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Just Energy Group Inc (JE)
Q2Â 2021 Earnings Call
Nov 12, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, everyone. Welcome to the Just Energy Group's Fiscal 2021 Second Quarter Earnings Conference Call. [Operator Instructions]
I would now like to turn the call over to Michael Cummings with the Alpha IR Group.
Michael Cummings -- Investor Relations
Thank you, operator. Just Energy released results for the second quarter of fiscal year 2021 ended September 30, 2020 on November 11, 2020 after the market close. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at investors.justenergy.com. With me on today's call are Scott Gahn, President and Chief Executive Officer; and Michael Carter, Chief Financial Officer. This call is being webcast and will be archived in the Investor Relations section of our website.
Before I turn the call over to Scott, I would like to remind listeners that certain matters discussed on today's conference call could constitute forward-looking statements that are subject to known and unknown risks and uncertainties relating to Just Energy's future financial or business performance, which may be beyond the control of the Company. Actual results could differ materially from those anticipated in the forward-looking statements. Certain risk factors that may affect results are described in the public disclosure record of Just Energy, which is available on the SEDAR database at www.sedar.com and is incorporated by reference in this call, including the most -- the most recent annual information form of Just Energy and the press release announcing financial results for the second quarter of fiscal year 2021. Additionally, some non-IFRS financial measures will be discussed. Listeners are encouraged to refer to Just Energy's latest MD&A for a discussion of these measures. Unless otherwise noted all figures mentioned are in Canadian dollars.
I would now like to turn the call over to Scott. Scott?
R. Scott Gahn -- President and Chief Executive Officer
Thanks, Mike. Before we jump into an update on our recent performance, I'd like to acknowledge and thank our incredible team with dedicated employees and all our valued stakeholders for their hard work and perseverance during these unprecedented and difficult times. Through all this, Just Energy has continued to provide essential services while ensuring the health and safety of our customers and employees. Again, thank you all for your continued commitment. I'd also like to take a minute to welcome Michael Carter, our new CFO. Michael brings more than 20 years of industry and finance leadership experience. In the short month that Michael has been on the job, his calm highly qualified presence is felt by all of us. He's already made key hires, and I have the utmost confidence in Michael and his team.
The second quarter was hallmarked by several important milestones, including reestablishing the Company as a financially stable, more nimble and competitive retail energy provider. On September 28, 2020, we announced the closing of our recapitalization plan and the reconstitution of our Board of Directors. We believe the successful closing of this plan, the reconstitution of the Board of Directors and appointment of new management leadership were mission critical and position us to better meet our customers' needs and ultimately deliver value to our stakeholders. We are moving forward as a stronger company that is positioned for sustainable, profitable growth as an independent retailer and industry leader.
Turning to specific performance. We continue to deliver strong financial and operational performance despite the ongoing challenges brought on by the COVID-19 pandemic. As a result, we are tracking to the upper end of our original base EBITDA guidance and have increased our expectations for fiscal year 2021 base EBITDA to a range of CAD145 million to CAD165 million. With the recapitalization behind us, management has now turned its undivided attention to the core functions of our business. First among these is reviving our once industry-leading sales culture, but with the insight in discipline, our recent business challenges have taught us to ensure we attract strong fit, high value customers and capture strong returns on our acquisition cost investment. This fundamental function of our business is complicated by the current pandemic, especially for our retail and other direct face-to-face selling.
But our return to growth can't be assured by just selling more. We must continue to improve our customer retention and renewal efforts, and this means greater focus on improving our customers' experience, another core business function. We have several initiatives under way that will reduce the friction of customers doing business with Just Energy making it easier to do business with us at every level. Our success in these areas so far can be seen in another strong quarter of performance. During the second quarter, total gross new RCE additions were 86,000 from 46,000 in Q1 and we continue to see improvements in October. We saw improvements in recent customer attrition and renewal rates while maintaining our focus on profitable customer growth. We accomplished this while controlling costs and bad debt and delivering strong cash flow results, and we continue to pursue ways through our green initiatives and our TerraPass brand to meet customer expectations down in the future regarding renewable energy and sustainability.
