elevate our financial decisions. We returned to the core fundamentals that made Just Energy a leading energy retail for over 20 years. And while we've made significant progress in my first full quarter leading the organization we can and will do much more to deliver better more sustainable performance.

As we reported last quarter we identify and begin rectifying certainly enrollment controls in Texas that led to an AR impairment due to bad debt. The controlled issues a lot of significant number of high credit risk customers to be enrolled over periods stretching back to mid 2018 and ending when the control fixes were completed in July of Q2 fiscal '20. While we've largely prevented more high risk customers from being enrolled and we have made substantial progress in reducing the bad debt in Texas some residual bad debt risk is in the customer book and is working its way through the P&L as you've seen in our results for Q2.To ensure we deliver on our promise of improved performance and solidify our position as a leading North American energy retailer our objective for the remainder of the fiscal year will be two-fold. First we are focused on finding high quality customers. These customers are targeted with higher credit scores and larger energy footprints that fit our core business model. Correcting our enrollment controls and pivoting to these targeted customer segments is temporarily impacted our sales teams. However we're now focusing on restoring sales momentum with a razor sharp focus on value and we look forward to restoring sales growth in the quarters ahead.

Second we will continue to optimize our cost structure by eliminating redundancies and improving processes. I'm working closely with our leaders to identify and pursue opportunities to drive efficiencies and improve performance. And I'm confident that these actions will drive improve profitability and ultimately maximizing the inherent value business.Moving forward we'll also be more decisive regarding business initiatives. What we sell where we sell how we sell and to whom we sell all of these attributes will be evaluated at close to a customer level return as possible keeping only the combinations of products markets and customers that meet our threshold returns on invested capital.We're undergoing a rigorous performance improvement review process that will allow us to identify the very specific actions that we will take in fiscal '20 that will result in greater sales optimization through a focus on data analysis and maximizing internal rate of return on each sales campaign with improved margin activities and additional cost efficiencies to further strengthen our capital structure.

In addition to the stringent controls and evaluations we have made the strategic decision to dispose of our non core operations. This will allow us to focus on our higher margin North American operations and better aligns us with our future as a leading North American energy retailer. In line with this objective. we executed an agreement for the sale of the operations in the United Kingdom in October and our sale of our Irish operations earlier this month. Both transactions are expected to close before year-end. The sale of our UKThe sale of our UK operations aligns with our broader strategy to concentrate on our higher margin North American business.

Lastly let me add a little more color on our liquidity. We are focused on delivering stronger liquidity and building momentum from higher cash receipts lower selling and administrative costs and more efficient capital expenditures. All of this will equate to increased quality and add flexibility to our business. I am confident that our unwavering commitment to balance sheet discipline generating superior returns on invested capital and improving performance will position the company for more predictable stable performance.In closing we are driving performance improvements and focusing on best-in-class customer service as we shape a brighter future for Just Energy. We're operating the business aggressively evaluating opportunities for further streamlining of the business and the strategic review process remains in parallel and on track.

Now I'd like to turn it over to Jim Brown to give you some specifics about our financial results. Jim?

Jim Brown -- Chief Financial Office

Thank you Scott. As Scott noted the efforts in difficult choices made in the quarter allowed us to lay the groundwork for continued strategic review identifying efficiencies driving down costs streamlining processes in our core business. However we're still not happy with where we are and must continue to evaluate every facet of our business to drive shareholder value.As Scott said subsequent to the quarter end we signed agreements to sell both our Ireland assets and our UK business. We expect these transactions to close prior to year-end. Combined these efforts reinforce our decision to streamline our operations free up liquidity and build a solid book of business within our core geographies. I want to remind everybody that our fiscal financial results for Q2 are reflective of continuing operations on a year-over-year basis and have been updated to reflect discontinued operations.

Turning to the second fiscal quarter. Gross margin of $155 million was up 4% from the prior year due to lower hedge and supply costs in Texas despite our decline in customer base. The company continues to maintain discipline in layered hedging strategy and just pleased with the outcome of one of the most volatile summers in our history.Base EBITDA from continuing operations was $49 million for the second quarter. Base EBITDA for the quarter benefited from higher gross margin of approximately $6 million lower G&A costs reduced by higher bad debt and higher selling costs.

Included in second quarter base EBITDA was a gain on the reduction in contingent consideration from the company's acquisition of Filter Group of $15 million. As Scott stated bad debt expense for the quarter was higher than higher year driven by the Texas residential market as customers that historically exploited enrollment controls that were disclosed last quarter continue to drop from the portfolio.We've seen a significant decline in the number of customers who are higher risk in the portfolio since the enrollment gaps were closed in Q1 and continuing positive trends in collections and provision rates that we expect to continue to improve and stabilize in future quarters.

