Just Energy Group's (JE) CEO Deborah Merril on Q3 2017 Results - Earnings Call Transcript

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Just Energy Group, Inc. (NYSE:JE) Q3 2017 Earnings Conference Call February 9, 2017 10:00 AM ET

Executives

Deborah Merril - President and Co-Chief Executive Officer

Rebecca MacDonald - Executive Chair

James Lewis - President and Co-Chief Executive Officer

Patrick McCullough - Chief Financial Officer

Analysts

Nelson Ng - RBC Capital Markets

Carter Driscoll - FBR Capital Markets

Raveel Afzaal - Canaccord Genuity Corp.

Sophie Karp - Guggenheim Partners

Damir Gunja - TD Securities

Operator

Welcome to the Just Energy Third Quarter Fiscal 2017 Results Conference Call. My name is James, and I will be your Operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being record.

And I would now like to turn the call over to Co-CEO Deb Merril. Ms. Merril, you may begin.

Deborah Merril

Thank you very much. Good morning, everyone, and thank you for joining us this morning for our fiscal 2017 third 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.

Just Energy continues to operate at a very high level, our strategy is working, our business is healthy and growing stronger. We are entering a very exciting time where we have headed from a period of internal repair to a period of what we believe will be prolong growth.

Historically, Just Energy had primarily then a commodity only business, overtime we have made investments and pursue the strategy that has transformed the company to what we are today. The leading independent retailer of energy and water management solutions with a multinational customer centric approach. We are committed to delivering comfort, convenience and control to all customers.

During the transformational period, we have been able to significantly elevate the profitability profile of the business, while also repairing our balance sheet and overall financial position. This progress is evident in our third quarter results.

During the quarter, our gross margin per customer continue to increase, our attrition and renewal rate both improved, the business generated strong cash flow and we were able to accomplish several significant objective within our long-term growth strategy.

However, while we made significant progress along a number of important strategic operational and financial objectives, which are enabling us to continue to pursue profitable growth. Our total sales and customer addition goals faced some near-term challenges during the quarter.

One of those challenges is that we continue to operate in an environment of relatively low and stable prices, which reached a lower than anticipated levels of customer switching activity. We are also seeing the effect of increased competition that often follows low commodity price environment such as the one we are currently experiencing.

Fortunately, these are short-term challenges, as a result of the overall improved health of our business and the strong pipeline of new products and growth opportunity, we have delivered strong results year-to-date and remain very well position to achieve our fiscal 2017 guidance and continue to deliver growth in 2018 and beyond.

We move forward with a strong balance sheet and the restored financial flexibility necessary to support our growth. For arguably the first time in our history and certainly in our tenure as management team, we have an efficient capital structure in place and sustainable payout ratio.

This was no accident; the successful execution of our plan allows us to now focus our resources on aggressively pursuing growth through Just Energy’s graphic presence, enhanced sales channel and the introduction of new products and structures that meet the changing need of today's consumers. This will ultimately empower our brand and drive increases in customer contract.

Before Pat takes you through the financial results at a deeper level, I want to expand upon these important elements of our growth strategy. Our geographic expansion plan remains on-track as we continue to further diversify our business.

During the third quarter, we announced a very exciting and important entry into Germany through the acquisition of SWDirekt, and we were recently awarded our license to do business in Ireland. The acquisition of SWDirekt provides Just Energy immediate access to the largest energy market in Continental Europe accelerating our market entry substantially while also adding a talented local team in Germany that will play a valuable role in the growth of our operations in the region.

We are confident in our ability to combine our core competencies, experience and depth of product offering with the local expertise and leadership of SWDirekt, as we seek to access over 50 million gas and powered meters in Germany.

Our UK market continues to perform well. This market now represents 7% of our global customer base, having grown by 8% to 309,000 RCEs over the past year through increases in both the consumer and commercial business. We believe we can apply the lessons learned from our UK expansion as well as the early lessons learned in Germany to successfully expand into other attractive Continental European markets. We see tremendous opportunities to grow our platform.

We are also pleased with the progress we have made on our product line. In line with our overall growth strategy, we believe we can continue to disrupt the utility market with new products and channels while creating strong residential and commercial customer relationships. We are experiencing great customer acceptance of our growing product suite and long-term loyalty program such as JE Perks, our flat bill offering, LED retrofits and our newly added smart sprinklers, which I will touch in on in more detail shortly.

I have only named the few of the exciting products we are currently offering customers today, and our pipeline of value added products is robust. We remain focused on delivering energy management solutions including commodity, energy efficiency, water conservation and renewal products through a growing market.

Last week, we announced an exciting partnership with Skydrop. This is an innovative industry leading manufacturer of digital self regulated smart home irrigation systems. This allows us to add smart irrigation controllers or smart sprinklers as I referenced earlier to our suite of home energy management solutions.

Similar to our Ecobee smart thermostat, smart irrigation controllers contribute to significant resource conservation while saving our customers time and money. This is the only adaptive and smart watering controller in the market. It also allows for real-time weather monitoring, remote homeowner control over their sprinkler system and the ability to schedule watering times using a smart phone app.

