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Just Energy Hires Big Data Exec, Focusing On Behavioral Analytics In Channels, Pricing

Describes Industry "First" In Awareness, Enhancement Of Returns At Customer-Specific Level

Driven By Analytics, Will "Shed" RCEs As Focus Moves To Higher Return Customers

Set To Launch Water Filter Business In Houston, Dallas

"Stay Tuned" For "Comprehensive" Across Electricity, Gas, Water

De-emphasizing Two International Markets Due To Opportunities In North America For Growth

Discloses Metric At Which Book Acquisitions Would Be Of Interest

February 8, 2019

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Copyright 2010-19 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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During an earnings call, Just Energy CEO Patrick McCullough discussed the company's pivot to use behavioral analytics and data to segment customers, and disclosed that the company recently hired a big data veteran as Chief Technology Officer.

McCullough's customer segmentation remarks stemmed from a discussion concerning the company's retail storefront sales channel

"I know we were talking for a while about getting to 700 stores. And then, I think, we may have even told you guys we've got above 1,000. We're well above 1,000 right now. We don't want to be above 1,000. And let me tell you what we're aiming for. We're looking for the highest quality ROIC that we can get out of that channel, not the highest quantity of stores. So one of the efforts that we've taken on in earnest in the last two months is: let's start to segment customers both on a credit score basis, on new pricing versus old, folks with perks, without perks, folks that are sold through -- at Sam's channel or an H-E-B channel or even better, a Sam's Store in a certain town in Texas versus Ohio," McCullough said

"And what we're doing right now, and you really have to scale broadly before you can understand the economics and the returns on our sales effectiveness, is we're starting to see IRR differences on a store-by-store basis, or a customer-by-customer basis if you really want to go to an extreme," McCullough said

"We're very proud we hired a Palantir executive named Alexander Ince-Cushman [as Chief Technology Officer]. He is the guy that is bringing some of the most sophisticated predictive behavioral analytics, cohort analysis, that our industry has ever seen, and we've been applying that for the past two months. And what we are learning is, the nuances customer-by-customer, store-by-store, credit-level-by-credit-level, zip-code-by-zip-code," McCullough said

"And now what we're saying is, 'Let's kill that store that doesn't make us enough money or high enough return, that doesn't pass our hurdle rate in Ohio.' So what you're going to see us doing is pulling back to probably something in the 700 to 800 store count, allowing our competition to get access to some of those weaker stores that we don't prefer from our own hurdle rates, and really generating more accretive cash and higher returns on a smaller footprint. Now the only way to understand how to do that is to go broad and get experience in more stores than less, and then understand the buying, scale, train up your team, and then determine if the productivity and the returns are there," McCullough said

McCullough then said the same analysis is being applied to pricing and margin.

"Same thing with pricing, right? I think, we talked about this in the past. We did not have the ability to understand elasticity curves by customer segments or customers. So what we did was we raised the water level of pricing everywhere. Now we're starting to see a little bit of attrition on the higher margin or the higher priced customers," McCullough said

"And the great news there is, now that we've seen a bit of attrition, we understand the types of customers or the types of channels that can't support the higher margins and the ones that can. It allows us to do two things -- addition by subtraction, by taking out the ones that have lower than expected returns. More importantly, reinvest our commission dollars. If you take the commissions we're reporting and predicting this year, both on a cash basis, so the IFRS stuff that's amortized, IFRS 15 amortized commissions, and the commissions that we've accounted, you're in the $250 million plus range. Well, what if we could take $90 million of that $250 [million] and funnel it into the higher IRR segment or customer. For the first time in our company's history, and frankly, it might be the first time in our industry, we are highly capable now of getting really acutely aware of returns at customer level and enhancing that," McCullough said

