Q2 2019 Just Energy Group Inc Earnings Call

Nov 08, 2018 PM UTC 查看原文
JE.TO - Just Energy Group Inc
Q2 2019 Just Energy Group Inc Earnings Call
Nov 08, 2018 / 03:00PM GMT 

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Corporate Participants
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   *  James Brown
      Just Energy Group Inc. - CFO
   *  Patrick McCullough
      Just Energy Group Inc. - CEO, President & Director

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Conference Call Participants
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   *  Carson McCall Sippel
      B. Riley FBR, Inc., Research Division - Research Analyst
   *  David Jonathan Lieberman
      Advisors Capital Management, LLC - Portfolio Manager
   *  Endri Leno
      National Bank Financial, Inc., Research Division - Associate
   *  Mark Thomas Jarvi
      CIBC Capital Markets, Research Division - Director of Institutional Equity Research
   *  Nelson Ng
      RBC Capital Markets, LLC, Research Division - Analyst
   *  Raveel Afzaal
      Canaccord Genuity Limited, Research Division - Analyst
   *  Sameer S. Joshi
      H.C. Wainwright & Co, LLC, Research Division - Associate

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Presentation
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Operator   [1]
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 Good morning, and welcome to the Just Energy Group Fiscal 2019 Second Quarter Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

 I would now like to turn the conference over to Pat McCullough, CEO. Please go ahead.

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [2]
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 Thank you, operator. Good morning, everyone, and thank you for joining our fiscal 2019 second quarter conference call. I am Pat McCullough, Chief Executive Officer of Just Energy. With me today is our Chief Financial Officer, Jim Brown. Jim and I will discuss the results for the quarter as well as our expectations for the future. We will then open up this call to questions.

 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.

 Today, we'll offer some perspective on our results, followed by a deeper dive into a few of the key strategic initiatives we're pursuing that will continue to drive performance in the second half of the year and beyond.

 In short summary, this was a quarter full of wins for the business that we're quite excited to talk to you about today. Base EBITDA achieved $37.3 million, surpassing year ago results and our internal projections, as referenced in our recent press release. This EBITDA advancement was a result of margin enhancement efforts associated with our differentiated products and service offerings. This overcame headwinds in G&A, bad debt and higher ERCOT costs in the period, so we're very excited to put a number like this forward despite those headwinds, which will not continue in the second half of this year.

 Margin expansion led to embedded gross margin of $2.3 billion. This is an all-time high for our company. As you know, embedded gross margins are publicly recorded forward earnings projection on gross margin. This is up 45% from $1.6 billion a year ago. So what we're essentially telling the market is, our future earnings will be up on the gross margin line by 45% from where we had this book valued a year ago.

 We also noted that within our margin enhancement efforts, we were able to report $333 per RCE on income in Consumer contracts signed and renewed. This is higher than $197 a year ago. So it's significantly up. These are the margin enhancement efforts that we're very proud of and we expect to continue into the third quarter and hopefully beyond.

 Additionally, we're pleased with our payout ratio, which has fallen off of levels near 100% over the last 4 or 5 quarters. We reported 82% on a trailing 12-months basis. We feel very good about what that means to the sustainability of our dividend. And additionally, we had some very large wins in terms of closing a USD 250 million refinancing which solidifies our short-term financial needs as well as giving us capacity for inorganic growth.

 We bought a large filtration company, which puts us squarely into the health and well-being space and makes us feel like we're very relevant to our customers when you think about devices in homes with our name on it.

 We closed a $225 million insurance wrap, which protects the downside on our earnings going forward. This is important because if you think about the earnings challenges that the company had in its recent past, this would cover some of the events that plagued us in fiscal 2018, things like the January winter freeze in Texas, things like the weather and hurricane challenges we had second quarter last year. So we're very pleased that this underpins our earnings going forward, and along with our margin enhancement, we think that's a very powerful recipe for forward earnings, and frankly, cash flows to the benefit of our shareholders.

 Customer contracts grew. So we report RCEs which are slightly down, but the RCEs are a subset of what we're selling. That's only in the commodity business, as it's [subjected] within RCEs. And while we're focused on that commodity growth because we feel like it's a great short-term upside for financial results in our company, the customer contracts include both commodity contracts and value-added products and service contracts, and both recording with and without our water filter acquisition, those numbers are up year-on-year, which we're very pleased -- and quarter-over-quarter.

 In summary, the quarter was marked by many wins that are significant and items that our team is very proud of. The core business is strong and stable and we're quite focused on this. We realize with the margin enhancement experience that we've had in the last quarter and a half, that the majority of the short-term earnings and cash upside for the business is on that commodity book, where the value-added products and services strategy is really meant to address the longer-term customer needs.

 But you'll see quite a bit of emphasis on margin enhancement on the electricity and natural gas book that we manage, because we gained very strong confidence that there's a lot for us there.

 The expected impact of these margin enhancements, G&A cuts, that we'll be talking about more on this call, risk management activities and improvements like the insurance wrap will help drive performance this year and EBITDA growth for the rest of this fiscal year and fiscal '20.