These types of value driven products and structures are a key component of our growth strategy and are allowing us to price our energy management solutions competitively without sacrificing customer satisfaction. This is evident when we look at our improving attrition in renewal rates as well as our ability to continue to grow gross margin for customer.

All of these improvements are a result of Just Energy's focus on becoming the trusted advisor and providing a variety of energy management solutions to our customer base to drive loyalty.I strongly believe the company is capable of delivering more value to the marketplace and on path for future sustained growth.

One of the key parts of our plan is to diversify and expand sales channels, which will give us the ability to connect with more customers in new ways to support our trusted advisor strategy. As part of that, we launched a brand new channel with retail storefront partners that positions Just Energy value to potential customers already in the buying mode.

We are very excited about the prospects of the channel and feel that it could be one of the largest channels in the future. Additional new channel opportunities exist in affinity marketing, authorized agent, telemarketing and others that we will continue to pursue as we expand our portfolio.

To conclude, we ended this period of growth with the capital and financial flexibility to invest in organic as well as inorganic growth opportunities. The combination our refinancing efforts with our ability to generate meaningful cash flow from our ongoing operations, provides us plenty of runway for further expansion.

In addition to ongoing investments into products and channel opportunities, we are actively looking at inorganic growth. Rest assured, we will apply the same discipline in this area that we have applied in our successful efforts to transform the business over the past three years, and we will maintain our capital light structure.

With that, I will turn the call over to Pat, so he can provide some more additional color on our financial results. Pat.

Patrick McCullough

Thank you, Deb. The business is functioning well and we are on a solid path to executing our growth strategy. First, I will cover some of the highlights of the third quarter and then provide some adding color in certain areas before closing with our guidance.

Our third quarter base EBITDA decreased 8% to $51.5 million, primarily as a results of lower than normal consumption, increased prepaid commission expenses and the impact of foreign currency translation. Excluding the $1.4 million of additional prepaid commission expense, base EBITDA was down 5% during the quarter.

During the quarter, gross margin decreased 3% to $174.5 million as a result of a mix of factors including lower than normal consumption, foreign currency on UK based customers and the decrease in the overall customer base. The consumer division gross margin decreased 6% while the commercial division gross margin increased 9%.

Average realized gross margin over the trailing 12 months ending December 31, was up 14% to $264 per RCE in the consumer division and up 22% to $82 per RCE in the commercial division. If you take a look through our MD&A, you can see these incremental improvements between customers added and lost continue to hold true in the recent standalone quarter.

During the quarter, we saw attrition improved two percentage point year-over-year for the trailing 12 month periods. The consumer attrition rate decreased three percentage points to only 24% from a year ago and the commercial attrition rate decreased one percentage point to 8%.

It is particularly encouraging that attrition rates improved in both the consumer and commercial divisions and what we consider highly competitive market environment. We believe the improvements are a direct result of Just Energy's successful execution of our business strategy.

General and administrative expenses for the third quarter increased $1.6 million or 4% year-over-year. This was primarily driven by the higher operating costs in the UK to support its growing customer base, international expansion expenses as well as efforts relating to new strategic initiatives.

Selling and marketing expenses, which consist of commissions paid to independent sales contractors, brokers and independent representatives as well as sales related corporate costs decreased 17% year-over-year primarily due to lower commission cost associated with the lower gross customer additions in the current period.

Now, I will review some of our other key financial metrics and balance sheet items. Base Funds from Operations of $20.5 million decrease 23% from the prior year. The decrease in Base FFO was primarily result of the decrease in Base EBITDA as well as one-time finance cost associated with the early redemption of the senior unsecured notes in the quarter.

These items also affected the payout ratio on Base Funds from Operations, which was 92% for the quarter and 57% for the first nine months of the fiscal year. On a trailing 12-month basis, the payout ratio is currently 53%, which is less than our target of 67%.

Cash and cash equivalents of $77.5 million were down 15% year-over-year and down 39% from March 31, 2016. This decrease is primarily attributable to the early redemption of the $225 million on our 6% convertible debentures as well as the repayment of the $55 million on senior unsecured notes.

These repayments were offset by the issuance of 6.75% convertible debentures and withdraws of $90.3 million on our credit facility. Total debt of $519.5 million as of December 2016 decreased by 21% from $660.5 million as of March 31. We continue to pursue debt reduction and unique options to further improve the strength of our balance sheet and financing opportunities.

Since quarter end, we have announced several important actions towards this objective. In January, we increased our credit agreement capacity by $50 million. We also completed the early redemption of the remaining June 2017 convertible debentures, and we announced a new perpetual preferred equity offering, which represents the first time Just Energy has raised non-diluted permanent capital in the U.S. markets.

This type of offering is normally reserved for investment grade companies but with our improved credit worthiness and solid business model we were able to access over two times the marketed value and seven institutional investors participated and what is normally considered a retail products.

Overall, balance sheet improvement initiatives have resulted and significantly improved debt ratios. As of September 31, Just Energy’s book value net debt was 2.5 times trailing 12-month EDITDA, an improvement from the 2.6 times reported at March 31, 2016 and the 2.9 times reported for the prior comparable year-ago period.