"So what you should see from us is less of a focus on RCE growth. I know, we trained the analysts in the market to worry about RCE growth, and if you don't have RCEs replacing your attrition, you know, you have trouble in the future. We actually don't agree with that, because we're seeing ranges of ROIC and IRR that are exceptional when you get to the customer level. So you'll see us starting to shed more residential and commercial accounts to get to the higher return ones," McCullough said

Previously, McCullough said that, "we've always ran the business on an average or an aggregate level. We've approached the market with one price. We've approached the market with one product structure. That's not to say we don't have multiple products, but we've generally priced entire markets, I think, Texas, in one way, without appreciating that if you're selling at Sam's Club versus selling in a 99 cent store or selling in a high demographic, wealthier zip code versus a lower, that there is a different need, both in a product and maybe in a pricing and an ultimate return perspective."

"So what we're doing now is not managing the business on a portfolio basis, where we would have average pricing, average margin, average attrition and churn at the hundreds of thousands of customer level. But now we're saying, 'Let's get into those 10 customers who bought yesterday in Ohio. How did those contracted margins work out based on what we were hoping for?'. Or, 'Is that sales agent selling enough that the coverage and return there is strong enough for us?' We have complete conviction in the new channels we've launched and the returns that are there. What we're finding, though, is you can go too broad, and while you can have an average that looks pretty good, you can still have an element that is underneath the proper hurdle or threshold from a risk return or IRR perspective, where we just say that's not good enough and we're going to start to cull that," McCullough said

"So what you're going to start to hear from us as we go forward is more profit, more cash, maybe at the expense of customer growth. And it's not to say we won't be growing. You'll see pockets of growth that we will be advertising. Obviously, we're going to grow filters dramatically. Obviously, we're going to grow value-added products and services dramatically. Retail, digital -- these channels have the opportunity to grow as we expand into new geographies. But we have the ability now to not waste sales dollars on low return customers. So expect a bit of a pivot out of our company that really is focused on accretive cash generation," McCullough said

"We definitely are investing in higher engagement sales channels ... we think those unique and higher engagement channels allow us to differentiate and really represent our differentiated value in a superior way, which means, command higher pricing and higher margins. So we are not trying to be the low cost player in the market and compete our market share. That's not a business that we're excited about. We see too many retailers get in trouble with razor thin margins, operating off switching sites, and end up not having a very compelling book. So we believe in these high-touch, high-engagement channels. And think about our digital click to call. We have direct conversations on the telephone with people who find us online versus a switching site type approach, which we try to avoid. The retail kiosk is the best example of all. We've got somebody who approaches us, who's interested in either something that's written on our display stand or maybe a physical product that's in the kiosk. And we're helping educate them on what these products can do for them. That's a much different sale than somebody who -- shop and price online, find the switching site, they actually don't have an attachment or engagement to that process they went through," McCullough said

McCullough also discussed Just Energy's retail energy pricing power, reported in our story on the company's earnings yesterday (see story here), and said that such power comes from a combination of its sales channels as well as market volatility impacting smaller players

"The reality of the business right now is the North American channels are really special. We are signing up customers at retail kiosks. We're signing up customers with enhanced engagement and delivering things like customer brand promise, as you've heard us say in the past, loyalty rewards, superior service levels when we reach out or we're reached out to. And that has created, what we believe, is a stickier customer than the average competitor we have in this space. That's given us pricing power. But additionally, you've seen volatility in ERCOT. You've seen choppy gas markets, that's knocked a lot of the smaller players that can be troublesome when you're trying to raise price. Looking forward, though, to ERCOT remaining high this coming summer in a couple quarters, and the gas inventories remaining fairly tight, we feel like this thing is set up well to hold pricing where it's at and continue to reload our book at higher margin levels for at least a few more quarters," McCullough said

Discussing value-added products, McCullough discussed a "comprehensive" bundled solution the company is to roll out, and the imminent launch of water filter sales in Houston and Dallas. However, McCullough said value-added products are a play that will have an impact three to five years from now, rather than the short term