 We remain very focused on capital stewardship and cash generation for the support of our dividend and our growth. We're committed to balance sheet discipline and generating superior return on invested capital. We're committed to value-added product and service expansion and really setting the stage for predictable, prolonged and stable growth.

 With that, I'd like to turn the call over to Jim Brown, our Chief Financial Officer. Jim?

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 James Brown,  Just Energy Group Inc. - CFO   [3]
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 Thank you, Pat. As Pat noted, our business is strong with record-breaking embedded gross margin of $2.3 billion. Our balance sheet is healthy, and we remain committed to a strategy of profitable growth and dividend distributions.

 First, I'd like to cover some highlights in the second quarter then provide some additional color in certain areas. We are pleased to announce that we've seen significant improvement in our second quarter base EBITDA, which improved 81% to $37.3 million. these positive contributions are from our gross margin initiatives, which include contract margin enhancement and new risk management practices to neutralize our commodity costs throughout the year. This is partially offset by higher bad debt and administrative expenses.

 As a reminder, and as was stated in previous quarters, losses due to changes in fair value of derivative instruments, including net profits, is not reflective of the economic results or cash flows of the company. Similar to other energy retailers, Just Energy uses base EBITDA as a preferred measure of operating performance. As you can see, our base EBITDA grew significantly for the quarter.

 During the quarter, realized gross margin increased 22% to $173.3 million, due, in large part, to expanding unit margins in North America and greater sales in the United Kingdom. The Consumer division gross margin increased 17% to $125.2 million as a result of focusing on higher-margin customers; while the Commercial division, where gross additions remained strong, had an increase in gross margin of 36% to $48.1 million.

 We remain committed to enhancing our risk management activities, including our insurance wrap program, which was finalized in early October and adds an additional layer of protection to the company's earnings stability.

 Annual gross margin for RCE for customers added and renewed in the quarter ending September 30, 2018, was $333 per RCE for the Consumer division, a significant increase from $197 per RCE in the prior year period. In the Commercial division, [higher] margins increased to $96 per RCE, an increase from $88 per RCE in the prior year. As we noted in our Investor Day, we are were keenly focused on securing and retaining higher-margin customers, who will ultimately drive long-term growth rather than customers who are price-sensitive.

 Despite our increase in prices for the first time in 5 years, our combined attrition remained flat at 13% for the trailing 12-months as compared to the same time last year. Consumer attrition of 20% decreased 3 percentage points year-over-year, while Commercial attrition remained the same as a year ago with 5%.

 Moving back to the income statement. General administrative expenses for the second quarter rose $11.7 million. This increase is largely due to the expansion of our U.K. business and the cost of attracting top talent to our organization, coupled with an investment in operational efficiencies and automation. As an example, we launched a new cloud-based [weather] forecasting tool in the quarter to increase the accuracy and timing as the[provision management], while at the same time, reducing IT infrastructures, costs associated with this program. Efforts such as this are examples that will ultimately drive greater cost savings as we move to the second half of the fiscal year.

 Selling and administrative expenses decreased 3% year-over-year to $56.7 million, primarily due to capitalization of up-front commissions, along with consolidation of regional sales offices.

 Now I'll review some other key financial metrics and balance sheet items. Base funds from operations was $26.2 million, increased 241% from a year ago. The increase was largely driven by significant improvements in our base EBITDA, which came from our gross margin expansion. The payout ratio on base funds from operation was 85% compared to 279% this time last year.

 On a trailing 12-months basis, the current payout ratio is 82%. As we noted there in our Investor Day in September, we are committed to returning our payout ratio to 75% and believe we are taking the appropriate actions for that to occur.

 Managing our balance sheet continues to be a top priority for the company. As announced on September, 12 2018, the company entered into a USD 250 million nonrevolving, multi-draw senior unsecured term loan facility to secure refinancing of our USD 150 million Eurobond, which matures in July of 2019. In addition, the facility provides flexible capital for future acquisitions and general corporate purchases.

 Net debt to base EBITDA increased to 3.5% on a trailing 12-months basis, which is higher than 3.2x we reported in the last quarter, primarily due to higher utilization of our credit facility in the second quarter, constantly offset by higher base EBITDA.

 Turning to our outlook. We've taken several initiatives to attract higher-margin customers, in conjunction with implementing a pricing optimization strategy across the organization. To further drive profitability, we have put in place several cost-cutting initiatives, in particular, the reduction of administrative expenses to greater automation and consolidation.

 We believe we have the right strategy and people in place to drive profitability, gross margin and customer growth through our existing channels by aggressively promoting high-growth products and services while also developing additional strategic alternative channels.

 These actions will contribute in the third and fourth fiscal quarters. As a result, we are reaffirming our fiscal 2019 base EBITDA guidance in the range $200 million to $220 million. I look forward to updating all of you on our progress next quarter.

 With that, I'll turn it back to Pat for final remarks.

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [4]
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 Thanks, Jim. We recognize it's early and there's still a lot to be done, but I expect the Q2 results to be representative of our new resolve as an organization to execute faster and promote positive change. Operating with urgency and accountability to a sustainable, predictable and profitable growth is our priority and our commitment.

