Genie Energy Ltd.

Good evening and welcome to Genie Energy's second quarter 2020 earnings call. All participants will be in listening mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. In its presentation, Genie Energy's management team will discuss operational and financial results for the three-month period ended June 30, 2020. Any forward-looking statements made during this conference call, either in the prepared remarks or in the Q&A session, whether general or specific in nature, are subject to risks and uncertainties that may cause actual results to differ materially from those which the company anticipates. These risks and uncertainties include, but are not limited to, specific risks and uncertainties discussed in the reports that Genie Energy files periodically with the SEC. Genie Energy assumes no obligation either to update any forward-looking statements that they have made, or may make, or to update the factors that may cause actual results to differ materially from those that they forecast. During their remarks, management may make reference to adjusted EBITDA and co-forma revenue and co-forma income from operations for key retail energy international segments. Both are non-GAAP measures. Management believes that key energy's measure of adjusted EBITDA and key retail energy international's co-forma results provide useful information to both management and investors that supplement key energy and the Gini Retail Energy International segment's core operating results. The Gini Energy earnings release includes a reconciliation of adjusted EBITDA to net income and of the pro forma Gini Retail Energy International results to their nearest comparable gap measures. The earnings release is posted on the investor relations page of the Gini Corporation website, www.gini.com, and has been filed on a Form 8K with the SEC. After today's presentation by Genie Energy's management, there will be an opportunity to ask questions. To ask a question, you may press 1, then 4 on your touch-tone phone. To withdraw your question, please press 1, then 3. Please note this event is being recorded. I will now turn the conference over to Michael Stein, Genie Energy's Chief Executive Officer. Please go ahead, Mr. Stein.

Thank you, Operator. Welcome to Genie Energy's second quarter 2020 earnings call. Today we will discuss our operational and financial results for the three months ended June 30, 2020. As in prior quarters, my remarks will focus on our operational results and key performance indicators. Avi Golden, our Chief Financial Officer, will follow with a deeper dive into the quarter's financial results. Following Avi's remarks, we will be glad to take your questions. Genie Energy generated the highest level of adjusted EBITDA of any second quarter in the company's history and much improved financial results compared to the difficult year-ago quarter. Operationally, our businesses also performed very well despite the challenges of the COVID-19 impacted environment. Globally, our retail energy provider businesses, which generated 94% of our revenue, added 64,000 RCEs year-over-year and 20,000 sequentially to reach 421,000 RCEs with solid growth in both our domestic and international markets. Global meters served increased by 88,000 year-over-year and 4,000 sequentially to 536,000. The increases in meters served were driven by expansion at Genie Retail International, including those of our Orvis Energy joint venture in the UK. Here in the US, Genie Retail Energy added 25,000 RCEs year-over-year and 13,000 sequentially to reach 343,000 RCEs. Domestic meters served declined by 4,000 year-over-year and 10,000 sequentially to 374,000. The robust increase year-over-year in domestic RCEs relative to the decrease in meters served reflects our sustained focus on acquiring higher consumption meters, warmer than average weather in the second half of the quarter, and the COVID-19 driven shift to work from home. These factors combined to increase electric per meter consumption by 26% compared to the year ago quarter. The COVID-19 pandemic has impacted several key aspects of Jerry's business operations with a mixed financial impact. Our customer base is predominantly residential, so we benefited from the increased demand for electricity as customers were from their homes rather than offices. On the other hand, like other retail providers, we suspended our face-to-face customer acquisition programs in March as public health measures were implemented to combat COVID-19. As a result, gross meter ads decreased to $40,000 this quarter from $69,000 in the prior quarter and from $91,000 in the year-ago quarter. While we are intent on growing GRE's meter base over the long term, the decline in meter ads has two positive short-term impacts. Both customer acquisition expense and customer churn rates have decreased significantly. GRE's churn rate decreased to 3.9% in the second quarter from 4.7% in the first quarter. That's partly because new customers tend to have higher rates of churn than longer-tenured customers, so we would expect to see churn rates fall after the pace of gross meter addition slows. But also, COVID-19 halted not just our own face-to-face customer acquisition programs, but also our competitors' programs. This effectively eliminates a key turn driver. Looking ahead at GRE, we expect to see a modest rebound in meter acquisition beginning in the third quarter. Public health restrictions have begun to ease in some of our markets, which allows us to resume face-to-face sales and marketing. We'll also be entering some new utility territories. Turning now to Gini Retail Energy International. RCEs increased 40,000 year-over-year and 7,000 sequentially to 79,000. Meters served increased by 92,000 year-over-year and 14,000 sequentially to 161,000 meters. We generated solid year-over-year growth in each of our overseas markets, the UK, Scandinavia, and Japan. At June 30th, GRE International held 30% of our global meters served and nearly 18% of our global RCEs. I'm very pleased by the progress we've made to diversify our customer base. Also this quarter, we successfully leveraged Lumo's expertise and platform to enter the Swedish retail supply market and began acquiring customers there. At Genie Energy Services, Genie Solar had a record quarter generating positive adjusted EBITDA for the first time, while diversity is close to breakeven. As I mentioned last quarter, we are refining Prism Solar's business model to more closely align with the current business environment. GES recorded an impairment of $800,000 in the second quarter related to the write-down of an asset impacting income from operations, but not adjusted EBITDA. At GOGAS, we have had to again postpone the final well test at OPEC's Nest 10 drilling site. Because of COVID-19 restrictions, an essential member of our technical team has not been able to get a visa. I'm reluctant to offer a new timeframe for completion of the test when the execution depends on factors outside of our span of control. but I will provide an update for you when we discuss our third quarter results. Before turning the call to Avi, I want to highlight that given our continued favorable outlook and strong cash generation in recent quarters, and after raising our dividend last quarter, we resumed repurchasing our shares in the second quarter while continuing to pay the dividend at the increased rate. And also a big shout out to the Genie team that again did an outstanding job growing our business and significantly enhancing our bottom line results all while working from home. A big thank you to them. Now, here is Genie's CFO, Avi Golden, to discuss our financial results.