Our year-end expectation with achievement of guidance and the new perpetual preferred will be a net debt to EBITDA of 1.9 times or better. We believe that the combination of our strong cash flow and our commitment to a capital light strategy will allow us to maintain this relative level moving forward, which clearly preserves the affordability of the dividend.

Turning now to our outlook, based on our performance so far in fiscal 2017, we believe we are on-track to achieve our previously provided full-year Base EBITDA guidance of $223 million to $233 million. This range reflects continued double-digit percentage growth year-over-year.

With that, I will turn it over to Deb for some concluding remarks.

Deborah Merril

Thank you, Pat. In summary, we are in a exciting period for Just Energy, where both our financial strength and flexibility our matched by a growing product suite that we expect to translate the growth in markets across the globe.

We are aggressively pursuing growth through Just Energy geographic presence, enhanced sales channel, the pursuit of strategic acquisitions and the introduction of new products and structures that meet the changing needs of today's customers.

We remain on-track to deliver a very strong fiscal 2017 highlighted by improved profitability, strong earnings growth and ongoing generation of strong cash flows. We are committed to maintaining our dividend and achieving strong growth in fiscal 2018 and beyond as we pursue our objective of becoming the premier world class provider of energy and water management solutions.

With that, we will now open for questions.

Question-and-Answer Session

Operator

Yes, we are now ready for Q&A. I apologize for the delay [Operator Instructions] And our first question is from Nelson Ng [RBC Capital Markets].

Nelson Ng

Great. Thanks. Just a quick question regarding your solar business. Are you able to provide a bit more color as to how many rooftops solar customers you have or how the results were from the solar business. I know you pulled your outlook for solar last year, but I was just hoping to kind of get some color on how that part of the business is doing?

Patrick McCullough

Yes. Thanks, Nelson. This is Pat. No, we are not reporting solar sales at this point. In fact, we have turned bearish on the segment, and we are looking at what is happening in the U.S. from a government and political perspective and we are recognizing the tax reform that’s being planned is going to be very negative for the residential rooftop solar space.

In two ways that we can envision, the first way is, with the lower corporate income tax plan, it's obviously going to make the investment tax credit a great deal less valuable if it actually stays in effect through the Trump administration.

And then secondly, we see a lot of protectionist talk around imports, and I think as we all know most of the hardware for U.S, solar right now is coming from outside of the United States. So, we see a lot of pressure on cost and frankly returns in that space. So, we are looking at solar as a product that’s part of the portfolio that we bring to our customer base, but not a primarily a growth strategy for the short-term.

Nelson Ng

Okay. Thanks, Pat. And then Pat, question for you, how do you finalize the decision on how you will use the net proceeds of the preferred share issuance. I was just wondering like how the allocation will work out in terms of like paying down your credit facility or redeeming the 2018 or 2019 maturities?

Patrick McCullough

Yes. So, I appreciate the question. So, we talked about this in the prospective of the perpetual preferred that the CAD126 million roughly of net proceeds will be used to number one, sure up short-term working capital and that means exactly what you said pay down the credit facility to avoid that almost 6% cost to capital.

This puts us on the front foot for refinancing our 100s that mature in 2018. And those 100s have an early call option at par value. But in addition, this supports the balance sheet and the capital structure as we free cash flow close to $100 million in fiscal 2018, we are going to be able to use this new base for growth as Deb was talking about.

So, right now we actually have a line of sight to the 2018s with free cash flow alone or with the proceeds of professional - however, you look at it. But there will be a surplus roughly a $150 million of total capital over the next four quarters that we can deploy towards organic or inorganic growth.

Nelson Ng

I see. And then just kind of switching gears a bit. On the gross margins per RCE for commercial customers added and renewed, I noticed that that was about $1 higher than the customers lost. So, from a big picture perspective, I was just thinking are you guys essentially done with like pruning low margin commercial customers?

James Lewis

Hey Nelson its Jay. I think as we talked about before, it's not too much the pruning, it's aspect of it, it's our disciplined approach to risk management as Pat and Deb talked about earlier with the low commodity prices out there, and the risk profile for some of the competition; we have a different perspective; we feel really good that as you can see during the results that our disciplined approach is working.

When we look at it to give you an idea over this last quarter, we could have signed up 100,000 plus of RCEs, but with a negative $3 million or so to the value for the shareholders in the company. That's something that we are not going to do.

So, as the market, volatility picks up; some of those players got a business, we have the foundation to be successful there and we see customers who like our value proposition, who like our bundles, sticking with us as we provide higher value services not just low prices.

Nelson Ng

Okay, thanks James. And then just one more question for you, I guess very big picture as well, and I noticed that the embedded gross margins is essentially flat to down a little bit year-over-year, I was wondering in terms of like given in your kind of EBITDA - like given that you guys are able to kind of grow EBITDA in the past few years. I was wondering with the flat embedded gross margin profile, how would you kind of drive growth in the EBITDA going forward, like will that mainly be through like lower overhead costs and marketing costs, or is there not a good correlation between embedded gross margin and EBITDA?