 With that, I would like to open up the call for questions. Operator?

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) The first question comes from Carter Driscoll of B. Riley FBR.

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 Carson McCall Sippel,  B. Riley FBR, Inc., Research Division - Research Analyst   [2]
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 This is Carson Sippel on for Carter Driscoll. I just had a couple quick questions. First, so the customers that you're currently signing up, are they signed up with the better pricing, the one that provides better margins to you?

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [3]
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 Can you explain your question, Carson? This is Pat. I didn't fully grasp what you're asking.

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 Carson McCall Sippel,  B. Riley FBR, Inc., Research Division - Research Analyst   [4]
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 Yes, sorry. So the customers that you're signing up presently in the past quarter, are these the customers that have -- you had a better pricing? Like, you said you raised your prices. So these customers, they're currently witnessing the higher pricing that provides better margin to Just Energy?

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [5]
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 Yes, that's right. So when we report the $333 per RCE, what we're reporting there is our Consumer segment, which includes both residential customers and small C&I customers in all markets of Canada, U.S. and the U.K., and we're showing you what we have signed all new contracts and renewed all new contracts at. So that is the higher population, without the Commercial business in it, on new margin levels. So if you think about our book, we have about a 2.5-year realized life on these residential accounts. So we sign 1-, 2-, 3-, 4- or 5-year contracts. We have annual attrition on those contracts. We end up realizing 2.5 years, but then we renew 75-plus percent of those contracts. But to rebase your pricing on the entirety of the book, you would need to have that incoming price step-up for 10 consecutive quarters, and then you would capture 100% of your book. When we report $333, up from $197 last year, we're essentially telling you that a big part of our book has been repriced at the higher level. We also had that phenomenon in previous quarters, the net result being an embedded gross margin calculation being up 45%. That should continue at -- we can hold these levels of pricing in Q3 and Q4, we have confidence we can, then you'll see [it in the 10-K] or compound on itself, and you'll see the trailing 12-months gross margin for RCE results really move forward quickly.

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 Carson McCall Sippel,  B. Riley FBR, Inc., Research Division - Research Analyst   [6]
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 Great. And then one more quick question about pricing, can you comment on if there's any price differences between the regions?

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [7]
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 There certainly are. So every market is unique in terms of the value propositions that we offer, but also, the competitive landscape is different. In a market like Texas, where there's not an incumbent utility, we can speak directly to our customers. We hold the entirety of the customer relationships or the customer journey on a one-to-one basis. So we can promote our value better. So we generally will see a higher price, higher margin in a market like Texas. Take New York, where we're selling through Con Ed as the line item on the bill, we have to work hard to engage with that customer and promote the differentiated value to them. So when you're seeing this $333, it is a blend of Canada, our Midwest markets, our Northeast markets, Texas and the U.K. So the mix of what we sell and which market really does matter to those results.

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 Carson McCall Sippel,  B. Riley FBR, Inc., Research Division - Research Analyst   [8]
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 Got it. And then one last one from me. So in regards to the Filter Group acquisition, have you started realizing any of the cross-selling opportunities that you mentioned at the Analyst Day?

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [9]
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 We haven't in the second quarter, obviously. We closed the deal on October 1. We are in the planning and the integration phase for a couple of months, and then we will be working to cross-sell to existing customers and markets like Texas, but that will be something we'll be talking about in future quarters. Remember, while that's an important acquisition to strategically and for our customers, we talked about $5.5 million of first year EBITDA. So it's not going to be material to the bottom line, which is why we're really focused on the commodity book and what can be done with that in the short-term.

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Operator   [10]
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 The next question comes from Endri Leno of National Bank.

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 Endri Leno,  National Bank Financial, Inc., Research Division - Associate   [11]
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 I'll just start off with a couple. If you can talk a little bit about the retail channel, the kiosk and the Ecobee updates in the quarter, please.

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [12]
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 Sure, absolutely. So retail continues to be a really important channel for us. It was actually overtaken in sales this quarter by our digital channel, so our digital channel and our retail channel are neck-and-neck as our most important residential or Consumer channels. We did well in excess of 30,000 sales -- converted sales through retail. We're ending close to 4 digits of stores at this point, and we have expanded to well over 20 brands. So that -- retail channel is a very important one to us, and if you followed our material on Investor Day, we have authorized agent channel, which is a long lead development we've been working on, that should really impact fiscal 2020, which we're excited about. And you'll hear us talking about how we sell through other large enterprises with superior brand recognition and brand awareness than Just Energy's.

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 Endri Leno,  National Bank Financial, Inc., Research Division - Associate   [13]
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 Okay, great. The other question, in terms of acquisition and then as you're looking this add-on and diversification to your earnings and EBITDA, like -- have you looked at anything? If you can provide any guidance in terms of what kind of acquisitions are you looking, particularly, with increased capacity that you have now.

