Q4 2020 Just Energy Group Inc Earnings Call
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At this time, all participants I don't listen only mode.
I can speak his presentation, there will be a questionnaire fashion.
Asked the question Doron assessing new departure I didn't want ammonia touchtone phone.
I'll now turn the call somebody else, you're just talking argument together.
Thank you operator welcome everyone.
Joining me today is Jim Brown, our Chief Financial Officer.
Preface the goal by saying that the two press releases issue today potentially our answers to your questions will contain forward looking information that information may ultimately prove inaccurate. So please read the disclaimer regarding the information to bar in the press releases.
So let's get started we gotta love to cover today, we issued our fiscal 2020 earnings results as well as issuing a special press release regarding our recapitalization plan inboard renewal.
Jim and I will discuss the results for the quarter in our strategic priority for the coming years, rather than the recapitalization plan before four we cannot be brief question and answer session at the end.
I like to begin my remarks by saying that the past few weeks in March had been more foreign precedent intervention from a global pandemic record unemployment to destructive weather events across North America, and an international dialogue on civil rights and racism.
Through all of this just synergies mission remains unchanged provide a central utility services to customers, while ensuring the health and safety of all of our employees.
I'm proud of Archie even the culture of inclusiveness, we have worked hard to build at our company and I'm honored to lead this organization during these challenging times.
When I rejoining just energy your CEO last August I talked to accomplish three objectives, one stabilized the core north American commodity business through a series of measured but significant cost reductions and heightened enrollment conforms.
To shed low return non core business activities and three to improve liquidity.
Despite the substantial progress made through these initiatives. We ultimately concluded that we could not even with flawless execution operate our way to solving our balance sheet issues constrained liquidity high debt levels in the movie debt maturities, coupled with the need to build confidence among our financial credit in commercial counted.
Parties letters to conclude that we needed more than just operating efficiency to sustain the company.
This was confirmed to buy the strategic review.
That's right thoroughly believes that the recapitalization play and we announced today combined with the many operational improvements we've made will strengthen in de risk our business in a way that results in a much stronger just energy.
Through this plan, we will set the company on the right path for long term success as he North American energy be Taylor for all of our stakeholders.
Turning to our performance fiscal 2020 was an important year for just energy, we undertook a strategic review to explore avenues in which we can unlock greater value.
While continuing to provide best in class experiences for our customers are collective efforts absurd to stabilize our core business, specifically, we streamlined our operating footprint by exiting non core markets, including Ireland, the UK, Japan in Georgia, and refocusing our resources in our core North American retail energy markets, we reduced.
The necessary SGN expenses and embedded capex discipline across the company, which resulted in exceeding our spend reduction target of 60 million for fiscal 2020. These already completed actions have less position to deliver approximately 100 million in savings in fiscal 21 relative to our fiscal 2019 performance.
We updated our enrollment controls to prevent lower quality onboarding increased credit score apartments to improve customer quality selection. In addition, our reporting strict monitory now allows us to identify any bad debt issues before they mature.
Already we're seeing the positive effects of these efforts and reduced bad debt and overall improvement in customer quality, which has served us well as we have entered the current cobot 19 environment.
We expanded our retail sales channels in 22, winning in revamped our digital sales in order to improve the return on investment that we're making in our cost of acquisition. We also hired a new executive head of our digital and telesales.
We continue to adhere to a strict focus on return on investment of all marketing spend as we come out of Cobra disruptions. This approach will serve us well as we scrutinized each dollar spent as we ramped back up on these channels.
The early results of our efforts can be seen in our financial results for the quarter and full year as we reported base EBITDA from continuing operations of 74.6 million for the fiscal fourth quarter and 185.8 million for the full year inclusive of the 22 million dollar positive adjustment from the reduction in the filter group earn out.
Liability.
In total the stabilization efforts have been critical and laying a strong foundation, we needed within our business to begin pivoting to a period of sustaining our improved performance in structure and ultimately enhancing our growth and value longer term.
More recently like all businesses, we've had to take several difficult.
But necessary steps to ensure the health and safety of our employees customers and communities. During the cold at 19 pandemic that have affected near term results to be clear our business is operating as a healthy business and our multichannel model and essential nature of our services.
Served us well during the initial stages of coated Additionally, regulatory and government agencies have been supportive in working with just energy and other companies in our space on credit risk issues related to the pandemic.