Patrick McCullough

Yes. So first of all let's answer the growth part of the question and then we can talk about a little bit of the conservatism I mean the calculation of embedded gross margin. so we are looking for growth through new products, new product structures, looking through geographic expansion and looking for channel expansion.

So we do believe you will see RCEs and embedded gross margin, but also products that don't get calculated as part of commodity contracts and end up in embedded gross margins. So, if you think about us selling a smart sprinkler systems, you are not going to see an embedded gross margin associated with that non-commodity product.

So, that's part of the answer. Now, embedded gross margin is calculated on the added and renewed design margin assumption that we report in the MD&A that you are referencing for commercial. You see that the actual realized trailing 12 months gross margin that we are experiencing is a fair bit ahead of that and it's been running 20% to 30% ahead of our expected design margins as we report those.

Now obviously the trailing 12 months actual realized margin is the more valuable number, because that shows you what actually settled out, what fees we added to those designed deals, what up sales we were able to accomplish. So, our thinking is that our embedded margin is conservative and probably lacks that residential difference in actual realized margin versus a planned margin.

But I think the more important is growth will be coming from areas outside of embedded margin, but will be coming from embedded margin and you have seen a small reduction in embedded margin based on the RCE net attrition that we have seen over last year.

Nelson Ng

I see. Thanks Pat. Just one last question, in terms of I guess growing into new products geographies and sales channels can you talk about whether you are starting to look more closely at like M&A opportunities? And if so, would those be more focused on essentially new products and geographies rather than adding book of customers?

Deborah Merril

I think Nelson from our perspective, we are looking at a little bit of everything. We recently did the German acquisition, which was relatively small but gave us a foot hold there. We are looking at other European acquisitions as that was just retailers that could get us into a market faster. We have been pretty disciplined about now wanting to be a fully integrated company that owns all of the products that we are selling.

So as it relates to buying a company that has products, if it makes a lot of sense, we might, but generally we will probably partner for those kind of things, but really it’s about either geographic expansion or capabilities potentially a sales capability or sales channel we may not have currently today, or are not currently expanding into.

So it's kind of a little bit of - anything that helps us advance our strategy will be something that we will look at. Now from a just a pure book standpoint, we will look at books, but we will value them appropriately as well. So all of those things are in play for us right now.

Nelson Ng

Okay thanks Deb. Those are all my questions for now.

Operator

Our next question is from Carter [FBR Capital Markets].

Carter Driscoll

Carter Driscoll, FBR. Thanks good morning guys and the whole team. So just kind of following up on Nelsons question, if embedded gross margin is almost I think of it as almost looking backwards on the business that you had built but really transitioned more towards a full suite of energy management solutions and I guess today more the residential customer and then maybe eventually commercial side.

Is there a metric that we can pull away from embedded gross margin adding to, I think some of the struggles you go from that realized gross margin and back into the embedded gross margin as kind of a proxy for either growth in the net customer side and or the up sell that isn’t necessarily being captured and I guess there is maybe a metric you can give today, but is that the right way to think about it. The difference between that is really the up sell with a little twist on the customer splits whether it’s positive or negative?

Patrick McCullough

Yes. That’s generally right this is Pat obviously. We are going to be looking at modifying metrics as we go into the fiscal 2018 year. We are really focused on number of customer or contract. And then the makeup of those contract meaning how many products per contract and then what is the profit per product.

So you are going to see a little different segmentation from us as we go forward, where you will start to see some products splits that we haven’t provided in the past, which I think will help to address what I am referring to which is some of these sales outside of embedded gross margin, but there also should be more clarity around poor profits on commodity contracts as well.

Carter Driscoll

Okay. And then my next question is obviously given the change administration and potential negative facts on what you said coal generation, but also the strong support for development of [indiscernible] Marcellus Shale. is there any expectation. I guess we are trying to figure out the expectation of it the volatility that is partially necessary outside of your own marketing efforts and customer acquisition efforts that you need that volatility to do switching. How do you think your plan versus what the forward curve might be saying today versus your expectations of additional customer growth where its organically, inorganically or how I think about it at least the organic side obviously M&A is separate from that.

James Lewis

Yes. Hey Carter, its Jay here. I think when we look at it you are exactly right, I guess the favorable outlook right now for the Marcellus Shale in terms of natural gas and coal and generation, volatility might not show up and we might continue to see these lower gas prices for while which in some markets leads to lower power prices as well and maybe lower volatility there, which is why when we talk it's really bullish and excited about our European extension there, which will be organic growth as well as other countries.

We continue to believe that here in North America it's a wider value added products and services that we talked about, well keep the customers who are able to talk to you and who communicate and that who are reaching out to. They appreciate those products and services for the folks who just wants the pure low commodity when there is no volatility, we won’t pick-up those customers, they won’t switch away, but we think they've grown the opportunity is overseas. So that's where the organic growth will come from.

Deborah Merril

Just to add a little bit to what Jay said. The channel stuff is really important. When you think about our business over the last - we are actually celebrating our 20th anniversary this year for Just Energy, so we have been in business as a public company for 20 years, which is quite an accomplishment in a lot of ways.