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [14]
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 Yes, we always keeping our eye on the market. I think we've said publicly a few times that buying commodity books would be interesting to us if volatility returns in a significant way and if multiples on, let's say, commodity books drop below 3x. That's happened in the past with events like polar vortex, and that's where we would be keen on acquiring books, provided they were healthy books. Outside of that, you probably won't see us buying any commodity books at today's 5-plus times EV-to-EBITDA. And if you observe what we've been doing in the last few years, buying small bolt-on capabilities and the value-added products and services agreement with well-structured deals that really limit the amount of cash that we put upfront. That will remain our strategy. The truth is, right now, with the acquisition of the water filter business, which is a different sale, it's a [lot] sale versus an immediate sale, so if you think about the customer's perspective, we digest that acquisition. We need to scale it along with our Ecobee product. So we're really going to be focused on what we have right now. Don't expect a big announcement in the short-term that we're going to add a big inorganic add-on. And we see so much opportunity on the core commodity book right now, that we're really focused on leveraging that. With regards to Ecobee, we're selling more Ecobees. We sold over 5,000 Ecobees in one month this quarter. So we do believe that Ecobee is a compelling product that we can cross-sell to our customer base. It obviously provides a [record churn] to the business, but it also supports our equity investment in Ecobee, which is 8-ish percent. So we're pretty excited about that product, that company and what can be done with it. But yes, we see a lot of opportunity to sell more Ecobees and water filters to the existing commodity book and new customers.

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 Endri Leno,  National Bank Financial, Inc., Research Division - Associate   [15]
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 Great. And one more question before I jump in the queue is that, if you can you talk a little bit about the working capital outflow in the quarter and the first half of the year and how do you see that evolving for the remainder of 2019.

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 James Brown,  Just Energy Group Inc. - CFO   [16]
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 Yes, thanks for the question, Endri. There's basically 3 elements to that. One is greater sales with more upfront commissions. We see gross adds expanding on a trailing 12-months basis, and those are all around, not just our Commercial business like it used to be but the residential business as well, go to our balance sheet first. Secondly, general seasonality, we always have more capital used in the second quarter due to ERCOT, summer and injections of natural gas for winter. And the third part is what I alluded to in my discussion on gross margin, is we are becoming more sophisticated in how we hedge volatility. And by hedging volatility, the primary instrument we use is options. And options, in many cases, require upfront premiums sometimes for the entire year. So we see that trend reversing for a couple of reasons: one is a lot of those costs have been incurred and have reversed, as we get the customer cash receipts as the year goes on; and second, profitability in the second half of the quarter is obviously expected to be higher than the first half.

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Operator   [17]
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 The next question comes from Mark Jarvi of CIBC Capital Markets.

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 Mark Thomas Jarvi,  CIBC Capital Markets, Research Division - Director of Institutional Equity Research   [18]
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 Wondering if I can get your comment in terms of what you're seeing in terms of current pricing, whether it's a step-up that you saw in terms of the new additions and the renewals, gross margin per RCE, whether or not that can go flat or still go higher from what you're seeing in terms of the marketplace right now.

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [19]
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 Sure. We believe it's sustainable, and we'll give you a couple facts and then also a little bit of more recent evidence. So number one, we truly have differentiated value propositions in the market. We add things like loyalty rewards, which are very material to our customer, to all of our commodity products. We have almost 1 million customers on our loyalty rewards program right now. We add things like a customer brand promise, which is best-in-class, where we give our customers more flexibility to manage their account or switch products without cancellation fees. We are attaching Ecobees, and soon, water filters, so we're creating a stickier relationship. So we do expect to be able to price as a premium to our competition going forward because we feel like we have the better product and service. You guys probably have heard that we have won awards for the most trusted brand in Texas recently. We won an award for most innovative product in Ireland recently. We're really having a lot of external acknowledgment of that differentiated value product that we're bringing. Secondly, we were below market. We were not raising our prices over the last 5 years, as Jim mentioned, despite the fact that our competition was. So there's a bit of a catch-up game here, where we're getting something that we probably always do, but we're not going after. Another market dynamic that I know you guys think about, ERCOT had higher pricing on a forward basis next August than this past August, which is well up from a year ago August. So that is going to keep our competition in the marketplace thinking about pushing prices up, in our minds, because their costs are going up. And as you're noticing in our results, we do not see an attrition spike despite the fact that we started raising prices in a material way towards the beginning of our first quarter. Now I can tell you, I'm looking at October and the first few days of November, and I'm seeing the residential gross margin expand from what we just reported. So we just reported $333. If we continue to hold the pricing for the rest of this quarter, and there's a caveat on that, we'll push that past $350 next quarter when we report. So we actually do feel that we're going to go on a run here at several quarters of expansion on margin due to the differentiation that we're bringing to market and it's going to continue to drive embedded gross margin up and short-term gross margin. But really, as we replace, quarter in, quarter out, big chunks of the book, you will have a nice year-over-year profit improvement layering effect, which we hope to enjoy for a few years.

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 Mark Thomas Jarvi,  CIBC Capital Markets, Research Division - Director of Institutional Equity Research   [20]
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 Okay. And can you maybe just elaborate in terms of pricing between new customers and renewals, just sort of maybe give us a bit color on how that compares relative to the $333?