We are pleased to report that the cost transactions we initiated in recent quarters are beginning to reap -- yield results. Administrative expenses from continuing operations declined 7% to $41 million due to the savings we realized from the restructuring actions that hurt in prior fiscal year as well as our efforts to reduce administrative expenses through greater automation and consolidation and support activities.Included in the $41 million of administrative expenses is $3.6 million associated with our strategic review. Excluding the strategic review cost administrative expenses were down $7 million or 14% in the comparative period.

Selling and marketing expenses were $54 million an increase of 8% from the prior year. The increase stems from increased amortization of previously capitalized costs.Financing costs amounted to $29 million an increase of 43% from the $20 million reported in the comparative period. The increase was driven by increased interest expenses from higher debt levels and higher interest rates.Our operating cash flow and liquidity increased during the quarter due to seasonality in the company's business and the timing of settlement of certain trades in Texas market which experienced record high prices. We expect continued seasonality in our cash flows with second and fourth quarter being the most favorable quarters for liquidity.

Turning briefly to capital allocation. Last quarter the Board of Directors made a difficult choice to suspend the quarterly dividends to common shareholders for the foreseeable future. This was one of the tough decisions we made to better align our capital to promote long-term health of the business.Scott and I are working closely with the board to ensure that we prioritize the use of cash prudently pay down debt and pursue near-term organic growth opportunities that will support the business in the future.Before I turn back to Scott I'd like to discuss our fiscal year 2020 guidance. As we close the summer and begin to enter the period of potentially extreme winter weather in some of our primary North American markets. Our best hedging programs and our insurance wrap will help offset headwinds that could significantly impact markets in which we operate.

Furthermore we continue to make strides in eliminating costs attracting higher quality customers and improving liquidity. As a result of these efforts we are maintaining our fiscal year EBITDA guidance of $180 million to $200 million as well as fiscal free cash flow guidance of $50 million to $70 million.

With that I'll turn it back to Scott for concluding remarks. Scott?

R. Scott Gahn -- Chief Executive Officer

Thanks Jim. So again strategic review process is ongoing and the special committee is satisfied with the progress being made there from. From my perspective as I've said I said last quarter and then again this quarter which is my first full quarter. First thing we had to do was lock down some of the operation issues -- operating issues that were negatively impacting business performance and we've done a great job of doing that largely the enrollment control issues that we had in Texas but in other areas too. The second thing that had to be done which we have done a good job so far on is to shed some of the international non-core assets.We sold Ireland assets and we sold the UK business and so lot of success there we're looking forward to getting the benefit of that in both liquidity as well as the price. The third thing is right sizing the company G&A and non-commission selling expense. And we've done a great job with that. We've taken 400 FTEs out of the cost structure of the company this year 290 of those have been employees and the other and 110 roughly have been full time equivalent contractors that have been taken out.

The fourth things we've done that I really feel like is important for our company as large as we are is that we're embedding an intense data driven mindset around all aspects of the business from investment decision to customer acquisition to the targeting of customer segments and specific pricing. We evaluate everything about our customer survival rates long-term value lifetime value of the customer it's all critical to us.The idea the business decisions could be made on trailing 12 month average numbers when you got a book that is as diverse as our book we are looking at very very very small and very tight cohorts of customers for their profitability and that's the way we're going to look at the business going forward.

And the fifth thing that we're going to do is we're going to do a lot of work on trying to restore customer growth. The company struggled to have that customer growth for a number of years. And I'm working with our sales teams now and what we need to do to restore growth as a company in terms of net customer adds.And that's it. And we're ready to turn it over to Q&A.

Questions and Answers:

Operator

[Operator Instructions] We have a question from the line of Chris Van Horn of Riley FBR.

Chris Van Horn -- Riley FBR -- Analyst

Maybe you could talk a little bit about -- you reiterated your 180 to 200. Could you talk about maybe some of the puts and takes between that range?

Jim Brown -- Chief Financial Office

I think the key contingencies are that we as Scott said continue to get the sales turned around make sure we get back to positive our RCEs. The second item is we need to ensure that we continue in there with the bad debt with respect to Texas. I think that you were seeing signs that everything is moving in the right direction. But it takes time to realize that gain and we want to make sure it happens.