While our business is performing well and we continue to advance our strategy, the harsh realities of operating during a pandemic, and our decision last year to focus on profitable customers have impacted our results. We saw a decline in our customer base due to our decision to focus on profitable growth as well as dealing with the impact of the pandemic constraining our ability to sell through in-person sales channels. That said, our proactive decision to accelerate building the foundation for our digital sales channel allowed us to substantially slow the decline in our customer base from last quarter.
We believe our digital sales capabilities provide a resilient growth platform for the future positioning Just Energy to continue to build sales momentum even in this uncertain environment. In parallel, we are also working to rebuild our direct sales channels in a more sophisticated manner by applying a higher level of financial discipline to these channel investments, leveraging our existing external relationships and better utilizing and reinvigorating our internal talent pool. We believe there is tremendous opportunity in direct residential commercial sales channels as the impact of COVID-19 subsides. We're keenly focused on driving growth from these channels through expanding and diversifying our relationships with external partners cross-training our sales agents and evolving these channels by utilizing our contactless enrollment to better match today's environment, among other efforts.
As a part of these efforts, our team has also done a great job of staying close to and working with our existing partners to provide a safe enrollment experience for our customers and we remain poised to ramp up as conditions allow. We believe all of these actions will shape the core sales competencies of Just Energy's future and help position the Company to achieve profitable growth.
Looking ahead to the future, while we are on the right path, we understand that what got us here won't necessarily get us to where we ultimately need to be. It is now incumbent upon our team to take our simplified, stabilized more competitive business and pivot to executing on our strategy and driving sustainable profitable growth. We're focused on reviving our sales culture and our customers' experience by striving to gain a deep understanding of our customers and delivering what our customers want, improving our customers' experience through operational excellence and maintaining a disciplined approach across the organization to deliver profitable growth. Through adherence to these efforts, we'll continue to strengthen our business while delivering consistent predictable performance.
With that, I'd like to turn it over to Michael Carter who will provide some detail on our financial performance. Michael?
Michael Carter -- Chief Financial Officer
Thank you, Scott. Before I discuss our financial results for the quarter, I'd like to express how excited I am to be joining Just Energy at such pivotal time in the Company's transformation. We completed our recapitalization in late September, which provides us with a sustainable capital structure and which, to execute on our strategy. With this important step completed, we are strategically positioned to focus on the core tenants of our business with an emphasis on profitable growth and prudent cost management.
Now let me cover the specifics of our second quarter financial results. We achieved base EBITDA of CAD32.8 million, which is down 33% compared to the prior year period. This decline was the result of a CAD6 million one-time legal provision, lower base gross margin and a non-reoccurring CAD15 million gain in the prior-year period, partially offset by lower bad debt expense and cost reductions resulting from our cost containment efforts. Excluding the one-time impact of the legal provision and the one-time gain last year, base EBITDA from continuing operations was up CAD5 million year-over-year.
Second quarter base gross margin was CAD138.3 million, a 11% decrease year-over-year primarily driven by a smaller customer base, partially offset optimization of our weather hedge cost. Embedded gross margin for the quarter decreased 20% to CAD1.52 billion, which was driven by a decline in our customer base partially offset by stronger US dollar. We're continuing to capture value from our existing customers and believe that we are investing in the appropriate channels and resources to do so. Before we review the balance sheet, I want to address the improving quality of our customer base through the use of a few important KPIs. We continue to add and renew higher quality strong fit customers at profitable levels with an average gross margin per RCE of CAD355 which is a 13% increase from the year-ago quarter.
