Updated: Just Energy Reports Highest-Ever Gross Margin Per Consumer RCE Added, Called "Sweet Spot"

Fiscal 2019 Annual Gross Margin Also A Record

Just Energy Reports "Very Competitive Market" For C&I Customers, Aggressive Competitor Pricing

Just Energy To Dispose Of Retail Energy Businesses In Three International Markets

May 16, 2019

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Reporting by Paul Ring • ring@energychoicematters.com

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Just Energy reported earnings for the three and twelve months ended March 31, 2019 (4th quarter and full fiscal year 2019).

As noted in our original story below, Just Energy announced in reporting earnings that it has decided to dispose of its businesses in Germany, Ireland and Japan

"In March 2019, Just Energy formally approved and commenced the process to dispose of its businesses in Germany, Ireland and Japan. The decision was part of a strategic transition to focus on the core business in North America and the U.K. The disposal of the operations is expected to be completed within the next 12 months. As at March 31, 2019, these operations were classified as a disposal group held for sale and as discontinued operations," the company said

Fourth quarter highlights, including Base EBITDA and gross margin for the fourth quarter, were noted in our prior story below

The average gross margin per RCE for the customers added and renewed by the Consumer segment was $386/RCE (all $ Canadian) in the fourth fiscal quarter of 2019, compared with $216/RCE in the prior comparable quarter. The increase was a result of the Company's margin optimization efforts with a focus on quality customer additions.

Just Energy said that the $386/RCE gross margin for added/renewed Consumer RCEs was a record

Executives said such level was attained even with record low attrition. Executives called the Fiscal Q4 2019 gross margin per Consumer RCE added/renewed a "sweet spot" and don't expect to push it higher

In terms of customers, Just Energy's 1.609 million customer count as of March 31, 2019 reflects 1.399 million commodity customers, 70,000 value-added products & services customers, and 140,000 customers on a commodity and value-add bundle. The total customer count had been 1.647 million as of December 31, 2018 and 1.658 million as of March 31, 2018 with 1.556 million commodity customers as of March 31, 2018

The decline in commodity customers is a result of the company’s focus on renewing and signing higher quality and long-lasting customers, the company said

The total value-added products & services customer count also includes 27,000 distinct customers from Filter Group’s water filter subscriptions, with 33,000 active assets. Just Energy’s customer base also includes 74,000 smart thermostat customers.

In terms of RCEs for the commodity business, total RCE count was 4.089 million as of March 31, 2019, versus 4.133 million as of December 31, 2018, and 4.163 million a year ago

Gross RCE additions from April 1, 2018 to March 31, 2019 were 1,102,000, compared to 1,171,000 for the prior year, reflecting the transition from a purely RCE driven focus to a greater focus on attracting and retaining strong-fit customers that will drive greater profitability, the company said

Attrition during the period April 1, 2018 to March 31, 2019 was 615,000, with 561,000 RCEs failing to renew

Net RCE additions were negative 74,000 for the year ended March 31, 2019, compared with negative 48,000 net RCE additions in fiscal 2018.

At March 31, 2019, Consumer RCEs were 1.684 million, and Commercial RCEs were 2.405 million

Consumer RCE additions amounted to 499,000 for the year ended March 31, 2019, a 14% decrease from 578,000 gross RCE additions recorded in fiscal 2018, primarily driven by significant customer acquisitions in the U.K. from switching sites in the prior year, which was not repeated in fiscal 2019. As of March 31, 2019, the U.S., Canadian and U.K. segments accounted for 68%, 17% and 15% of the Consumer RCE base, respectively.

Commercial RCE additions were 603,000 for the year ended March 31, 2019, a 2% increase over fiscal 2018 due to improved selling efforts in the Midwest and Eastern U.S., offset by lower adds from large Commercial and Industrial customers and Interactive Energy Group RCEs. The Commercial failed-to-renew RCEs for the year ended March 31, 2019 improved by 37%, decreasing from 534,000 RCEs to 334,000 RCEs with the launch of the Company’s enhanced product offering, which resulted in improved renewal rates. As of March 31, 2019, the U.S., Canadian and U.K. segments accounted for 69%, 24% and 7% of the Commercial RCE base, respectively.

For the year ended March 31, 2019, 44% of the total Consumer and Commercial RCE additions were generated through commercial brokers, 35% from online and other sales channels, 11% from retail channels and 10% from door-to-door sales. In fiscal 2018, 47% of RCE additions were generated from retail, online and other sales channels, 39% from commercial brokers and 14% from door-to-door sales.

Overall, as of March 31, 2019, the U.S., Canadian and U.K. operations accounted for 69%, 21% and 10% of the RCE base, respectively. At March 31, 2018, the U.S., Canadian and U.K. operations represented 67%, 22% and 11% of the RCE base, respectively.