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [21]
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 Yes. It's not something we disclose, but I think it's obvious to say that attracting a new customer and earning that trust is harder than renewing a customer that you've already served well. So generally, the big margin expansion can happen on your renewing books, but fundamentally, we will call customers and move them off prior to renewal, which is a lot of what we've done. Now the interesting thing that I want to point out to you is we're giving you a blended new adds and renewals and we're also giving the counts on gross adds. Our gross adds are up significantly year-on-year in all channels and segments, which means despite the margin enhancement that we're talking about and the price increase with it, we're selling at rates well above a year ago, which means the customers are validating our value in the market.

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 Mark Thomas Jarvi,  CIBC Capital Markets, Research Division - Director of Institutional Equity Research   [22]
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 Okay. And then just on your RCE additions, expectedly flat in the quarter. And at the Investor Day, you talked about a target of 10% annually. Maybe can you just reconcile what you're seeing in terms of the ability to add customers and grow the book versus the trade-off of profitability and how you guys see that evolving over the next year relative to the target of 10%?

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [23]
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 Yes, it's a great question. I think I acknowledged it on Investor Day. We really thought, coming into this year, that we have the ability to put 200,000 net RCEs on the board if you think about just the commodity book and don't think about customer contact count. That's obviously going to be pressured by our margin enhancement efforts, both on a sale to renew and attrition basis. So I'm probably going to tell you that I don't know that we want to put a few hundred thousand net add goal ahead of the ultimate embedded gross margin or forward earning and expansion opportunity that we see. So as we're managing our business every day, every week and every month, we're thinking about, okay, we have a save type of activity on a customer or a planned renewal type of activity on a customer or a resale, and we're thinking about the pricing from a total customer life cycle and a total enterprise value-creation potential. So it might be in our best interest to go flat this year on the commodity book and take price increases like $197 up to $333 and then stabilize that and then promote growth and not push the envelope. Once we find that elasticity point, where our customers say, "Okay, we love your value more than your competition, but we only love it to this amount," that's where you'll see these price increases stop and stabilize and maybe shrink a bit, if we've gone too far with the attrition result, which we haven't seen to this point. And that's when you'll see the growth kind of snap through. So know that from an investor perspective, we're truly focused on enterprise value creation and shareholder returns. We're not focused on market share, which I know a lot of companies do get quite distracted with. So I wouldn't say the 200,000 number that we thought we could do at the beginning of the year is the most important target to us right now. If we can get it, we'll get it. We love the customer count additions and increases that we're seeing across all products, so we do feel like there's growth there. But we're really going to be focused on a stable, cash-flowing commodity book maximized and then return to a big growth emphasis. Having said that, there's quite a bit of channel and product expansion, so we still believe strongly there's a big growth story here we just made -- we have called that for a couple of quarters as we take major steps forward on profit.

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 Mark Thomas Jarvi,  CIBC Capital Markets, Research Division - Director of Institutional Equity Research   [24]
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 Okay, understood. I'll touch one more question. Just on the cost to acquire trends, aggregation costs were up pretty substantially quarter-over-quarter. Obviously, you're getting the benefit of higher margins. I'm just wondering what it is that's driving the aggregation costs, is it the channels where you're bringing them in? Or maybe you can just elaborate on how those have moved up in parallel sort of with the higher margins.

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [25]
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 Yes, it's really the concentration of the retail channel now that it's to scale. It is definitely, as I said, from the channel to door-to-door was. So even though we're losing door-to-door emphasis, we're gaining retail. I think we mentioned in Q1, retail overcame digital and became our largest channel that period. That's reversed. Both are still large in Q2, and it's really the mix of channel sales that drive that as much as anything. Now as you scale, you do get a little bit of fixed absorption, but it's primarily a variable cost. So it's really a result of the retail channel.

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Operator   [26]
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 The next question comes from Raveel Afzaal of Canaccord Genuity.

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 Raveel Afzaal,  Canaccord Genuity Limited, Research Division - Analyst   [27]
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 Can you speak about what your book looks like in Texas? How many variable-rate customers do you have versus fixed rate customers just heading into this quarter that you guys just reported?

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [28]
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 Yes, so we don't have very many variable month-to-month customers in Texas. One of the reasons is we did raise price there. But we're very proactive with our customers. So as we raised price in Texas, our variable, month-to-month, we were engaging with our customers to say, "Why don't you get back into a fixed-price contract?" So as we saw the variable book the [trip] recently, we did drive 2/3 of those retreating customers back into higher-margin fixed contracts for long term. So think about a couple tens of thousands of customers is all we actually have on variable month-to-month in Texas right now. So it's not driving the big results you're seeing here. It's really fixed-price new contracts and renewing contracts that's the main driver behind us. I know that's quite a bit different than a few of our competitors, Raveel, yet there's no dependence on a high-churn variable book. And we don't acquire -- by the way, we don't to acquire residential customers on variable contracts.

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 Raveel Afzaal,  Canaccord Genuity Limited, Research Division - Analyst   [29]
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 Perfect. Great. And can you speak about the weather volatility that we saw in Texas, what sort of an impact it had on the competitive landscape in that market?