We are also seeing improvement in our renewal rates with consumer renewals improving for the fourth quarter in a row to 80% on commercial renewals remain challenged and were down 4 percentage points to 49% year-over-year due to competitive pricing in the US market. On a RCE basis, consumer additions were 34,000, an 89% increase sequentially driven by increased focus on digital sales and restarting sales activity through retail and other direct sales channels. On a year-over-year basis, consumer RCE additions were down 52% due to the impacts of COVID and our efforts to target higher quality customers.
Commercial RCE additions were up 52,000, up 86% sequentially, but down 46% from the year-ago quarter due to the selling constraints post by COVID and the competitive pressures on pricing in the US market. We manage our business around the known and unknown effects of COVID-19, one of our top priorities is to prudently manage our costs while we work to invest in our growth initiatives. We are working diligently to control costs we can
Amid the challenging selling environment. Our selling non-commission and marketing expenses for the quarter fell 37% to CAD13 million compared to the prior-year quarter due to suspension of our door to door selling partially offset by additional investments in our digital platform.
Bad debt for the quarter totaled CAD11.7 million, a 61% decline from the comparable prior-year quarter as we continue to implement enhanced controls and operational processes associated with residential enrollment and collection activities. We are seeing further improvements in our expected credit losses since identifying and remediating the enrollment control gaps as we discussed last year. Moving to the balance sheet, we finished the quarter with CAD138 million in available liquidity which included CAD78 million in cash and an additional CAD60 million in available capacity under our senior secured credit facility. With the closing of the recapitalization combined with a CAD30 million repayment on our senior secured credit facility, we decreased our total debt position to approximately CAD500 million as of September 30, 2020 from CAD782 million as of March 31, 2020.
Turning to our unlevered free cash flow, we closed the first six months of our fiscal year with CAD53 million after paying CAD30 million in recapitalization and restructuring costs as well as paying down CAD15 million in certain supplier payables. As we look forward on our capital allocation plans, we're applying unprecedented level of financial discipline and our investment in growth initiatives. We believe these investments are critical to our success and reaching our targeted potential customers. Turning to our full year fiscal 2021 guidance, we're continuing to control cost on significantly improving the quality of our customer book as we build off the success we achieved in fiscal year 2020.
Despite the uncertainties associated with COVID-19, we are now narrowing and increasing our prior year guidance of between CAD130 million to CAD160 million of base EBITDA to a new expected range of CAD145 million to CAD165 million for fiscal year 2021. I do want to acknowledge that this guidance includes an impact of the one-time CAD6 million legal provision during the second quarter. We are also expected to be at the upper end of our unlevered free cash flow guidance and are narrowing our guidance range of between CAD70 million [Phonetic] to CAD100 million to a new expected range of CAD80 million to CAD100 million for the fiscal year 2021. We've had a strong start to fiscal 2021 and that strong start coupled with our improved overall financial health provides us confidence in our ability to achieve our updated guidance.
With that I will turn the call back over to Scott for his closing remarks. Scott?
R. Scott Gahn -- President and Chief Executive Officer
Thank you, Michael. I just want to reemphasize the challenges we faced in COVID-19 environment as it relates to selling, which as I said earlier, it's just an absolutely fundamental core business function for a business like us. We continue to navigate those challenges and make improvements, in the context of COVID-19, we look forward to some of the advances and recent announcements regarding a vaccine and the possibility that we will get to the other side of the pandemic, again return to some of our historic run rates in our direct selling activity.
But all in all, I would like to thank the team for everything that they've done, as I said earlier, we've had -- we've had our employees and our stakeholders have been highly committed to us through a very challenging time working from home, some working from the office, having to deal with social distancing, all the other protocols for COVID-19 safety. But I want to thank everyone for that and I look forward to any questions that we have in the Q&A session. Thank you.
Michael Cummings -- Investor Relations
That concludes our prepared remarks and I'll hand it over to the operator for the Q&A. Thank you.
Questions and Answers:
Operator
[Operator Instructions] And our first question comes from Nelson Ng with RBC Capital Markets. Your line is open.
Nelson Ng -- RBC Capital Markets -- Analyst
Great, thanks and good morning, everyone.