The combined attrition rate for Just Energy was 13% for the year ended March 31, 2019, an increase of one percentage point from the 12% reported for the prior year. The Consumer attrition rate decreased one percentage point to 19% from a year ago while the Commercial attrition rate increased two percentage points to 6%. The decrease in the Consumer attrition rate is a result of Just Energy’s focus on margin optimization while working to become the customers’ "trusted advisor" and providing a variety of energy management solutions to its customer base to drive customer loyalty. The increase in the Commercial attrition rate reflected a, "very competitive market" for Commercial renewals with competitors pricing aggressively, and Just Energy’s focus on improving retained customers’ profitability rather than pursuing low margin growth, the company said

Just Energy's renewal rate was 59% for the year ended March 31, 2019, an increase of four percentage points from 55% as at March 31, 2018.

For the year ending March 31, 2019, Just Energy reported a record gross margin of $712.2 million, versus $640 million a year ago

In the Consumer segment, gross margin for the year ended March 31, 2019 was $535.7 million, an increase of 10% from $487.6 million recorded in fiscal 2018. Gas and electricity gross margins increased by 5% and 10%, respectively, primarily as a result of the pricing power improvements in North America, additional sales from newly acquired VAPS [value-added] businesses, normalized weather compared to the extreme negative one-time weather events in the prior fiscal year, growth in the U.K. operations and favourable foreign exchange fluctuations.

Average realized gross margin for the Consumer segment for the year ended March 31, 2019 was $252/RCE, representing a 7% increase from $236/RCE reported in the prior year. This increase is primarily attributable to the margin improvement initiatives, partially offset by significantly higher bad debt expense in fiscal 2019. The gross margin/RCE value includes an appropriate allowance for bad debt expense in applicable markets.

Gross margin from electricity customers in the Consumer segment was $359.7 million for the year ended March 31, 2019, an increase of 10% from $327.4 million recorded in fiscal 2018. The increase in gross margin was primarily due to lower gross margin in fiscal 2018, impacted by the abnormally mild summer weather in North America, customer disruptions caused by Hurricane Harvey and higher supply costs due to the January deep freeze in Texas followed with warmer days that resulted in a normal monthly average.

For the Commercial segment, gross margin was $176.5 million for the year ended March 31, 2019, an increase of 15% from $153.3 million recorded in the prior year. Average realized gross margin for the year ended March 31, 2019 was $100/RCE, an increase of 20% from $83/RCE a year ago as a result of the margin improvement initiatives, partially offset by the increase in bad debt expense. The gross margin per RCE value includes an appropriate allowance for bad debt expense in markets where Just Energy has customer credit risk.

Electricity gross margin for the Commercial segment was $144.2 million, an increase of 7% from $134.6 million recorded in the prior year. The increase in gross margin was due to the pricing power improvements in North America, ramp-up on sales from the Commercial value-added products and services businesses acquired in the latter half of fiscal 2018, normalized weather compared to the extreme negative one-time customer disruptions caused by Hurricane Harvey and higher supply costs due to the January deep freeze in Texas in the prior year.

For the year ended March 31, 2019, the average gross margin per RCE for the customers added or renewed by the Consumer segment was $300/RCE, an increase of 46% from $206/RCE in the prior comparable period. The average gross margin per RCE for the Consumer customers lost during the year ended March 31, 2019 was $268/RCE, an increase from $198/RCE for customers lost in the prior comparable period. The increase in gross margin is attributed to the improved pricing power and continued risk management of the weather derivative costs.

For the Commercial segment, the average gross margin per RCE for the customers signed during the year ended March 31, 2019 was $76/RCE, a decrease of 5% from $80/RCE in the prior comparable period. Customers lost through attrition and failure to renew during the year ended March 31, 2019 were at an average gross margin of $77/RCE, a decrease from $78/RCE reported in the prior comparable period. Management continues to focus on margin optimization by focusing on small and medium-sized customers and retaining larger margin customers.

The average aggregation cost for the Consumer segment was $242/RCE for the year ended March 31, 2019, an increase of 22% from $199/RCE reported in fiscal 2018, primarily related to the weakening of the U.S. dollar.

The average aggregation cost for the Commercial segment was $51/RCE for the year ended March 31, 2019, versus $41/RCE a year ago

The $51/RCE average aggregation cost for Commercial segment customers is based on the expected average annual cost for the respective customer contracts. It should be noted that commercial broker contracts are paid further commissions averaging $51/RCE per year for each additional year that the customer flows. Assuming an average life of 2.8 years, this would add approximately $92 (1.8 x $51) to the year’s average aggregation cost reported above. As at March 31, 2018, the average aggregation cost for commercial brokers was $41/RCE, Just Energy said

Just Energy sales increased 1% to $1,024.2 million for the three months ended March 31, 2019 from $1,012.9 million recorded in the fourth quarter of fiscal 2018.

Administrative expenses for the three months ended March 31, 2019 increased 3%, attributable to the additional operational administrative expenses from the acquisition of Filter Group, and unfavourable foreign exchange fluctuations from the U.S. and U.K. operations. Selling and marketing expenses for the three months ended March 31, 2019 increased by 15% to $69.4 million as a result of the increased commission costs to acquire new customers in certain channels, increased customer additions in Texas and growth in the residual perks points commission, offset by capitalization of certain upfront incremental customer acquisition costs under IFRS 15 and cost savings from restructuring of the marketing function.