How are we took early action to suspend our door to door sales and in store retail selling activity essentially spending all face to face selling.
We suspended all business travel as well as requiring employees to work from their homes unless required for business continuity.
Stay at home orders are lifted across markets in which just synergy operates we're working closely with state prevention in local officials officials as well as retail channel partners to reopen sales channels that were impacted by cobot 19, new protocols for how best to engage with potential customers being reviewed and trial in certain markets.
As we speak with you here in July I can also add that in Q1 fiscal 21, while sales have been adversely impacted due to covert 19, the business continued to perform well on many levels. Our work on signing better customers is continuing to yield results as a result, our attrition rates in our consumer business.
Our our improved partially offsetting the reduction in sales in our bad day rates continue to decline despite the impact of cobot 19.
We're also using this time to revamp our sales strategy with a renewed focus on our emerging did digital sales platform.
[noise] our mission in the year ahead.
As we must continue to reduce cost and simplify our structure and streamline our portfolio further stabilize or liquidity while also preserving.
Preserving arts and expanding our high return sales channels.
I'd like to before turning it over to Jim I'd like to reiterate and provide a little more detail on the recapitalization inboard renewal announcement, we had today.
Today, we announced a comprehensive plan to de risk the business and position just energy for sustainable growth and as an independent industry leader. This plan is the culmination of an extensive process, where we explored many options for the future just energy by taking these actions now we can position just energy for a bright future as an independent leader.
In the business and providing energy and sustainable energy solutions to consumers.
As you will see they've seen the announcement included a recapitalization and.
And a plan to renew the board as well as the end of our strategic review and the determination that we will forge ahead as an independent leader in our industry.
The actions, we are taking position us to succeed in that goal, providing employment for approximately 900 employees uninterrupted service to our more than 1 million customers.
There are many things that are great about this business, we have a great customer base, we have a great team of employees and an experienced management team and we have a strong position in key markets, but we also have a capital structure that is not sustainable in the long term or appropriate for business of our size and scope.
So we made the determination to undertake a recapitalization of enable us to raise equity and reduce our debt and to do so in a way than insurers no disruption to the business. What we're planning has no impact on our day to day operations, our employees our customers for our suppliers. It it's business as usual from that point of view.
This recapitalization enables us to protect what is great about our business and address what needs addressing and Thats our balance sheet. Our plan is to raise equity and undertake a series of actions that are highly de levering lowering net debt by over $500 million and materially low in annual cash interest payments you.
Can find a presentation on our website that provides more details on the recap plan at investors not just energy Dot com.
I'd like to that we'd like to turn it over to Jim Brown is going to give you some more detail as well as discuss our financials in more detail Jim.
Thank you Scott I'll start with recapitalization transaction as far as our car recapitalization.
We'll be undertaken in the plan arrangement under the Canadian business Corporations Act, we raised $100 million through an equity subscription opportunity is open to all security Oneish.
Of that a significant Matt will go into the business portion will be used to pay down debt.
This will provide increased liquidity pay down our credit facility and allow us to be able to continue improve our operations to move forward driving sustainable growth over the long term.
We will convert approximately $420 million of convertible debentures and preferred shares to common active equity.
Extend $335 million.
Of credit facilities by three years since December 2023, with revised covenants and scheduled commitment reductions throughout the term.
And we will extend our unsecured senior debt March 2024 would interest to be paid in kind.
In the investor deck that Scott referred to above.
We have included a high level pro forma capital structure for the company post recap.
We've also provided description of the new equity subscription opportunity.
In our press release. This morning, you will find greater details about the plan, we expect our circular for the plan to be issued within approximately two weeks.
Holders of record on July 20, Threerd 2020 will be eligible to participate in the equity offering.
Theres a table in our press release that tells you not only how many shares you will receive under the plan.
How many shares hearing tied to under the new equity subscription opportunity for shareholders record.
As of July 20, Threerd 2020.
He share in the new equity subscription can be purchased for Canadian dollar.
3.41 too.
There will be a deadline for completing the subscription process.
On a day to be set the August backstop commitments ensures that any unsubscribe shares will be purchased and the company will see gross proceeds of approximately $100 million maybe.
Our anticipation of this transaction will be completed in September.