Chris Van Horn -- Riley FBR -- Analyst

And then you talked a lot about you know limiting the cost and revisiting various cost structures within the business. How do we think about that in terms of timing? I mean is that something that you want to -- do you have an end goal here or is it just going to be a continuing effort until you're satisfied with the level?

R. Scott Gahn -- Chief Executive Officer

This is Scott, It will be a continuing effort. If you're not continuing to try to keep costs down they're going up. And for me I always -- this is a sort of tired story internally it cranks every time we bring it up. But I led this company in 2011 as a North American commodity business and that's really kind of what we always thought our value added products that we -- I do continue to believe especially being able to roll those in to engage our customers but we had to face commodity business first. And I'm trying to get that G&A back to what it was in 2011. And I know that unless we are continually looking to get more efficient we're going to end up with rising costs. So it is a continual process.

Chris Van Horn -- Riley FBR -- Analyst

And then you mentioned your fifth item was customer growth. What's the kind of -- I'm sure there's many ways you can you can tackle that initiative. But is there something that's glaringly obvious in terms of what you need to do to help grow the customer or is it just a variety of things and as you get through it some might have more weight than others?

Jim Brown -- Chief Financial Office

So I look at our business, We go after customers through a number of different channels. And I think we can optimize some of our channel strategy. We've got a retail strategy. We've got people in Sam's Club selling to customers who come into Sam's Club. We've got kiosks and other stores. And that's our sort of retail channel which has really grown significantly over the last two years and I feel very good about that. Our digital strategy is evolving. I think there's a lot of opportunity for the company to grow its digital footprint and its ability to bring in customers through that channel.

But one of the areas that I've really challenged the organization to look at is our fail to renew customers. We lost 180000 customers so far this year who concluded their contract with us and did not renew. Those are the most valuable customers we have. Because when I talk about valuable customers I talk about customers who stick with us for a contract term they pay their bill on time we don't have to disconnect them. Those are really valuable.

And we've also found that there's a high correlation in good customer characteristics, So when I got a customer that runs through contract term I need to try to keep that customer because they are by definition a high value customer. So one other things we're looking at and that have really challenged the team is to increase our ability to renew customers. It's its own channel in effect 180000 customers that go somewhere else for their energy I want to keep as many of those as I can. So I think that's a key element of us being positive net add.

If I kept those customers right now I would be positive net-adds. And I'm not going to keep them all. So I got to have some improvements on the new sales side but just keeping the majority of those that lead if I could keep them I can really close to positive net-adds. And so that's really what we're trying to do.

Chris Van Horn -- Riley FBR -- Analyst

Could you, update us on the green portfolio? And is that a good opportunity set for you as you think about customers moving in that direction?

Jim Brown -- Chief Financial Office

Yes we like Green. We're in the process now of really looking at the way that we price Green. We've had some changes in the way we price Green that is making a challenge for customers. So some of what we're trying to do is change the way we price our Green to customers. But it remains a good element and we use it oftentimes as an up sell to customers as they come in. So at our customer base we still have a significant segment of our customers that want to have a green footprint as it relates to their energy consumption and we continue to offer that product to them.

R. Scott Gahn -- Chief Executive Officer

And Chris I'd also like to comment on the commercial side. We've seen emergence of the demand for sustainable energy solutions around what we've been calling direct Green business where basically the customers directly contracting with us to point to an identifiable asset that produces Green. We see that trend increasing. And those are sticky customers good margin customers and they have a very specific action that we're able to deliver. So it's not a non-issue on the commercial side either.

Operator

And your next question comes from the line of Mark Jarvi with CIBC.

Mark Jarvi -- CIBC -- Analyst

I just wanted to go back on the guidance which was reiterated. Just trying to think about the context of the continued consideration with the Filter Group. If you didn't have that $15 million would you have thought about altering the guidance? Or does this now mean that you think you can push to the upper end of the range with that $15 million?

R. Scott Gahn -- Chief Executive Officer

No Mark, We're talking about the range absent that one time game. We understand that's an unusual accounting and that's why we called it out but it is GAAP. We believe that we'll still be within the range without that.

Mark Jarvi -- CIBC -- Analyst

And then the bad debt did take higher I think you guys are working through this enrollment controlled issue in Texas. How do you guys see that trending over the next couple quarters or any visibility as you've now moved into the current quarter?

R. Scott Gahn -- Chief Executive Officer

We continue to see improvements. We actually -- the President of North American business and I have a weekly meeting on this because we have very keen eye on what's going on. And we see improvement and we see a decrease in the number of customers that were problematic being build which in turn means the number of bad debts arising from those will be lower.