R. Scott Gahn -- President and Chief Executive Officer
Good morning.
Nelson Ng -- RBC Capital Markets -- Analyst
Just in terms of the CAD6 million of legal provisions, I know it's difficult to predict court processes, but like when do you think that amount would be payable. I was just kind of reading the background again, it looks like that court case has been going on since 2012. So I was just wondering if, do you see some closure in the upcoming quarters.
R. Scott Gahn -- President and Chief Executive Officer
Well, as you will see, we are going to appeal this to the Supreme Court. And with that appeal, we're not exactly sure when they will -- if they don't accept it and that money could be paid next year if they do decide to take the case then we'll just have to wait to see how long that process takes. But it could be as early as next year.
Nelson Ng -- RBC Capital Markets -- Analyst
Okay, got it. And then in terms of the growth, customer additions, we saw a pretty nice increase this quarter. Are you guys able to give a very rough background in terms of which sales channels you're seeing them from. I just wasn't too sure whether some of the face-to-face sales channels have started or whether they've been suspended again. Can you just give a bit more color there?
R. Scott Gahn -- President and Chief Executive Officer
Yeah. So it's been an interesting first six months of the year, we had suspension, we had the beginning of reopening and deployment of reps and then a shutdown again over the summer. So it's been a little bit lumpy. We are deployed in retail and retail direct selling with sales protocols that limit effectiveness. In other words, selling behind advisor with a mask on is not the same as being able to smile at a potential customer without a mask. So there, we are in certain regions where they have allowed us to come back in, for instance, Texas. We are selling in Texas. We are waiting in other of our important markets for states to allow us to sell basically. And so it's really -- it's really geography-driven, like I said Texas is there, the Northern, Midwest and Northeast is more limited.
Nelson Ng -- RBC Capital Markets -- Analyst
And is Texas I guess fully open from a retail perspective? Or are there, in various select stores?
R. Scott Gahn -- President and Chief Executive Officer
I -- again, it's -- there are two things that are affecting us. One is of course what the policies of the governments. When Texas were opened and the stores are actually open, but then the stores themselves have to make a decision about how they feel about it potentially exposing their customers to direct selling activity. So there are some stores that are taking a different position than others, but most of our store partners, our retail store partners have allowed us back in. The thing that we are finding that is important to consider as we look forward to and project our sales growth is that, when you have a commission-based sales force that is shut down for four months, they've had to find something else to do and so we are rebuilding that sales force through recruiting with our partners, and it's taking time. So even though we are -- we have stores that are available for us when we are not staffed in every store yet. So we have not gotten back to the staffing levels that existed pre-pandemic. And we are in the process of doing that, but it's taking time.
Nelson Ng -- RBC Capital Markets -- Analyst
Okay that makes sense. And then in terms of the admin costs of about CAD44 million, if we take that CAD6 million legal provisions off and go down to CAD38 million, would that be a fair run rate going forward for G&A? Or is there further cost reductions you're expecting to realize in the coming year?
R. Scott Gahn -- President and Chief Executive Officer
At this point, given our strategy, I believe that's a fairly fair run rate going forward.
Nelson Ng -- RBC Capital Markets -- Analyst
Okay, got it. And then just one last question, in terms of working capital, I believe there is a big positive working capital this quarter. I know it's probably seasonal. So do you expect some of that to reverse in this coming quarter, as we head into the winter?
R. Scott Gahn -- President and Chief Executive Officer
I think typically -- I think typically it's the same seasonal pattern that you would have seen in prior years. We would expect it to be very similar type.
Nelson Ng -- RBC Capital Markets -- Analyst
Okay.
R. Scott Gahn -- President and Chief Executive Officer
Not as much last year because of certain things, but, definitely there is a seasonality as we go back into the winter.
Nelson Ng -- RBC Capital Markets -- Analyst
Okay, great, thanks. I'll leave it there.