But as we look at our business, customers are - think about utilities nine units a year, they are not necessarily going out and thinking about these things especially in the volatility environment, but that's why the channel expansions is so important as well. Geographic as well as channels that put us in front of customers when they are in a shopping mode or through affinities and partnerships and other things that we really believe that getting more access to those guys - into customers will help us drive that volume in a low volatility environment.

Patrick McCullough

And then one more add-on for the 300 answer. So one of the great things about this business model as we all know is we are not expanding a bunch of capital investment into these things. so if solar looks promising two years ago and it's starting to dry up now that's a very simple pivot for us. We are trying to deliver customers energy solutions via the grid, via distributed generation and the hybrid of the two.

I think that gives us a big advantage from our competitors in the energy space that as politics, regulation, markets, economics change we can move quite nimbly to where the customer benefits the most. If that changes a little easier for us to be ahead of that versus our competition.

Carter Driscoll

Okay and then maybe just last question, so I'll get back in queue. Is how do I think about the strategy for Europe in terms of really applying your success to the base business versus maybe the [indiscernible] strategy you are doing here. Are there different potential energy management solutions strategies reaching to the country or is it too early to try to apply that strategy.

Deborah Merril

I think overall what we are trying to do is to bring our strategic vision of bringing value based products everything unique and value driven to every country we were in. what that looks like in Germany, probably looks different in Ireland, probably looks different in Spain. So I think the fundamental philosophy is the same, but the Lagos that we might put together to build it will probably be different by market given the regulatory structure, given the wholesale market and what it looks like.

For instance in Germany, I think 20% of their customers overall build is actually the commodity everything else are basically taxes and overhead and distribution and a lot of the infrastructure things that customers are paying for. So that kind of economic impacts from all these other things might have a different kind of construct for product that we might have in North America when its more or like 50%.

Patrick McCullough

But the over arching model of selling commodities, selling energy efficiency or water conservation products and then offering renewables will be similar in every market, but the mix and the competitiveness of each let say energy efficiency device versus renewable flavor can be different.

Carter Driscoll

Okay. I'm sorry one last one for me. You have obviously had good success bringing down you attrition level recently. Is that A, you think sustainable as you go back and focus on organic growth and or inorganic growth. And then if you could maybe contrast domestic versus I think you have long enough period in the UK now the big to talk about attrition. Could you talk about what you had experienced there so far.

James Lewis

Yes. I think our resource there Carter is that we think it is sustainable when you look at attrition number now especially on the mass market size. We are seeing customers appreciate that bundle service, our approach to program has been very well received. We have seen our net promoters go up, so we are excited about that. We have seen higher conversation rates and we are talking to customers, which ultimately leads to lower attrition there.

In UK side, we continue to see good success there. We are going to rollout some of these exciting programs over in the UK as well. Today, the value proposition really has been some of the longevity, longer-term pricing term that they historically haven't seen or we have been very competitive on the green side as well. And we have focused there and on the commercial side, we have been very successful as well. The attrition has been lower there, than state and we expect it to trailing in lower as we rollout from - of these exciting new products and services.

Carter Driscoll

I appreciate the answer to all my questions. I will get back in queue.

Operator

Next question is from Raveel Afzaal [Canaccord Genuity Corp].

Raveel Afzaal

Yes. Hi, guys. Thank you for hosting for call. A few questions for you, first of all with respect to the sales and marketing expense. I'm wondering how does that number change as customer growth returns. Can you give us some understanding of how much of your currency is in marketing expenses are fix cost versus variable cost and that could change over time?

Patrick McCullough

Yes. Raveel, thanks for the question. This is Pat. So, about a quarter of our channels today are paid in the form of an upfront commission, where about three quarters are paid on a residual commission basis. So depending where that growth comes from as we go forward, there may be that upfront cost that we incur and cash flow that gets recovered over roughly three quarters time.

If you are selling into the three quarters of our channels where you have a business built around residual, then you obviously have a nice match between cash inflows, cash outflows and profits. So, as revenues and gross margin are incurred we will be booking the commission monthly as we experienced the contract over one, two, three years.

In terms of fixed cost, there are some fixed cost associated with our door-to-door channel and our joint venture for our online and telemarketing. You can see the nature of selling and marketing move with our gross margin with our business.

With the commercial broker channel there is very little fix cost for us, there is some internal insight sales type of folks that do support that, but with a smaller dependents on door-to-door over a past couple of years that fix over head of sales offices and the recruiting machine behind door-to-door has actually come down quite a bit for us.

Raveel Afzaal

Okay. And do you mind diving deeper into this and just giving us some sense of what is your acquisition cost for these different sales channels per customer? I mean [indiscernible].

Patrick McCullough

Yes. We have historically reported through our Investor Relations deck our consumers versus commercial costs of acquisition and you see that in the MD&A, but at this point in time that's all of the cost of acquisition that we are reporting. May change in the future with new channels being added, but for right now we are just giving those segment splits.

Raveel Afzaal

Understood and then Deb was talking about the new retail sales channel that you guys have recently launched, is that the kiosk, can you provide some more color on that?