It takes time for a billing month to flow out. So we see what the collections are with the different billings months and every month is better. So the rates at which that increasing is a little less that we've expected so there's some residual bad debt going through Q2. But all the trends are positive. We expect it to be better in Q3.

Mark Jarvi -- CIBC -- Analyst

And then [Indecipherable] Vistro had their call this week and they talked a bit about market volatility and how they thought for retail there that it would make it more expensive or difficult to provide I guess hedging or -- against volatility and things like that. Anything you guys could point to you in terms of your ability to stay really competitive in Texas and manage that volatility? And then any costs associated with -- it seems you have volatility over the next couple of years?

R. Scott Gahn -- Chief Executive Officer

Yes I'll start off. We don't see -- we have a very strong inter-creditor group of suppliers that we rely on to provide us with all manner of products that help us be competitive and help us manage our risks in the market. And so we actually feel very good about it. Jim can give you some more details of why function rolls up to him. But from my perspective the strength of our supplier group gives us a lot of capability.

Our internal risk management supply team is very good and performed really well in a -- as Mr. Ed Vistro have said in a highly volatile particularly that August volatility we saw we actually -- our supply team actually produced a slight net positive "P&L". In other words their costs actually came in lower than first of month forecast had. So we feel very good about it. And don't see any real challenges to our ability. In fact we think of our -- the sophistication of our risk management we think actually gives us an advantage against a lot of other retailers out there.

Jim Brown -- Chief Financial Office

And I'll just reiterate everything Scott said that I think the layered process we use of continuing to take volatility out of that through our base edges our shape hedges our whether contingent hedges and then finally the insurance wrap which is gives that final piece of not having to worry about black swan events as much allows the flexibility for the team to optimize the P&L. So we're happy with how it ended up it was just definitely one of the most volatile summers I've ever seen that's for sure. But we're happy with the results.

Mark Jarvi -- CIBC -- Analyst

And you don't anticipate those products becoming more expensive?

Jim Brown -- Chief Financial Office

It's going to be expensive for everybody if it is. And we consider that in our pricing as well. So we're somewhat in different for the price because it's going to be a market price and we're going to -- but one thing I can assure you is we will continue to hedge in a very conservative and effective method.

Mark Jarvi -- CIBC -- Analyst

And the last thing I want to talk about was the credit facility that kind of moves into your current debt now given that it's 12 months from maturity. You guys obviously talked a little bit in the MD&A about a plan to manage that. Any commentary if you guys think you're in a place to have that extended in the near-term? Or is it at a lower size or asset sales whether its eco b safe or things like that to help retire some of that credit facility in the next 12 month?

R. Scott Gahn -- Chief Executive Officer

Well maybe not that specific Mark. But I can tell you that we're actively working to renew the facility.

Operator

And your next question comes from the line of Nelson Ng with RBC Capital Markets. Please go ahead.

Nelson Ng -- RBC Capital Markets -- Analyst

So first question just relates to the $15 million EBITDA benefit from the reduced contingent consideration. So my understanding is the contingent consideration reduced by about $31 million. Could you just walk us through how that translates to $15 million benefit to EBITDA?

R. Scott Gahn -- Chief Executive Officer

What we did not -- since the contingent consideration is in shares we did not want our own share price flowing through base EBITDA. So we bifurcate the split of the contingent consideration and to change due to movement in share price and change due to movement in performance of the entity. So that's actually why the split occurs.

Nelson Ng -- RBC Capital Markets -- Analyst

And then the second question just relates to the sale of the UK business. So it seems like the UK should be reinstating the capacity market. So does that mean that you'll be receiving that additional EUP8.5 million of proceeds from the purchase price?

R. Scott Gahn -- Chief Executive Officer

Well the way it actually works is if the market was reinstated and we don't get the payment. That was an open question at the time we close the deal is whether that market will be in reinstated. If it wasn't reinstated the buyer didn't have to pay it and we're going to pass the costs or the savings through that. It has been reinstated but the amount that we actually owe is still being determined. Any benefit below the cap on the contingent consideration will be cash flow to us and we're still working through that.

Nelson Ng -- RBC Capital Markets -- Analyst

And then can you just explain how the -- whether the capacity market is reinstated or not. How that impacts the value of the business? I generally thought the capacity markets that pain was a bit of a pass through. So just wondering how it impacts the underlying business?

