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Just Energy Group (NYSE:JE)

Q1 2015 Earnings Call

August 07, 2014 10:00 am ET

Executives

Rebecca MacDonald - Co-Founder and Executive Chairman

Deborah Merrill - Co-Chief Executive Officer

James W. Lewis - Co-Chief Executive Officer

Beth Summers - Chief Financial Officer

Analysts

Damir Gunja - TD Securities Equity Research

Nelson Ng - RBC Capital Markets, LLC, Research Division

Trevor Johnson - National Bank Financial, Inc., Research Division

Antoine Bourgault

Operator

Good morning, ladies and gentlemen. Welcome to the Just Energy Group, Incorporated conference call to discuss the first quarter 2015 results for the period ending June 30, 2014.

[Operator Instructions]

I would now like to turn the meeting over to Ms. Rebecca MacDonald. Go ahead, Ms. MacDonald.

Rebecca MacDonald

Good morning, everyone. I'm Rebecca MacDonald, and Executive Chair of Just Energy. And welcome to our first quarter conference call for 2015. With me this morning are our co-CEOs, Deb Merrill and James Lewis; as well as our CFO, Beth Summers.

I will make a short presentation, and then turn it over to Deb, that will discuss the results of the quarter and our expectation for the future. We will then open the call to questions.

Before we get going, 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 eventually may prove to be inaccurate, so please read the disclaimer regarding such information at the bottom of our press releases.

Our primary focus has been clearly laid out over the past quarters. We should invest it to expand our business and we should build the geographic and product base that we can support our long-term growth. Just Energy has now entered a period with 2 priorities: reaping the benefits of our expansion to enhance cash flow; and reducing leverage on our balance sheet. As Deb and James began to fill the role, what you will see from them is conservative approach to our business, conservative management of operations, conservative hedging of our supply group, conservative balance sheet.

The sale of NHS to Reliance was announced during the quarter. We continue to work towards the closing of this transaction, working with the regulatory agencies to gain necessary approvals. As denoted in the past quarterly reports, our major priority for management is the reduction of company debt levels. We examine all of our non-core assets and concluded that the sale of NHS at the announced price will allow us to pay down approximately $400 million of our outstanding debt, substantially reducing our leverage.

We have intent of further reducing our debt in the future periods to continue growth of our core energy business. NHS was a regional business. Our core electricity and natural gas business continues to offer growth across North America, and we believe the U.K. market has substantial potential as well.

We are committed to growing our business through innovative energy products that provide our customers with real value. We are clearing our balance sheet and we expect to continue to reduce debt throughout -- through a payout ratio of well under 100% for the coming years.

Let me turn things over to Deb to talk about the first quarter trends and we -- and see the markets for the future period.

Deborah Merrill

Thank you, Rebecca. James and I saw the first quarter as a success, which put us on solid footing to achieve our financial goals for the year. It is a quarter with many highlights that service well in progressing with our strategic priorities for the company.

In the first quarter of fiscal 2015, took customer aggregation to a new level, with 441,000 additions, 21% more than the previous record. As a point of comparison, during the first quarter last year, Just Energy signed 361,000 energy customers. Net additions were also at record levels, with a 127,000 customer increase during the period.

To put this into perspective, we added a net 188,000 customers in the entire year of fiscal 2014. Overall, our customer base increased 5% over the past year to $4.5 million. New additions were generated from all sales channels, led by 276,000 new commercial customers, up 43% from the 193,000 added in the first quarter of fiscal 2013. Consumer additions totaled 165,000, down slightly from the record 171,000 as in the prior comparable quarter.

Our main business continued to show strong growth and profitability. 29% of our new consumer customers took JustGreen for some or all of their energy needs. On average, these customers are likely to purchase 85% of their consumption as green supply. For comparison, as reported for the 3 months ended June 30, 2013, 27% of consumer customers who contracted with Just Energy to include JustGreen for an average of 83% of their consumption.

Overall, JustGreen now makes up 12% of the consumer gas portfolio compared with 9% a year ago. JustGreen makes up 18% of the consumer electricity portfolio, up from 14% a year ago.