Deborah Merril

Yes sure, this is our in-store, in-box retailer store and various types of stores, so we actually launched five so far, one is an electronic store in Texas and the other one is a kind of multi-store in Canada. So we have kind of have a bit of the pilot up and running. There a couple of ways we are going to do this, one is, the one we are currently doing right now is our kiosk, as we said before, and we have a partnership with a company who is already in many of these relationships with various retailers across North America. So, with our partnership with them, we will continue to test pilot and then ramp that sales channel.

Raveel Afzaal

And how long has this pilot been going for just this quarter or previous?

Deborah Merril

No, we just started, we launch about two weeks ago. I think last week was our first active week in those five stores. So, as you can understand our brand new channel working through the teams, making sure it all works and then it will kind of a linear ramp over the next 18 months as we open and go into more-and-more stores.

Raveel Afzaal

Thank you. Very interesting and then can you speak about the UK market dynamics, how is the competitive environment on the commercial versus consumer side at the moment?

James Lewis

Yes. I think when you look at the UK it's interesting, September they had power spike there, which you saw probably and there was a line down, and I think in [indiscernible] France and some of the imports. So you saw some volatility pick up there; at the end of the year, you saw a pickup in some of the pricing there, which then increases the shopping aspects there.

So, that gives you a sense of some of the volatility back, when you see the volatility, you see some of the pickup and a switching as we talked about and we saw some of that as well. It is competitive, but commercial side you have a lot of brokers like you have here, very sophisticated.

We do really well, we are a great supply key over there that looks unique opportunity for us to be very competitive on the pricing side there, which allowed us to grow. So we continue to see that, we don't expect anything different, and we will continue to apply the same discipline that we have here in the states.

Deborah Merril

Adding to what Jay said. they did see that volatility and we actually saw a competitor bail out of business based on that volatility last year. So we could see that go into January as well where we have seen a lot of activity in that marketplace on the residential side.

Raveel Afzaal

Great. Thank you. So looking ahead, you think most of your growth for the UK will come from the consumer side or is it 50/50 consumer commercial?

Patrick McCullough

On an absolute basis, it will be slightly more commercial, because it's a bigger base, but on a percentage basis, it will be the opposite. So we will get good solid growth from both segments.

Raveel Afzaal

And what is the current penetration of the retailers in Germany?

Deborah Merril

As far as the total, I believe there is the…

Patrick McCullough

The total count, is that what you are asking?

Raveel Afzaal

Yes, I was just saying here for example in U.S. the energy retailers have closed to 30% penetration in deregulated markets, I was just trying to know what number that looks like in Germany?

Patrick McCullough

Maybe less than half. It's actually very similar to that number; a lot of people have never switched from the default utility.

Deborah Merril

Default rate. People on default rate is around that 30% I believe Latin America.

Raveel Afzaal

Great. Think you. Just two more questions. Now the attrition rate is coming down but the fail to renew when I look at it on the consumer basis it's still pretty elevated, how do we get this fail to renew number further down?

Patrick McCullough

Are you speaking of commercial?

Raveel Afzaal

Consumer.

Patrick McCullough

Renewal rates are high for consumer.

Raveel Afzaal

So for example fail to renew in absolute numbers was 50,000 in Q2, number of customers of failed to renew and now that number is at 56,000. If I have it right for Q3? And that compares with 31,000 in Q3 2016.

Deborah Merril

Part of that Raveel is going to be the number of customers up for the renewal in that period. So even though the percentage is getting better, if you have a more customers that are up for renewals in that period that absolute number might be better. Does that make sense?

Raveel Afzaal

Yes, it does, absolutely. Lastly, with respect to bundle packages can you speak a little bit more, about what sort of sequential growth we are seeing in terms of selling these bundled products? I know it's still in early days so it's difficult to say, but any data point from that will be helpful.

Patrick McCullough

Yes. So the bundled solutions that are out there now are still the vast majority of what we are selling. So a lot of the scaling of Perks, plus LEDs, plus multiple commodities, that scaling has just happened here in the last two quarter for the company. So as we are going forward, we will be scaling that up offering more bundled solutions to our product mix. But it's still the majority or the minority I apologies.

Raveel Afzaal

Okay. That’s it for me. Thank you guys.

Operator

And our next question is from Sophie Karp [Guggenheim Partners].

Sophie Karp

Hello guys, thank you for taking my question. I was wondering if you could discuss a little more or give us more color on the competitive environment. You mentioned that there is one of the factors that impacted the quarter and so how do you see to that being affected by the other factors in the U.S. here in the other markets and where do you expect it to go?

Deborah Merril

Sure. May be I will start it. So the competitive environment that we - this industry has always been competitive, but we tend to get ebbs and flows of things. So as you get periods of very low volatility in North America especially in the U.S. you get a lot of competitors get very skinny on margin, very skinny on pricing and maybe do some irrational things.

And then when volatility returns and they tend to get these prices, you find that those of either adjust their risk profile and maybe increase to more prudency in their pricing and also go away in some cases. But at least these could return to normal.

So we have been in this low volatility environment, which get people a bit complaisant I would say. A great example to UK is they haven’t had volatility forever, you have a little bit of volatility in September, immediately somebody got our business in October. So they hadn’t priced all the risk prudency associated with it. Managing retail energy, which is much different than buying [indiscernible] power.