R. Scott Gahn -- Chief Executive Officer

So an important thing to understand about the sale of the UK business is at the signing day everything was determined. We didn't want to have any contingencies with respect to working capital adjustments or anything like that. So we used what's called a lock box agreement. So therefore it's really just whether that payment had to be made or not it's not indicative of the valuation of the business.

Nelson Ng -- RBC Capital Markets -- Analyst

And then just one last question. So I noticed in the quarter I guess net debt including cash balances the net debt reduced by I think over $100 million or so but obviously the cash flows from operations was less than that. Can you just talk about how the changes in working capital or other things or maybe if the timing item helped with the reduction in debt?

R. Scott Gahn -- Chief Executive Officer

So there's two things. One is we're seasonal business Q2 and Q4 or the positive cash flow quarters for us becoming increasingly seasonal as well for reasons that are probably deeper than we could talk about separately Nelson outside this call. The second is there is some timing. There was some trades in our past as a result of the extreme high prices settled positively in the quarter and will have some negative cash flows in the next quarter and that's just -- that's part of business we're in.

Nelson Ng -- RBC Capital Markets -- Analyst

As I know previously you guys were kind of pushing out the payables date with suppliers. So I'm not sure whether you leaned on some of the suppliers bit more in the last quarter or just more about timing of the quarter?

R. Scott Gahn -- Chief Executive Officer

It's actually -- it is the extension of payables is somewhat what created some of the seasonality. We haven't had material increases in any other supplier terms in the quarter. But those supplier terms do create some of the timing differences in seasonality.

Operator

[Operator Instructions] And the next question is from Raveel Afzaal with Canaccord.

Raveel Afzaal -- Canaccord -- Analyst

A couple of housekeeping questions. First of all how much of the selling costs were amortized in the quarter in Q2 '20?

Jim Brown -- Chief Financial Office

Rraveel could you repeat that wou kind of cut out for a second.

Raveel Afzaal -- Canaccord -- Analyst

Can you tell me how much of the selling costs were amortized in the quarter?

Jim Brown -- Chief Financial Office

What was the amortization of selling costs in the quarter as opposed to total selling costs?

Raveel Afzaal -- Canaccord -- Analyst

Yes that's right exactly.

Jim Brown -- Chief Financial Office

Do you want to ask your second question while we pull that up?

Raveel Afzaal -- Canaccord -- Analyst

Can you also tell us like how EBITDA was generated by the UK operations in the second half of last year last fiscal year?

Jim Brown -- Chief Financial Office

Or pulling both of those up now as you see so we will pull both. Is there any -- so those are straight up numbers I can give you after the call or we can pull them up right now.

Raveel Afzaal -- Canaccord -- Analyst

Sure, It's OK, I can get them from you after the call that's fine with me.

Jim Brown -- Chief Financial Office

Just commentary though around the amortization Raveel is while we're pulling up the specific number that wasn't broken out. We have seen -- we saw significant increase in capitalized selling costs last year. We are being more particular about how we spend those dollars. We're really focused on the IRR of what we get back from marketing and capital deployed. And we are seeing a levelization of amortization and cash spend in the quarter which is what we -- which we like.

Raveel Afzaal -- Canaccord -- Analyst

And just with respect to the cash flow guidance that you have for the year. Now should I be using cash flow from operations after working capital changes minus investment capital which equates to about $50 million in the first half of 2020 and calibrate that with the guidance that you have or should we take out this $12 million payment that you've made for the business in Q1 '20?

Jim Brown -- Chief Financial Office

No you're correct it's operating cash flow minus invest in net of acquisitions or excluding acquisitions.

Raveel Afzaal -- Canaccord -- Analyst

Excluding acquisitions so I should take out this $12 million then?

Jim Brown -- Chief Financial Office

Correct.

Raveel Afzaal -- Canaccord -- Analyst

Got it. That's all for me. Thank you.

Jim Brown -- Chief Financial Office

Thanks Ravell. I'll follow up with you on the other two numbers.

Operator

And I'm showing no further questions at this time. I would now like to turn the conference back to Scott Gahn for closing remarks.

R. Scott Gahn -- Chief Executive Officer

I want to thank everyone who was on the call today. We feel very positive about the business and feel like we've done a lot of things to correct some of our problems. And we will look forward to talking to you again next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

R. Scott Gahn -- Chief Executive Officer

Jim Brown -- Chief Financial Office

Chris Van Horn -- Riley FBR -- Analyst

Mark Jarvi -- CIBC -- Analyst

Nelson Ng -- RBC Capital Markets -- Analyst

Raveel Afzaal -- Canaccord -- Analyst

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