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [30]
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 Yes. So we definitely saw some choppiness in July. It's impacted us, as we showed to you on Investor Day, by a few million dollars. So it wasn't a material result to us, but it was because we had a very sophisticated series of hedges in place. And obviously, we do not have the insurance wrap done in July so we didn't have to rely on that. So we think that was a great result that shows the power of our supply and hedging team and their work. But we do know that many of the folks in our market that didn't have weather hedges on a book for its size could have had tens of millions of dollars of issues if they weren't properly hedged for weather.

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 Raveel Afzaal,  Canaccord Genuity Limited, Research Division - Analyst   [31]
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 Makes sense. So did you see a lot of your competitors going out of business? Or at least -- I mean, like you guys are very sophisticated, but the smaller guys in the market, did you guys see those guys going out of business, like who didn't have the right hedges in place?

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [32]
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 Raveel, I mean, we see people going out and being consolidated, basically. One of our larger competitors, who is -- or not larger competitor, but one of the larger small competitors recently got acquired by a company, and I think it was due to margin compression and maybe taking maybe aggressive stances against the tough Texas summer. But the interesting thing about Texas summer is while volatility went up and forward prices went up, real-time prices still remained very low. And if you gambled, we could have won. That's a bad gamble because -- and as a public company we'll never do that because we can't risk that, whether or not we wanted. But I think that the real issue will be real-time prices shooting up from the non-hedgers, yes, that would be a much greater opportunity. We do see pressure, though, for people who are getting out of the market who can't afford the collateral costs.

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 Raveel Afzaal,  Canaccord Genuity Limited, Research Division - Analyst   [33]
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 Got it. And how's the weather outlook looking for Q4? I know it's just too early to say, but I think October was a bit colder than expected. Can you just speak about how you see the outlook for weather variations or any other volatility that you guys expect seeing in this quarter?

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [34]
------------------------------
 Sure, yes. We're not worried about it at all. I think we've all talked in the past about Just Energy, how we hedge gas. For this winter, we have mild and extreme weather hedges in place in every market we serve of any scale, and we do it at the metropolis areas. So for example, we'll have a specific-colored swap differential [auto] than New York City than Chicago than Dallas. So we're really well buttoned-up on natural gas in the winter. Of course, we got an insurance wrap behind it if we had any intra-month volatility. So I'm truly not worried about what weather does this winter because of the robust hedges and insurance wrap behind that. And we don't know anymore than you do in terms of what to expect at this point.

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 Raveel Afzaal,  Canaccord Genuity Limited, Research Division - Analyst   [35]
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 Got it. And just finally, I'm guessing the bulk of this growth, the pricing improvement came from Texas. But can you speak a little bit about U.K.? Because it looks like pricing over there has also been going higher. And just what impact that has had on your margin improvement?

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [36]
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 Yes. You're right, that they in fact did surge, and frankly, the North American markets. The U.K. market is a unique one with the Big Six in a highly competitive market. We don't have quite the pricing power there, and a great deal of the value prop enhancements that we've made, we have the U.K. business lined up to receive them this year. So you're going to see us be able to differentiate in a meaningful way in the U.K. in the next quarter or two, and then you'll probably see more price enhancement there, or at least, we'll attempt to premium price for that value there. But no, it's not a large contributor to the $333 in this quarter. It's really coming from Canada, the Northeast, Midwest and Texas.

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Operator   [37]
------------------------------
 The next question comes from Nelson Ng of RBC Capital Markets.

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 Nelson Ng,  RBC Capital Markets, LLC, Research Division - Analyst   [38]
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 Just a quick clarification on the, I guess, customer counts. You guys mentioned that you lost Sears as a customer but then you also gained a large U.K. commercial customer. Were those 2 items a wash or was it a net negative?

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [39]
------------------------------
 So for customer counts, I think you're referring to...

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 Nelson Ng,  RBC Capital Markets, LLC, Research Division - Analyst   [40]
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 RCEs, yes.

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [41]
------------------------------
 Yes, and one of our large North American customers that well, we're refraining from naming, was getting himself into an insolvency issue. So we were able to monitor that credit risk and get out at a perfect time. So we did fire our customer. That is a very public consultancy issue. And at the same time, as you see in the Commercial book, what we're most excited about in the Commercial book isn't really the way we measure success in the Commercial space, is not around RCEs or customers, but around contract sales term margin, okay? So again, really well aligned embedded gross margin and ultimately our enterprise value. So as we're managing the leverage of that business, you're seeing a great deal of progress in the sales churn margin in that business and we're very excited about where it's running. The Commercial business' contribution to this quarter was well ahead of expectations. So we're talking about Consumer pricing and how meaningful that was, but we're really excited about both new sales coming immediately in the Commercial book in October, which we haven't seen yet but also sales churn margin enhancement. That's very interesting versus prior years.

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 Nelson Ng,  RBC Capital Markets, LLC, Research Division - Analyst   [42]
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 Okay. And then my next question relates to just cost savings and efficiencies. I think Jim mentioned that there's a few initiatives that would be realized in fiscal Q3 and 4. I think in the Investor Day, you guys talked about realizing at least $20 million of efficiencies or gains and cost savings. Could you just give us like a profile in terms of what you think you can achieve, I guess, this fiscal year?