So this is something we have been in this business for 20 years, this has been going on, this is a cyclical thing that goes on and it goes away as soon as it shows up. So it really just depends on how those wholesale markets are operating in weather and other things. I think what we are trying to do Sophie is really not to be commoditize.

So we want to be able to break away from this commoditize seeking of rate per kilowatt hour, which will hopefully give us the ability to weather the storms as people are doing some irrational price increasing like, [indiscernible], smart sprinklers, things that bring a different type of value to consumers that will really distinguish us in a way that will keep us out of this overtime. It is laid up a little bit more from these low volatility environments and highly competitive prices.

Sophie Karp

Got it. Thank you.

Operator

And a question from Damir Gunja [TD Securities].

Damir Gunja

Thanks, good morning. Just wondering if you could spend a little bit on international expansion you have got Ireland license, Germany obviously is underway. Deb, I believe I heard you mentioned Spain? Can you just discuss the potential roll-out of other countries and their timing?

Deborah Merril

Yes, sure. So active in Germany, very excited about that. Ireland get a license it will take us probably a couple of quarters to get through all the testing to get that launched, but we got all the approvals from the regulator which is exciting, but that should probably in the second half of this year really be - this coming fiscal year probably start to see some good results from that.

But we are being very active in all of the European markets looking at what makes sense for our next move. As well as Japan, so those are kind of the two places that we are looking now and Spain has come up recently, the Netherlands is another one that were very actively looking at.

And we are looking at essentially hiring some local people and growing organically, we are always opened to small to medium size acquisitions that get us there quickly, but a couple of things on the radar screen in Europe are Spain and the Netherlands as well.

Damir Gunja

And do you have any thoughts on sort of the value of a customer in Europe versus North America, presumably, they use less energy or more efficient, so the overall value of a contract or customer might be a little bit less, is that fair?

Deborah Merril

Yes, I believe the average household in Germany uses just 450 kilowatt hours a year. Right? [Multiple Speakers].

Patrick McCullough

Yes, it's about half, it's a little bit more profitable per unit though at the same time. But it's definitely right. It will be a bit more fragmented market than within North America, but this is something we experience in the UK as well.

Deborah Merril

And I would sort of add that you know that we do get lower consumption, but we actually see higher margins in the UK that we see in the U.S. as well. So we are approaching each one of these countries as a individual study and making sure that we understand all those cost and we can make money.

So that's something that we look at very closely, size of the customer, consumption, value products, what works, what wouldn’t works. If you look at these the credit profile, I think Germany, very little bad debt, very little attrition because they tend to stick with our contracts. So there are all kinds of variables that we evaluate when it comes to the overall profitability in which country we want to spend our time on.

James Lewis

Damir, one of the things to also look at it is customer [Indiscernible] what you will see as well in Germany like in the UK that the majority of what your sell is door-to-door and so [indiscernible] w owns own gas, Indiana owns gas and the same period you start-off with before Ohio and Illinois to put off with gas and with the power, but over there in Germany and in like the UK you will get door-to-door and as we move to more customer focus, not when we look at it, that’s what we are looking at. So, customer profitability might be [indiscernible] would be different but we are looking at customers going forward, not so much RCEs.

Damir Gunja

Well that makes sense. Thank you. And can you elaborate a little bit on the acquisition front, I guess beyond smaller geographic expansion. Are there any books of size or businesses of size that you would consider purchasing or what sort of a range, what the range could look like?

Deborah Merril

Yes. I think before, we are not buying it necessarily towards size whether it’s small or medium or medium to large. That’s not necessarily a criteria, we are looking at what it brings to us. So, if it make sense and given where we are from a financial perspective, we know that we can afford doing some really strategic things here. But we want to be pretty prudent about how we go about doing that. So, I think the answer to your question is we are open to various sizes of things, but it would really have to really make sense for us.

Damir Gunja

Okay. And just a final one for me. To the extent you can or willing to comment, you had a little bit balancing impact in Q3, is there anything you could say as to how Q4 is tracking so far from a usage perspective?

James Lewis

Yes. The balancing there at year-over-year, we plan for those so that [indiscernible] for just the year-over-year, last year very mild we don’t see any of the normal balancing this is just returning to normal. So, I don’t think there is any major impact. Just when you comparing year-over-year and there wasn’t a lot of the previous year as shows up as margin. So, that’s answer there.

Patrick McCullough

And one thing Damir to mention which we are trying to point out a little bit here. Actual consumption in the third quarter was down over 10% versus year ago, where RCEs were down something like 7%. So, we are actually seeing in this period that we are speaking about today, less consumption than normal within our customer base.

So that’s a little bit of a abnormal in our minds nonrecurring volume metric softness to our earnings at this period. We expect that gets back to a normal on average and won’t impact the fourth quarter, which is why we are confident in guidance.

Damir Gunja

Okay. Thanks very much. That’s it for me.

Operator

[Operator Instructions] We do have a question from Carter Driscoll.