Green energy remains a core product of Just Energy. We continued to explore the optimum method to utilize our selling expertise as a profitable entry into the residential solar market in North America. Overall for Q1, our sales were up 13% and gross margin was up 16%, reflecting a more profitable customer base.

Firm control of operating costs allowed us to see even higher growth in base EBITDA and base funds from operations. Administrative expenses were up 11% versus the 16% growth in margins. Selling and marketing expense increased by 9% year-over-year compared to the 21% increase in customer additions. By maintaining administrative and selling costs growth at a rate lower than growth in margins, we were able to increase our base EBITDA to $30.2 million, up 46% from a year ago. Our funds from operations in what is seasonally our lowest -- slowest quarter with about 50% to $13.5 million this year.

As Rebecca pointed out, we entered this year intent on building upon the foundation established throughout very rapid expansion in fiscal 2012 and 2013. We then began to reap the benefit of this plan with our 22% EBITDA growth last year. Our fiscal 2015 plan would see us solidify these gains and allow us to significantly de-lever the balance sheet. This will give us a base for the stability and profitability seen in our financial results in the past.

We have provided fiscal 2015 guidance up to $163 million to $173 million in base EBITDA, pro forma the sale of NHS. This is based on a 188,000 net customer addition seen last year. To achieve the guidance, we need to realize 4 objectives in fiscal 2015. Let us look and see where we stand with each after the first quarter. First, we have to maintain customer aggregation at the levels seen in the past 2 years. The first quarter was our highest aggregation quarter ever, beating the previous record by 21%. We are clearly on track to achieve this goal.

Second, we are working towards a decline in the attrition rates from the 15% seen last year. While the fundamentals appear strong for lower attrition with winter bill shocks over and greater volatility in gas and electricity prices, we have not seen a decline, but rather a small increase to 16% from 15% based on the first quarter. We will closely monitor attrition and anticipate gradual improvement in coming periods.

Thirdly, we would require residential renewals to remain stable around last year's average of 75%. We came in right on this number after Q1.

Commercial renewals are normally a function of our willingness to accept the margin required to win the business. Management is focused on maintaining overall commercial profitability, and our renewal rates will reflect these margin decisions. Finally, we had to maintain administrative and selling costs growth at a rate lower than the growth in margins. As I pointed out, we achieved that goal in the first quarter.

It is important to note that the first quarter is seasonally the slowest for our business, and we will maintain our existing guidance. We will carefully track attrition rates in coming quarters and will update our shareholders as to any changes to our guidance.

Our payout ratio is another important target for us. Our trailing 12-month payout ratio is based on our current $0.50 annual dividend -- at our current $0.50 annual dividend is 77%, moving toward our long term target level of 60% to 65%, expected by the end of fiscal 2016. This payout ratio of less than 100% will allow for further debt reduction on our balance sheet. Overall, Just Energy had solid operating performance in the first quarter.

Let's now talk about trends for the future. It is important that we recognize that this is just one quarter. As we noted in past calls, the vast majority of our EBITDA comes from the third and fourth quarters. So regardless of the results you see, they were only a good start to a potentially good year.

We would expect slower EBITDA growth in the second quarter, more in line with our annual guidance than the 46% seen in Q1. Our highest side debt quarter is now the second as our fast growing Texas-base is in the peak of its cooling season. Accordingly, many more credit cut-offs occurred during this period.

Residential margins were strong in the quarter as we saw annual margin on new and renewing customers higher than that of customers lost. Commercial margins continue to face competitive pressure, but strong growth in commercial additions more than offset lower margin for RCE.

For the year, an examination of our book of contracts to supply indicates that we remain on track to meet our guidance range of $163 million to $173 million base EBITDA for the year. The remaining -- the usual due to weather risk, as well as normal business variance, but we've seen nothing to date that would throw us off track.

While we carefully manage our business day-to-day, management is focused on the bright, high-growth future for the retailing industry, and how to maintain Just Energy's leadership in that industry.