Pending required approvals from stakeholders and the court.
We have indication to support from significant stakeholders, including our senior unsecured lenders will be backstopping, the equity subscription opportunity and we're optimistic that upon reflection of our investors. The merits of this cat recapitalization will be clear.
And we'll be able to support.
Receive support to move ahead.
Let me now shift to our briefly to our.
2020 financial results.
Before I dive into the 2020 results I want to direct you to our financial statements and Mdna that were issued this morning.
Over the over the last year following the Texas enrollments bad debt issue, we ticket undertook an exhaustive review of our balance sheet to ensure all accounts are properly stated.
As a result of this review we have made restatement to our fiscal 2019 results and our retained or specifically the first quarter 2019.
And our retained earnings as of March 30, Onest 2018.
Please refer to note five in our financial statements for a more fulsome explanation.
Turning to the key performance metrics for the fourth quarter fiscal years 2022 twice ways sorry.
EBITDA for continuing operations was $74.6 million, which represents an increase of 25% compared to the same period a year ago.
This was primarily driven by higher base gross margin and lower non commission selling costs.
Based on what gross margin increased by 5% for the quarter ended March 31, 2000, sway primarily due to margin improvement initiatives and supply cost management, partially offset by smaller but higher quality customer base.
I would like to emphasize that our base gross margin does not include the $6.1 million.
Non recurring charges associated with our strategic review.
Restructuring costs.
Costs.
Related to the Texas residential enrollment impairment.
Since Scott's at the helm, we've been keenly focused on shifting our focus to our core commodity business.
As opposed to international opportunities and value added products acquiring higher quality customers.
While the customer book is smaller than previous year, we're experiencing higher consumer renewal rates significantly lower bad debt.
An acquisition margins.
Exceeding physical 2019 by over 25%.
Embedded gross margin remains strong at $1.8 billion with over 1.1 million customers include.
Our cash flow was significantly improved from the as soon as your 2019.
As a result of our lower cost model and better management of bad debt. We finished the year with positive free cash flow $25 million.
This is being $88 million negative in 2019.
We are keenly aware of how important cost management is to our investors.
This quarter and moving forward. We're also committed for writing more transparency to our selling non selling costs, which you will see.
As an extended disclosure in our Mdna.
For the year administrative costs, excluding strategic review costs.
Decreased by 7%.
Selling on commission, marking expenses decreased by 14%.
And most notably capital expenditures decreased by 68% from 43.6 million to 16.1 million.
Our cost reductions engagements with us vendors and suppliers allows team.
And the year.
With about $80 million of available cash and credit facility.
These actions.
Should yield all undergoing dollars in savings in fiscal year 2021 relative to 2019.
These figures also exclude improvements that Megan have been made in bad debt.
Finally, I'd like turn so discussion to our fiscal 2021 guidance.
Given the uncertainty associated with Coke was 19.
And the impact is had sales we are providing a wider than normal.
Once range between 130 million, an $160 million base EBITDA for fiscal 2021.
Additional Additionally, we also expect to see between 70 million in $100 million of under Levered free cash flow.
For fiscal year 2021.
Before I turn the call back over to Scott I want to say that we remain confident that our continued focus on the core business cost reductions and return it to customer growth we deal greater results in future periods now I'll turn it back to Scott. Thanks, Jim.
So I will conclude with a few final thoughts on our plan to strengthen de risk the business you recapitalization as well as board renewal.
I recognize the actions we're taking through the recapitalization are tough if you're an equity holder.
However, as I said earlier the capital structure. We have currently is not sustainable we need to fix it. So we can put management is full focus on driving our underlying business in the markets focused on the really positive attributes and just energy.
Furthermore, this recapitalization follows from an extensive strategic review process. It has been determined to be the best alternative for the company.
This is also a good time for board renewal to set us up for that future as a leader in our business and we will be proposing changes to our board of directors at our upcoming shareholders meeting the board size will be fixed at seven directors with at least for new directors joining the board.
The realized slave nominate directors, including the relevant skills and experience will be outlined in the information circular, which we set out to shareholders in the near future.
The result of these actions will be a company with a stronger balance sheet revitalize board a management team that no longer has the distractions that come we're trying to deal with our liquidity and leverage runner strategic review, while all the while I have also running the business.