Operator
Thank you. [Operator Instructions] Our next question comes from Mark Jarvi with CIBC Capital Markets. Your line is open.
Mark Jarvi -- CIBC Capital Markets -- Analyst
Thanks. Good morning, everyone. Just a question with the rising gas prices in recent months, I'm just curious what that's doing to your sales and margins. It looked like there was some positive commercial or an addition to the commercial gas segment, so how you guys are seeing that segment shape up?
R. Scott Gahn -- President and Chief Executive Officer
Yes. So we -- our supply team is bullish on natural gas prices and believe that we will see some tightness. And that is a good thing for our business, particularly commercial. One of the things, it's hurt us on the commercial side is the customers are uncertain about the future of their businesses and are not signing term contracts. Price volatility and the potential for rising prices will encourage them to lock up, despite that uncertainly about their business. And so we do hope that will help us, it's generally a positive for selling when we can get some volatility in our energy markets.
Mark Jarvi -- CIBC Capital Markets -- Analyst
Have you seen any indication of that yet or increased activity, or is there something you think going to pick up in the coming months?
R. Scott Gahn -- President and Chief Executive Officer
We think it'll pick up in the coming months.
Mark Jarvi -- CIBC Capital Markets -- Analyst
And then just maybe just historically, how do you see that showing up also in the residential and consumer segment? Is there a lag or any sort of relationship there in terms of timing of this commercial first and then consumer?
R. Scott Gahn -- President and Chief Executive Officer
Commercial sees it first, because it's just so much more contestable market. And the consumers in the commercial market are just a little more astute in paying attention. I think there's a bit of a lag. Generally, you could almost see a lag that could be an entire sort of winter season, lag where once we go through the winter, coming out of the winter, we might see the impact of customers wanting to take action.
Mark Jarvi -- CIBC Capital Markets -- Analyst
Okay. And then obviously, you guys took up the guidance and the business is performing pretty well and more resilient through COVID, sort of fairly resilient. So if you do exceed your plan and hit the top end of the guidance on free cash flow and EBITDA, where does the incremental dollar go in the next couple of quarters? Is it toward faster deleveraging? Is there some incremental processes or technology and investments you'd like to add on or just maybe just kind of see where you think that incremental dollar goes, if results do better?
Michael Carter -- Chief Financial Officer
Well, I think there's two parts there. You do have plans on the digital side. As we said, we are investing in that platform. We see that as a growth platform. So there's -- to the extent that continues to show promise that we expect it will, then we will continue to invest in digital. As far as you can see in our documents we have, restrict -- requirements as far as step downs in our commitment and our senior secured credit facility. So to some degree, we have over CAD200 million borrowed under that facility. So generally, we'll pay that down if we have extra cash.
Mark Jarvi -- CIBC Capital Markets -- Analyst
So debt first, then further investments in digital, is kind of how you...
Michael Carter -- Chief Financial Officer
No, I wouldn't say that. I think we are definitely going to fund the growth initiatives as we view them profitable and they're meeting our requirements that we talked about. And then to the extent, once we've done that then we'll be looking to use that cash and we'll pay down that -- keep that debt and pay down to make sure we're within our -- within the commitments.
Mark Jarvi -- CIBC Capital Markets -- Analyst
Okay. Now obviously a lot has changed in recent quarters with the recapitalization, reconstituted board and Michael, you joined in the Company. So I'm just curious, the Management Information Circular and some of those sort of performance and compensation metric, maybe are quite stale. Can you guys share with us in terms of how you now are being sort of measured and judged in terms of compensation metrics and targets?
R. Scott Gahn -- President and Chief Executive Officer
Can you -- I'm sorry, I didn't catch the last bit of what you asked?
Mark Jarvi -- CIBC Capital Markets -- Analyst
I'm just curious, like what is specifically in terms of compensation metrics? Is it free cash flow generation? Is it EBITDA? Is it total shareholder return, like sort of what you guys are seeing from a short-term and long-term compensation targets? What you guys are being benchmark till now?