KEMA, an independent research firm, shows the utility commodity retailing industry is continuing to grow at high-single digits and sees no reason why that growth will slow in the future. We will keep our position in the market through continued innovation, with not only fixed-rate contracts, but also JustGreen offerings, flat bills, capped variable rates and shared savings through smart [indiscernible].

Continuing to achieve these results will require tremendous effort from the entire Just Energy team. We are willing and able to make that effort. We are committed to Just Energy's success. We are not -- we're only one quarter in, but it was a good quarter. Just Energy has built a solid base to ensure that we will remain a leader in the first quarter as clear evidence of that, we are on track for that objective.

On behalf of James and I, we want to thank our shareholders for their continued support.

We will now open for questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Our first question comes from Damir Gunja from TD Securities.

Damir Gunja - TD Securities Equity Research

Very strong net customer adds. Just wondering if there's anything you could point to there. Is there a bit of a seasonal element, or is the sales force, I guess, just motivated or what made them driving that?

James W. Lewis

Damir, I think what you've seen here with the Polar Vortex you have more customer shopping, especially on the commercial side. So we saw a pickup there. And on the residential side, you seek consumers looking flexibility and pricing there. So those 2 factors help to drive that record number of gross adds.

Rebecca MacDonald

And just to add to that, Damir, we have been saying that we want to focus on the core business, and I think this is one of the indications that the management is getting back to basics and focusing on our strengths and not spending too much time on businesses that are not core to us.

Damir Gunja - TD Securities Equity Research

Okay. Maybe just a second one. Is there anything or any update you could give us with respect to the timing of the NHS sale? Or have you had any indications from the Competition Tribunal of request for additional information or anything of that nature?

Deborah Merrill

Damir, we're working through the process. All of our indications so far is going along exactly as we expected. So we see no red flags or anything that will push that beyond what our current or expectation was to close it, hopefully by the end of September.

Operator

And the next question comes from Nelson Ng from RBC Capital Markets.

Nelson Ng - RBC Capital Markets, LLC, Research Division

Quick question on the margins. So you saw some margin improvement on your consumer side. I was just wondering whether some of that improvement was due to like have you seen any impacts from the Polar Vortex in terms of energy retailers leaving the market? And has that led to like higher margins, like has there been less competition on that front?

James W. Lewis

I think, Nelson, what we are seeing at -- you're seeing some impact with retailers leaving the marketplace as customers look for other places to provide their business. And we're one of the beneficiaries of that. I think what you've also seen is the balancing cost or that you normally see in our first quarter was lower, which we were able to benefit from as well. So across-the-board, we've seen margins [indiscernible].

Nelson Ng - RBC Capital Markets, LLC, Research Division

Okay. And then I think Deb mentioned that attrition remains high in the past quarter. Is there -- I presume that's just due to the lag from the Polar Vortex and I was just wondering whether there's any improvement in the past month or so? I presume you expect attrition levels to moderate going forward?

James W. Lewis

I think when we look at the attrition, you're exactly right, the hangover from the Polar Vortex. But we expect it to improve in the coming quarters as we've looked at -- customers are very -- are receiving our part from the flat bill, the fixed price products there. We're happy about the way customers are receiving our products. And you expect attrition to return back down to normal levels.

Nelson Ng - RBC Capital Markets, LLC, Research Division

Okay. And then just one last question. In terms of the guidance, I think Rebecca mentioned that you guys are taking a pretty conservative approach to everything. So is it fair to say that the EBITDA guidance is conservative as well?

Rebecca MacDonald

Everything that we have said is conservative and we are staying with conservative. And we're -- at this time around, we are letting you guys get optimistic, if you would like to.

Operator

[Operator Instructions]

The next question comes from Blair Lobensky [ph] from [indiscernible] Capital.

Unknown Analyst

I would just -- wanted to ask about the NHS and more details around regulatory process. I think you've answered, if you had anything else to add then that would be great.

Deborah Merrill

No, I don't think so. I mean -- we have to go through the Competition Bureau for approval process, which we're working diligently to go through at this point and like I said, all very on track for all that stuff. So it's as expected so far.

Operator

And the next question comes from Mr. Damir Gunja from TD Securities.