We'll have a clear path forward as an independent leader in our business strong board oversight on behalf, our stakeholders and a balance sheet that gives us flexibility do we need to drive the business now lets turn it over the two questions operator.
Thank you again, ladies and gentlemen, who like to ask the question. Please press Star then one on your pets pound telephone one moment for your first question.
Our first question comes from Nelson mean of RBC capital markets. Your line is open.
Great. Thanks, and good morning, everyone.
My first question relates to the Reorg.
Could you just walk us through what.
Approvals required from which security holders.
The recap correct.
Yes, right. So we filed a.
And I need to be careful about pay a plane lawyer, because I'm not a lawyer, but we filed an interim order this morning.
The record date.
And we will be seeking stockholder approval through vote and final quarter approval.
By September.
And then in terms of the stakeholder approval does that include like equity preferred shares converts or or is it mainly the senior lenders.
That that vote.
The c., the senior lenders and the unsecured lenders to them.
Our obviously prearranged deal.
The layers below that converts in the preferred and the comments will be voting.
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Okay.
And would it be.
It is is the much like a simple majority required.
In terms of those in terms of converts preferred and common.
Generally there's more to the ruling as simple vote, but the simple rule is 60% 66% of the people who vote needs. So yes.
Okay got it is there's other factors to consider but that's the general.
Okay.
And then just touching on the fiscal Q4 results.
Was there I'm just wondering if the results are pretty good.
I, just wondering whether the mild winter had any impacts on results rather positive or negative.
Yes, I think the.
In terms of weather event, we I would say that we are the we were middle of the road on whether we didn't see above board or detraction base based on weather.
Okay and then what is there anything recognized for the filter Griffin in fiscal Q4, I know there are some recognize earlier in the year.
In terms of the lower contingent payments, yes. The 22 million was from prior periods. It was not Q4, but that was part of Q4.
Okay.
And then just moving to the fiscal 2021 EBITDA guidance.
Could you just tell us what the main driver Saar for the kind of year over year reduction I guess given that.
I guess, roughly 109 out of cost savings and initiatives for were implemented.
I'm just wondering what's offsetting a lot of that.
In the coming here.
So Nelson we suspended.
All face to face selling which is the majority of our selling.
In March and it has yet to come back to a run rate anywhere near what we're accustomed to we do expect to get there, but the primary driver for our I'll say subdued guidance is the risk we see in.
What I call the growth wedge for fiscal 2001, which is the new customer additions every month that goes by that we can't get back to two our normal run rates on growth.
Makes it harder for us to make up forward in the current fiscal year and show.
We are expanding we are moving into some of our mid Atlantic in northeast markets as they open up Unfortunately, the surge in cobot 19.
Cases in our biggest market in Texas has caused some of our key retail partnerships to pause on their their reopening of our sales kiosks. So so really the the reason we've got the guidance where it is and the reason for the range has has to do with all with with the uncertainty regard.
Our ability to.
Get a retail sales back.
Digital list, it's doing well and we really playing on we're investing a lot in our digital and inbound telesales as a channel that's largely unaffected by cobot 19, but the face to face selling.
Try and a lot of different things, we got our kiosks look a lot different today than they did three months ago, There's a big clear plexiglass needs guard and our sales or have to be done in a touchless way.
Which was not the prior methods so.
Lots going to be learn.
This year, but I think.
I'm comfortable with the guidance that we've got out there, but that it is it is impacted largely geico, but the biggest impact on us was not what we were worried about which was a bad debt and customer payments at least not yet we haven't seen an impact of that it's been on our face to face selling.
Okay got it and then maybe that's the question for Jim in terms of bridging from the 130 to 160 of EBITDA to.
Unlevered free cash flow.
Could you just flag a few items there like first of all can you just clarify.
I presume the Unlevered free cash flow I mean theres no.
It's before interest payments.
If you can clarify that and whether it assumes that.
The recapitalization happens.
Like in September or or can you talk with some of down some assumptions.
Underlying the free cash flow calculation.
Yes, so to answer your question because of the recap we switched to giving.
Unlevered free cash flow because affected by interest so the capital structure change.
Would have been confusingly thoughts so that that is to answer the question one bridging from EBITDA I mean that debate the three big things that drive that and we don't necessarily give specific guidance on the three items, but is the taxes capital and changes in working capital.