"An unprecedented level of scrutiny has been applied across all products, contracts, operations and regions to ensure each part of the business is operating efficiently throughout the year, which culminated in the restructuring announcement in the fourth quarter of fiscal 2019. This decision resulted in $10.1 million of restructuring costs recognized during the fourth quarter, of which $6.6 million was accrued as at March 31, 2019," Just Energy said

Of all Consumer customers who contracted with Just Energy in the past year, 44% purchased JustGreen for some or all of their energy needs. On average, these customers elected to purchase 79% of their consumption as green supply. For comparison, as reported for the year ended March 31, 2018, 34% of Consumer customers who contracted with Just Energy chose to include JustGreen for an average of 71% of their consumption. As of March 31, 2019, JustGreen makes up 7% of the Consumer gas portfolio, compared to 10% a year ago. JustGreen makes up 14% of the Consumer electricity portfolio, compared to 12% a year ago.

Bad debt expense was $81.0 million for the year ended March 31, 2019, an increase of 44% from $56.3 million recorded for the prior year. For the year ended March 31, 2019, the bad debt expense represents approximately 2.3% of revenue in the jurisdictions where the Company bears the credit risk, up from 1.9% of revenue reported for the year ended March 31, 2018. Management’s target range is 2% to 3%.

Just Energy provided an outlook for the company as follows: "Just Energy is executing a strategic shift from a retail energy provider to a consumer company focused on differentiated value-added products, unparalleled customer satisfaction and profitable customer growth. While Just Energy continues to nurture its core commodity business, the Company is committed to harnessing the accretive potential of its large customer base by offering value-added products and services with strong consumer appeal. Early customer response has been enthusiastic and is reflected in a rise in the Company’s Net Promoter Score, a standard metric for evaluating customer satisfaction levels. Stable attrition rates provide further evidence of heightened customer satisfaction as the Company continues to increase gross margin on its residential book."

"Rapidly growing high-engagement sales channels have opened the door to sophisticated customers that are motivated more by value than price, allowing for further expansion of gross margin and near-term growth. Priorities of these customers include resource conservation and health and well-being. This presents a pivotal, long-term growth opportunity for Just Energy as a best-in-class product and service provider and opens the door to regulated markets," the company said

"Just Energy will continue to leverage its close supplier relationships and aggressively contain costs, building upon efficiencies of 2019 and further enhancing embedded gross margin. A comprehensive review of capital expenditures is underway, and new projects may be initiated only by meeting strict requirements for return on invested capital. The Company will continue to use its offshore business process office for transaction-based work and to consolidate back office functions where appropriate. Streamlined operations and a simplified reporting structure are expected to further reduce costs. Refinement of the Company’s geographic footprint will allow for sharper focus on profitability in the core North American and U.K. operations, markets in which meaningful growth is expected," the company said

Earlier:

Just Energy To Dispose Of Retail Energy Businesses In Three International Markets

Just Energy announced in reporting earnings that it has decided to dispose of its businesses in Germany, Ireland and Japan

"In March 2019, Just Energy formally approved and commenced the process to dispose of its businesses in Germany, Ireland and Japan. The decision was part of a strategic transition to focus on the core business in North America and the U.K. The disposal of the operations is expected to be completed within the next 12 months. As at March 31, 2019, these operations were classified as a disposal group held for sale and as discontinued operations," the company said

Brief highlights:

• Base EBITDA from continuing operations, which reflects the Company’s decision to dispose of its businesses in Germany, Ireland and Japan, decreased 3% to $68.8 million (all $ Canadian) in the fourth fiscal quarter as compared to the year-ago period. The decline was substantially due to the gain of $20.6 million on the Company’s ecobee investment in fourth quarter of fiscal 2018, partially offset by increase in gross margin.

• Gross margin from continuing operations increased 17% to $198.2 million in the fourth fiscal quarter year-over-year, primarily driven by the pricing power improvements in North America, additional sales on newly acquired value-added products and services, and growth in the U.K. operations.

• The average gross margin per RCE for the customers added and renewed by the Consumer segment was $386/RCE in the fourth fiscal quarter, compared with $216/RCE in the prior comparable quarter. The increase was a result of the Company's margin optimization efforts with a focus on quality customer additions.

• For the Commercial segment, the average gross margin per RCE for the customers signed during the quarter was $71/RCE, compared to $87/RCE in the prior comparable quarter.

• For the commodity business, total RCE count was 4.089 million as of March 31, 2019, versus 4.133 million as of December 31, 2018, and 4.163 million a year ago

• Total customer count from continuing operations was 1,609,000 as of March 31, 2019 which declined 3% from the prior year. Value-added product customer count increased from 24,000 in fiscal year 2018 to 70,000 for the current fiscal year.

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