R. Scott Gahn -- President and Chief Executive Officer
Absolutely. Yeah, I can share that with you. So what we're -- there are two things that are really important for us right now. And I think you guys have -- you've written it, it is consistent financial results. It's stabilizing the customer base. So what we're telling our teams, what we're compensating our executives and other key employees on are EBITDA, it's a combination of EBITDA and customer growth. So, because those are both important, right. I can meet my EBITDA by blowing the Company down, right. I mean, we can just shut sales and then we can meet our EBITDA targets, but we need to grow, we need to bring back the consistent growth that the Company has seen historically. And so we're compensating our -- incenting our executives on both of those metrics in parallel. So we're -- it's what you've written, consistent performance on EBITDA and stabilizing the customer base. That's what we're trying to do.
Mark Jarvi -- CIBC Capital Markets -- Analyst
Okay. And then my last question, just, now that you don't have the dividend, the leverage has come down, I think in the past, there's been sort of indication that you can maybe take on a little bit more on the margin of risk, reduce your hedging costs. Have you guys done a bit more on that? And can you give us any sort of qualification of how you've been able to save any hedging or risk management costs?
Michael Carter -- Chief Financial Officer
Well, I think there's two -- there's more than one major way. Historically, we had purchased an insurance policy that we paid a significant premium too, and we didn't need it, we get some of that money back. So that would really limit the amount of variability, due to weather and other things overall to our EBITDA. And so, we're not going to pay that insurance premium going forward. And we didn't do that this year. We're not going to do it in the future years, because it's risk that we can wear as a company, because we have that liquidity. We have that capital structure to handle that. So that's one way that we're doing it.
The other, look, part of the hedge cost is -- the wholesale markets are not as volatile in power like they were this summer, where they weren't, we did see that volatility. That does give us an opportunity to make a little bit of extra margin on overall, just from optimization around the positions we have during the -- especially during the summer and potentially in the winter when we have the weather exposure.
Mark Jarvi -- CIBC Capital Markets -- Analyst
And we have seen any of those cost reductions in this quarter or is that coming in the subsequent quarters?
Michael Carter -- Chief Financial Officer
I mean, as we talked about, one of the things that was a driver, it's not a huge driver, but it was a driver, as we said, our base EBITDA was -- did benefit from lower weather hedge costs. So we did see some of that benefit in the summer. And at this point, I think we'd continue to expect us to see some of that benefit in the future.
Mark Jarvi -- CIBC Capital Markets -- Analyst
Okay. And then just one last question, in terms of any severance or any sort of compensation for Oakland [Phonetic] people, is that all taken care of now with all the cash at the door? And is there any more sort of remaining costs or cash outflows around a turnover?
Michael Carter -- Chief Financial Officer
Yeah, I believe, we disclosed that in our financial statements, if I'm recalling correctly, it's about CAD2 million of additional cash payments that are still left to be paid on the severance side so not immaterial.
Mark Jarvi -- CIBC Capital Markets -- Analyst
Okay. That's, great. Thanks, guys.
R. Scott Gahn -- President and Chief Executive Officer
Thank you.
Operator
Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Scott Gahn for closing remarks.
R. Scott Gahn -- President and Chief Executive Officer
Thank you, operator. So we continue to be optimistic about the prospects of our -- effectively turnaround with the recapitalization and with the rebuilding of our direct sales and digital. We continue to wear significant risks of COVID-19, but we'll look forward to get to the other side of it and have the Company back to historic growth rates and financial performance. Thank you.
Operator
[Operator Closing Remarks]
Duration: 32 minutes
Call participants:
Michael Cummings -- Investor Relations
R. Scott Gahn -- President and Chief Executive Officer
Michael Carter -- Chief Financial Officer
Nelson Ng -- RBC Capital Markets -- Analyst
Mark Jarvi -- CIBC Capital Markets -- Analyst