Taxes, I think do you expect to be similar in terms of cash taxes as they were in the prior year.
We expect Capex to make remained consistent with prior years well, we do have some repaid payment of working capital financing that we than prior years, and we expect that to unwind.
During the year as well and we expect some use of working capital.
Okay Nelson sorry, one other thing there again like I said to not not the legal guy for sure, but the senior unsecured do do vote on the deal I apologies I misspoke there.
Okay got it.
And then like so I think in previous periods just in terms of the free cash flow included some capitalize commissions, but obviously.
Any.
Gets capitalized commissions would be a lot lower this year given given covet.
No it's pretty flat if we had a big increase in is 19 of capitalization, which is why I see the higher expenses coming through 2020, but.
Pretty flat.
Okay, and then one last question before I get back into queue.
So as part of the the re capitalization there is the 100 million of cash.
So could you just.
Flag like is that hundred million there to act as as a buffer or.
I just wondering what the what the plan to use for that as or is it there to pay down.
The credit facility.
Yes, a smaller point I mean, the way we look at is when we look at our company awfully.
During the month between low liquidity points and high based on when we layer air suppliers.
And we looked at the base level that comes down to and felt that that was on acceptably low.
So the majority of the money that's coming in is going towards raising liquidity for the company and some portion of the will go towards paying down the credit facility.
Okay. Thanks, I get back in the Q.
Thanks, Thanks Nelson.
Thank you.
And ladies and gentlemen, I would like to ask a question. Please press Star then one on you touched on telecom.
Our next question comes from Mark Darby.
The capital markets. Your line is open.
Thanks scored everyone may go to continue on with me.
Let me subscription an opportunity just maybe you can walk through how the pricing was set for that team whether or not.
And just maybe the backdrop of how that became less people there backstopping.
Equity offering.
Yes, the that was the.
That was the pricing that was required to acquire the Backstopping that's correct.
But maybe just kind of made a logic around high came to that $3.41.
Well there yes.
I don't mean, the routine myself, but that was the price that was required to get the backstopping the backstopping.
Turning to the overall recapitalization transaction.
And one thing I did want to reiterate is that the subscription is available to all shareholders. So.
Every existing shareholder or new shareholder under the plan, while the right for that subscription at that price as well.
Fair enough looking at that price wholesale side. So wondering why your cap. It at 100 million why don't give yourself in a more buffer on the leverage and and take down some of the different got facility.
You know I'll go back to the point I said before we looked at the liquidity, we thought the business needed and.
We also looked at the opportunity to pay down some of our short term credit facility debt.
And.
Yeah that that was what felt like the right number and that's what we're able to achieve.
Okay.
Everything is going to go to the senior secured debt that should be extended it being that the recapitalization done any details on what sort of considerations or may buy them to to celebrate our that's higher effective interest rate and maybe just walk through the pre payment terms are those quarterly or semi annual prepayments and is there anything there.
He restrictions like a cash sweep or anything like that on the.
Potential extension of that facility.
Generally speaking the cash it's mandatory repayments over the next three calendar years.
They occur every six months.
And our that the interest rate was increased across across all the different right.
Here is that our 50 basis points.
Is there anything else in terms of liquidity or covenants in terms of cash and bank that cars that management repayments kind of come from our debt restructuring.
Yes.
With respect to covenants, we adds relax covenants as compared to what we had in the path.
That will accommodate what we expect to do in terms of performance in the business.
Okay.
And then going back to the questions around approvals and support.
Are there any lock up agreements, many large shareholders and it sounds like you're saying that the senior unsecured lenders have essentially.
No done sort of a lockup is there anyone else what's on the common equity side or anything else in kind of comment.
No I can't comment Hassan.
No there is not or you just can't disclose that.
Okay, and I need to follow back up with you on that Mark Okay fair enough.
And then just like comments or time with that.
You can go to release the Q4.
We also announced a couple weeks ago. Some some relief again for fiscal Q1, obviously covance complained the near term results, but looks like the covenant relaxation was higher fixing forwarding in fiscal Q1 for Q1 fiscal 2021, we cannot help me reconcile the differences of what you needed back in April versus what you announced at the end.
As of June in early July and how we should think about that in terms of Q1 Q2.
The business.
Sorry are you asking is your question what do you expect our.