"You will see announcements coming from us in the future that have a more comprehensive bundled solution that does more things across electricity, gas and water. Stay tuned. This is all new to us though. This is uncharted territory. I wouldn't have significant growth on these things. I don't think you're going to see more than 2x the amount of water filters over the next couple of years," McCullough said

"As we get into the broader bundled solution, it's probably going to be a little bit more of an organic growth story that will take some time. We've always said that we think 3 to 5 years from now, that could start pushing beyond a quarter of our profit. I don't think it'll get there in the next year or two," McCullough said

"Value-added products and solutions are going to be a play that impact us in a more significant way 3 to 5 years from now. It's not where our bread is going to be buttered or the short term shareholder returns are going to come from in the next year or two," McCullough said

"We're about to launch filter sales in Houston, Dallas and a couple of markets to be named that are regulated markets. Now, I'm telling you about Houston and Dallas because that is the largest metropolitan areas that have JE [Just Energy] customers right now. So as soon as you get that installation capacity in place, you can do a couple of things. You can leverage a huge metropolis, but you can also leverage your existing customers," McCullough said

Regarding the water filter business, McCullough said, "we're not stopping there. We're building installation capacity right now in regulated or energy regulated states which we'll be announcing later. That's happening this quarter as we speak."

Asked about future acquisitions to enhance its non-commodity offerings, McCullough said that the company would be "selective" and focus on companies with limited CapEx spending

"The problem with investing in technology or R&D or product, is sometimes it comes with extensive CapEx. And what we don't want to do is turn our business model into a highly capital intensive business model. We really enjoy a very high ROIC, because there's limited CapEx spending," McCullough said

"So I think if we run across opportunities to own technology, R&D and product, it will be cases where we can acquire that for either future earnout dollars, but limited ongoing CapEx, so that there's not a big spend coming from us. We don't want to turn a retail entity into a vertical, go upstream and start betting on technology. That is not what we're trying to do, and we don't think that would be a safe thing to do for our shareholders," McCullough said

Discussing retail energy M&A, including the just-announced proposed acquisition of Crius by Vistra (first reported by EnergyChoiceMatters.com yesterday morning), McCullough said, "So the fact that consolidation continues to happen and folks with bigger balance sheets are interested in folks like us that have that customer intimacy, it bodes well for us. It means we're a target as well for sure."

"Now from an acquisition of a book perspective, we're still too well aware of the days where you could acquire a book after volatile weather when those books were unhedged at one-, two-, and three-times earnings. So for us this [the Vistra-Crius transaction] would be an expensive transaction," McCullough said

"We personally would be looking for 3-times or less EBITDA before we got excited about a commodity book. We'll be open to it if that type of volatility happens and the folks that don't hedge weather well get hurt, like after polar vortex. But for right now, we're going to stick ... with enhancing the core commodity business and really getting a technology and a data analytics advantage over our competition when it comes to who we're selling to, how we're making money. And then if opportunities come our way, like buying commercial or residential books, we'll certainly be open to them. But I think in the multiples that we've seen other companies trade at over the last two or three years, think 5- to 6-times earnings, it's too rich for us. We'd rather go the organic route or enhance the book we already have, because we think we can have a step function change in profit and cash that way," McCullough said

McCullough also said that Just Energy would de-emphasize Japan and Germany in favor of allocating resources and attention to North American and the U.K.

"So Japan and Germany have not been the focus right now, given the things you hear us talking about. We see so much opportunity in the core business. And to be honest, my worry is, as the leader of this company right now, is we could have executives distracted with trying to solve markets like Germany and Japan for us which could be really interesting years from now, but aren't going to be material to the bottom line in the short term. So we're de-emphasizing Germany and Japan right now. Literally monitoring them, but not putting heavy thought or investment in that, because we see tens of millions of dollars in play for us in doing the things we've been talking about in North America and the U.K.," McCullough said

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