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [43]
------------------------------
 Sure. So yes, we were talking about a run rate saving concept from where we were running. And if you think about our second half, we expect to be $10 million to $20 million below our first half G&A spend. And if you include a bit of the sales overhead that we reported in G&A, you get to that $20 million run rate that we're talking about. We think we can do another $20 million on top of that next year. So if you got yourself to -- I think we spent $114-ish million , if I had the numbers right, in half 1. We expect to be close to underneath $100 million in half 2, and then we expect to be able to carve another $20 million off that full year in fiscal '20 if we deliver all our cost savings plans that we intend to.

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 Nelson Ng,  RBC Capital Markets, LLC, Research Division - Analyst   [44]
------------------------------
 And this is on top of, I guess -- net of, I guess, additional spending for growth? So you're still, like there's -- I guess, there's additional spending to kind of grow the business, but the cost savings would kind of more than offset that incremental investment.

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [45]
------------------------------
 Yes, there's a couple of things to think about. You're right. There's going to be growth investments, but there already has been if you think about what we've been doing in our past. The second thing is, we haven't paid a bonus to our employees in the last few years, so we are accruing for a bonus, which should be as large as $10 million to $15 million on a full year basis. So you're going to have to overcome those year-over-year headwinds. So how are we doing it? We're doing it through structural cost savings. We're doing it by consolidating the back office and back end of our operation, both offices, people, systems and processes. So you saw a chunk of spend this quarter that was associated with severance and investment into our IT architecture, which we are cleaning up and streamlining so we can take the unproductive element of our processes out in, say, only a month.

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 Nelson Ng,  RBC Capital Markets, LLC, Research Division - Analyst   [46]
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 Got it, okay. And then just one last question, just on the Texas market. So in terms of the outlook for next summer, I believe the pricing is still high. And I guess, the -- and it sounds like the competitiveness in the market has somewhat faded in Texas. Like, do you have a sense of whether competition will kind of ramp up over the coming year?

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [47]
------------------------------
 We wouldn't expect competition to increase, given we see forward peak pricing in August next year being roughly 10% higher than we all just realized this year, which was several times higher than in previous years. So because we're seeing those value -- the $300 per megawatt hour at times before summer next year, that's not an environment that people want to run into because there's big collateral requirement and there is liquidity risk for, let's say, the little startup that might be a price -- a bottom feeder, for lack of a better word. So we don't expect to have any big competition in the market. The truth is, I'm not sure if it will impact what we're doing because we are operating off of differentiated values that's understood by our customers. And those guys that come in, they come in with pure, invisible price-based products. It is a little bit of a different animal these days than what we're doing. So obviously, we're taking a major step forward and we're learning every day and our customer reaction to what we're doing and customer satisfaction and loyalty. So we'll be constantly updating you on the evolving scenarios that we see. But we're not expecting increased price pressure to come into the ERCOT market in the next 4 quarters.

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 Nelson Ng,  RBC Capital Markets, LLC, Research Division - Analyst   [48]
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 Okay. And then you did mention collateral, so I think that the collateral cost increased materially this quarter. Is it very seasonal? So are you expecting collateral costs to come back down and then go back up next summer?

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 James Brown,  Just Energy Group Inc. - CFO   [49]
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 Yes, Nelson, that's exactly correct. There may be some mild increase in the winter so you could -- we're very protective of our balance sheet and we enter into bilateral agreements to protect ourselves against having to post collateral as well. There's 2 elements to the Texas collateral, one is the forward requirements, which recently changed; and the second is having to post a day ahead. And both of those are 100% correlated to price. So we figured it's better to have a security in place to make sure we are exposed to those cash flows and have some incremental financing costs.

------------------------------
Operator   [50]
------------------------------
 The next question comes from Sameer Joshi of H.C. Wainwright.

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 Sameer S. Joshi,  H.C. Wainwright & Co, LLC, Research Division - Associate   [51]
------------------------------
 My question focuses on the forecast of $200 million to $220 million base EBITDA. What are the contributors to that? Is cost saving a major contributor, or is there any contribution from any of the acquired companies that gives you that confidence?

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [52]
------------------------------
 Yes, the large -- and thank you for the question, Sameer. The largest contributor to the second half uptick in profit is, number one, it is the more profitable part of our book. We make more money on gas contracts than we do on electricity contracts. So you'll see our history, Q4 is normally our highest profit quarter and free cash flow quarter. So very important to us. However, if you think about the contributors overall from the first half to the second half or a year ago second half to a higher outlook this second half, it really is margin expansion first, so these margin enhancement actions that we've taken. Cost reductions are definitely in the full road to the tune of $10 million to $20 million from a half-over-half basis. So you'll see bad debt improve. You'll see G&A improve dramatically. You'll see a little bit of sales overheads within the selling line improve. And gross margin, for us, forecasting the short term is quite easy since we have signed multiyear contracts. We just take the bill break minus our costs, which is already locked in with our suppliers, multiply by expected volume and then hedge for variation around that. So it's really primarily driven by gross margin, which you're already seeing coming through this quarter and will continue to improve next quarter, then in the fourth quarter.