Senior leverage to look like.
Yes, I mean because.
So the results are pretty solid here, but I think take covenant on the senior debt to EBITDA relaxed I've had a greater levels higher than what we needed. Most recently at the end of June. So just trying to reconcile what looked like okay numbers through Q4 year complying with the guidance that you're facing a bit of ahead.
In the start of fiscal 21, but doesn't seem like a covenant relief.
Anything of those kind of labs to what we've seen looking for and what you're intimating until the start of fiscal 2021.
Yes, well you know we do have from U.S. to now denominated dollar debt and there has been considerable amount of FX volatility. So we tried to give a little extra room.
Thank you calculated number which I don't have writing from you'll see that we we probably could have asked for less but.
That is what we asked for and we had dashboard going into the ended the quarter with someone okay.
And then just on that reduced selling all personally with some restriction workover 19.
Help us understand theres, a lag because that's something you start to fear in Q1 or is it more of it since in Q3 effect, where you're not bringing those new customers and some of the people that exit through Q1 earnings are not replacements Turner understanding how much of a lag in my opinion from from the reduction inside activity based on what we actually see.
The financial impact.
Yes so.
So the it's very dynamic situation as you can imagine, especially with the recent surge in really our largest market which is Texas.
And so we have you know in our our plan as we as we look at it cobot impacted.
I would have us beginning to ramp back up in Q2, which would mean July August September would see us it's beginning to come back to run rates that we did we or that are we're accustomed to interface to face Sally.
That may not there is some risk to that as we look at at the market. Today. There has been a pause in certain of our retail channels, there been comfortable with with putting kiosks and increasing the amount of contact that their customers may have with people. So.
Yes, so so the ramp up.
We have assumptions, if we're going to be able to ramp up.
We have a eight we have a fairly resilient team in our retail sales group and they are already pivoting, though a mark to.
Staffing in expanding in markets other than Texas in order to make up for the for the slowness in Texas. So because we are in multiple markets and we can make decisions that were to staff kiosk, where we've really pivoted to take some of that into PJM markets, where they're beginning to open up and they're not having this.
Spikes that we're seeing and in Texas and so we do we do have some levers. Unlike as I said in addition to that we are we are investing heavily in our digital in inbound telesales teams. So that they can make up for some of the so this is despite the fact that covert may hurt our retail expansion, particularly in.
In Texas, we are finding other places, where we think we could make up for it which is which is part of the reason why we even with the pause that's happening in Texas and the resurgence of cases, we still feel comfortable with the guidance that we had estimated prior to this recent surge.
That's helpful. And then maybe my last question here is on.
Just on on load in demand and how that.
Evolved and protecting its of trying to hedge in.
Customer in boxing and what that could mean from a margin pressure in near term besides just customer levels.
Yeah, that's an excellent question and it's one that we have very early on began to monitor very closely because we had some concerns.
With our commercial business, which has significantly it actually makes up 60% of our volume and we had a lot of concerns about the commercial business low shrinking and what you did and we saw reductions in our commercial volume and we made adjustments to our hedging strategy on the basis for that.
Yeah.
Conversely, we saw expansion of our residential.
Consumer consumption. So you had some offsetting volumes across we manage our supply chain manages.
You know a combined portfolio of commercial and residential load. So you had some offsetting with a with with a net reduction in volume the commercial volume dropped by more than the in the consumer volume went up consumer margins are substantially greater than commercial margins.
So on a net pace. If there was it was I would say within the range of you could say a wash estimate on gross margin.
But.
But we are meant we are continuing to watch it as as as businesses coming back and as we have to adjust the way we hedge for for the restoration of business markets as they open up.
Okay. Thanks Alicia.
Thanks Mark.
Thank you I'm showing no further questions at this time I turn the call back over to Scott ran for any closing remarks.
Thank you operator.
As Jim and I mentioned earlier and earlier remarks, while we have a lot of work to do we have the right plan the right team and the resolve to ensure our organization is not only in the right track, but also coming from a position of strength deliver greater sales optimization and drive improved profitability over the course of fiscal 2021 and beyond.
Forward to updating you on our progress on our next earnings call later this summer and thank you for joining us.
Thank you ladies and gentlemen does that concludes today's conference. Thank you participating me all disconnect have a great that.
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