Carter Driscoll

Hi. A quick follow-up for me, if I may. You talked about the M&A and I realize that there are a lot of different criteria. Is there a kind of a one, two, three in terms of what you are looking for. I'm assuming accretion is extremely important, is that lateral expansion locally, is it international. I imagine that’s towards close towards the top. Maybe just talk about the factors openness to up sell on that from your valuation perspective if you could kind of list what you think to prior to that?

Patrick McCullough

So, let’s talk about the strategic and the financial criteria that we are kind of thinking through. And then we can talk to you about the differences in Europe and North America. So, strategically yes, we would like to accelerate our strategy into new geographies. So, it’s a important criteria as we think about capital resources and focus and how much we could take on in terms of acquisition and integration.

The second thing though is if you didn't accelerate your strategy, but you could get value out of buying in existing book and doing more with that book; we also see that a strategic, it's bringing those better products, that better customer support to let's say surely commoditized booking and maybe getting more with those customers then a seller could.

From a financial perspective, in a perfect world we are going to be buying at a multiple discount to our own, which is the easier said than done in North America than Europe; Europe we are seeing higher multiples than ours, in North America we generally see lower; and then we will be looking for day one cash synergies. So if it's a smaller acquisition, which should be taking out the [indiscernible] risk supply, which we feel we do better within the industry we could get very quick cash synergies there.

And then with our buying power and our diverse wholesale suppliers, generally speaking we would expect to buy with more scale and have cost of goods sold synergy on a go forward basis and then ideally a commercial synergy as we are offering superior products and a broader suite of products. So, that’s kind of the rationale that goes into this.

If we were looking at a North American, let's say tuck-in or roll-up, you have to ask yourself if it has a sales engine that is an ongoing let's say concern but also a high quality book, and if it does, we are going to be thinking about the acquisition on a multiple of earnings basis. If it doesn't, we will be looking at it on a book run-off basis.

So the way we approach valuing something let's say North America that's a commodity book would be different depending on the quality of its book and the quality of its sales engine let's say.

Carter Driscoll

Could you talk maybe multiple difference between those two last scenarios?

Patrick McCullough

If you saw something that had and it was a new sales channel for us and it was an organically growing book; we may look at an acquisition and say we are comfortable that there is a new dynamic and accretive sales machine within that company, so we would trust let's say projected earnings or forward earnings being consistent with what the trailing 12 month was.

Versus let's say somebody who was out gobbling up market share in a unsustainable way, let's say maybe there is variable contracts, maybe there is pricing that we don't think handles all the risk that's out there. We may look at their trailing 12 month earnings and say okay they have benefitted from a stable low energy price environment, but those earnings aren't going to be there in the future.

So we would literally one-off the book and say, okay over the next few years they are going to make 80% of what they made in the last year and we are going to offer let's say an acquisition price similar to that book run off one-off value.

Carter Driscoll

So, sorry if didn’t understand, it sounds at least of a high level that buying books is more likely domestically and then maybe Greenfield is the way we kind of trade internationally; and then my last question is you what your competitors talk about in absence of competitive bidders over the last kind of last 12 to 15 months, it sounds like maybe you were one of those parties that was not present at the time. Are you worried about getting into bidding wars with some of your competitors that maybe have taken on recent acquisitions and now they r starting to get through those?

Deborah Merril

No, we are happy not be part of that process; we have had kind of the whole world is our [indiscernible] at this point. So kind of getting in the bidding war in North America for some small book is not necessary for us. We have got plenty of other as we look at Spain and other places that we can go into, we would rather put our resources there to get too crazy here in North America.

Patrick McCullough

Furthermore Carter, if you think about seeing five times trailing 12 month earnings right now, those are earnings could be a fraction of what they are as soon as volatility comes back and then the multiples are going to shrink too. We were on the sidelines with debt after Polar Vortex but we are seeing one to two times earnings after earnings got hurt significantly through Polar Vortex. So we wouldn’t be very smart to the out paying big multiples for today's earnings if you can be patient wait for volatility to return.

Carter Driscoll

Right. Right. So it looks like slightly inflated multiple, but if the volatility comes back and look more accretive, I guess.

Patrick McCullough

In the multiple then the earnings will fall, so we actually be paying for quite a bit less enterprise value.

Carter Driscoll

Right. Okay. That’s all I had. Thanks.

Operator

[Operator Instructions]

Deborah Merril

All right, so it sounds like we are throughout all of the questions. Just wanted to take a quick minute to thank everybody on the phone for joining us on the call. I want to take a really quick minute to also welcome our new employees in Hamburg, Germany we are very excited to have these guys on Board and very much look forward to what we are going to be able to accomplish there, so I wanted to welcome to the Just Energy family of employees.

As well as just quickly, I mentioned it earlier, but couldn’t be happier about the fact that we are celebrating our 20th Anniversary and probably, all the time I have been in this business a long time, longer than 20 years. But what we have been able to accomplish as a company what Rebecca started back 20 years ago turning to what is it today. We are all very proud and we going to accelerate the whole year. So wanted to thank all of our employees for making it happen, thank Rebecca for her vision 20 years ago and look forward to a great year. Thank you very much.

Operator

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

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