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 Sameer S. Joshi,  H.C. Wainwright & Co, LLC, Research Division - Associate   [53]
------------------------------
 Okay. And is there any contribution from the acquired companies that is also boosting this?

------------------------------
 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [54]
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 Which companies, Sameer?

------------------------------
 Sameer S. Joshi,  H.C. Wainwright & Co, LLC, Research Division - Associate   [55]
------------------------------
 The Filter Group and the EdgePower acquisitions?

------------------------------
 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [56]
------------------------------
 Yes, but not material. So we'll see a couple million dollars from each of those in the second half. But no, that's not going to be a material contributor to the difference. It's really the core commodity book and the margin enhancement efforts we've made.

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 Sameer S. Joshi,  H.C. Wainwright & Co, LLC, Research Division - Associate   [57]
------------------------------
 Okay. And then from U.K., I think last quarter, if I heard that grows around 9% of your total business. Going forward, how big do you expect it to be? And then correlated to that is, what contribution to the base EBITDA do you expect from the U.K. business?

------------------------------
 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [58]
------------------------------
 Yes, so we don't report the U.K. segmented allocates. It's not how we run the business, frankly. We run the business by product lines. But no, the U.K. business is ranged from 7% to 8% to 15% quarter in, quarter out. We'll see when we get to the fourth quarter. It's a very large contributor to the fourth quarter because that is their big gas market quarter, and also, there's that significant growth compounding in last 3 years in the U.K. business. So really important business to us. We are definitely investing many of our SG&A dollars, both in growing products horizontally, if you think about differentiation and more value-added products and services, and we're definitely investing in an absolute organic customer growth through selling. It's a very important market. Do expect big things. Generally, if the U.K. ranges at 10% to 15% of our gross margin, it's relatively similar drop-through to the bottom line. Although we have been investing heavy G&A in that business, so this year, it will pull the ultimate EBITDA back a little bit relative to North American business. And again, it gets back to our bigger North American markets will have the biggest contribution to the second half, not the U.K.

------------------------------
Operator   [59]
------------------------------
 The next question comes from David Lieberman of Advisors Capital Management.

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 David Jonathan Lieberman,  Advisors Capital Management, LLC - Portfolio Manager   [60]
------------------------------
 My question is actually more around some of the fixed assets that you have in the bonds or the preferreds. Some of them, the DA, for example, has sold off. And yield [towards] on it, it's probably about 20%. Have you considered, from a use of capital standpoint, buying it back to lock -- or buying those assets in some capacity to lock in a 20% return?

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [61]
------------------------------
 Yes. We are recognizing the differences between our cost of equity in all forms today and our cost of debt. And I think if you find us in a surplus cash position, which is not at present, given the big seasonal cycle we're going through on the back end of summer, you may see us do interesting things in the market. We're not committed to doing that right now. We're really committed to dropping through free cash flow and delevering, but we understand your point when you think about the cost of equity on that [product] or from the cheap take-out that we could get -- ask around.

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 David Jonathan Lieberman,  Advisors Capital Management, LLC - Portfolio Manager   [62]
------------------------------
 Okay, great. And just one other question, going back to churn a little bit. Do you find that the churn levels are different from marketing type to marketing type: digital, door-to-door, retail and so on? Do you -- have you found that the churn levels can be improved, for example, on the retail store, where perhaps there's a bit more of an initial relationship than there might be in some of the other ways?

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [63]
------------------------------
 Absolutely. And it's interesting because I think some customers, no matter what channel they come through us -- or come to us through, they want to engage with us. And those end up being the stickiest customers. The ones who want to know their other options, want to get invites from us, those are the guys who'd stay and they can come from any channel. But you're right. If you have a face-to-face upfront sale, you have accelerated that process. You've made it more comfortable for the customer. They are more likely to engage with you with more frequency through the whole customer journey. So 100%, there's a ton of differences there. That's why we took on retail even though there is a cost to it. We wanted to be there in front of people, associated with great brands like Sam's Club, as an example, and get the halo effect of that. But we're also selling digitally through some channel partners that have better brand recognition than we do in the marketplace, which is super helpful. And you can also get sticky customers through those type of acquisitions as well.

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Operator   [64]
------------------------------
 This now concludes our question-and-answer session. I would now like to turn the conference back over to Pat McCullough for any closing remarks.

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 Patrick McCullough,  Just Energy Group Inc. - CEO, President & Director   [65]
------------------------------
 Thank you, operator. Before we conclude today's call, I wanted to pass out my deepest gratitude to our employees. Our employees have done a superb job really rallying around what we're trying to do as a business for the benefit of our shareholders. So thanks a lot to our employees, in all regions, in all parts of the business. Your dedication to building this business through innovation and commitment to customer service is the backbone of our success. It is acknowledged and appreciated. Thank you, everyone, for participating in the call and for your support of the business. We'll talk to you next quarter. Thank you.

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Operator   [66]
------------------------------
 The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.




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