Damir Gunja - TD Securities Equity Research

You had a nice inflection point on the residential margins now coming in higher than customers lost. On the commercial side, I guess you're still seeing a headwind there. Are you seeing any stability in the market, or any sense of where margins may stabilize there?

James W. Lewis

Yes, we are. When you look at the next quarter coming, what we've seen in the marketplace is margins coming back on that commercial side. So we would expect margins to go back to our normal levels on the commercial side in the future.

Rebecca MacDonald

I would just add that the management led by Jay have done a very, very good job in starting to move that target margin up and getting way more selective of the customers that we are taking on. And future quarters are going to be a reflection of that.

Damir Gunja - TD Securities Equity Research

So we may see that spread start to narrow and turn positive at some point?

James W. Lewis

Yes.

Damir Gunja - TD Securities Equity Research

Okay. And maybe just a final one for me. On the green side, 29% I guess of new customers are taking some green. Is there a level at which you can -- you think you can push that number to? Or is that kind of the current state of the market?

Deborah Merrill

Damir, we've seen an increase over the last several years, and I think there was a certain customer that likes to buy green and feels their duty to the environment, we want to provide those products to them. I don't think it'll ever be 100%, but I think a steady increase in that, we'll continue to see that as well.

Operator

Our next question comes from Trevor Johnson from National Bank.

Trevor Johnson - National Bank Financial, Inc., Research Division

You mentioned that you're exploring methods of offering residential solar without incurring the material additional debt. Just curious if you can give us a bit of a flavor as to what avenues might you be pursuing to try to target that venture?

Deborah Merrill

Yes, we're looking at joint ventures with existing solar players, we're pursuing other avenues as well. So it's one of the things -- we have to find the right partner for us, and the right structure that's going to work for our goals to deliver value to our shareholders. So we're in the process of trying to based on exactly what the best structure and the right partner for us looks like.

Trevor Johnson - National Bank Financial, Inc., Research Division

And partners will be attracted to JE given all these -- your existing book of business. Is that kind of the reciprocity that we could expect in terms of getting something done without incurring a lot of debt?

Deborah Merrill

Yes, I think so. And the joint venture structure would keep that debt off our balance sheet. But we also -- what we bring to the table is we bring obviously, sales prowess, we bring commodity expertise, and I do think there's some benefit and some real play here to have a retailer with a solar provider, so that we can get full benefit of what that distributed generation at that house looks like -- can actually deliver value in. So I think there are a lot of good scenarios that we're working through to make a structure that will give us the best value.

Operator

Our next question comes from Antoine Bourgault from ISM Capital.

Antoine Bourgault

A quick one for me on the financing. I was just a bit surprised by the usage on the credit facility for the first quarter that's really higher than I expected. And if you could give us a bit of color on the working capital movement for the quarter as well, that will be much appreciated.

Beth Summers

Yes, I think during the quarter, as a result of the strong quarter, we did see higher working capital, probably offsetting a little bit where the working capital was the positive or was probably less than you typically would've seen because of the timing at the year end. So as a result of those items, you're absolutely correct, the working capital has resulted in the line of credit being a little higher than you may have expected.

Antoine Bourgault

And does that leave you with the sufficient headroom considering the general cyclicality of the business, if you're still seeing growth in the remainder of the year, would you have to go back to the banks and renegotiate them?

Beth Summers

Yes, the working capital line is sufficient for the business. As far as working capital goes, the reality is as you move through time, the working capital, depending on the particular timing, will release itself and turn into the cash. So yes.

Antoine Bourgault

So you should be happy with the hedge that we have at the moment?

Beth Summers

Yes.

Operator

At this moment, we show no further questions. I would like to turn the meeting over to you for any final remarks.

Rebecca MacDonald

Well, if there are no more questions, I would like to thank all of you for attending our conference call. Deb, Jay, Beth and myself are available. If you have any follow-up questions, do not hesitate to call us. And we do look forward having you at our second conference call that would take place in November. Thanks for your support. Bye-bye.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. We thank you for participating. You may now disconnect.

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Source: Just Energy Group's (JE) CEO James Lewis on Q1 2015 Results - Earnings Call Transcript
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