Thank you, Michael, and thanks to everyone on the call for joining us this morning. My remarks today cover our financial results for the three months ended June 30, 2020. Throughout my remarks, I will compare second quarter 2020 results to the second quarter of 2019. Focusing on the year-over-year rather than sequential comparison removes some consideration to seasonal factors that impact our retail energy business. Keep in mind that the second quarter is typically characterized by relatively low energy consumption after the peak heating season in the first quarter and before the third quarter's peak air conditioning months in July and August. Results are driven by the electric side of the business with minimal gas consumption. The second quarter's financial results were strong, particularly in comparison to the year-ago quarter. As you may recall, the second quarter of last year was heavily impacted by mild weather and a mark-to-market within our hedge book. We expressed confidence that the business would rebound, and our performance since then has justified that confidence. In the trailing 12-month period, the company has achieved its highest level of consolidated operating income and adjusted EBITDA. As Michael discussed, the COVID-19 pandemic has resulted in mixed operating impacts, increasing electricity consumption while decreasing churn and slowing the pace of gross meter additions. In addition, the decline in overall commercial industrial power consumption on markets has helped mitigate price volatility despite the increase in residential consumption. As we have noted before, predictable commodity price environments tend to favor our business model. Consolidated revenue in the second quarter increased by $15.1 million to $76.1 million. The increase was powered by higher per-meter electricity consumption, resulting from the general acquisition of higher consumption meters, warmer weather than the year-ago quarter, and increased residential electricity consumption from residential customers as part of the transition from home during COVID-19. At Genie Retail Energy, revenue increased by $12 million to $66.5 million. Electricity sales accounted for nearly all of the increase. Electricity consumption increased 35% from the year-ago quarter, more than offsetting a modest decrease in revenue per kilowatt-hour sold. Overseas, at Genie Retail Energy International, revenue increased by $2.2 million to $5 million, reflecting meter-based growth at Lumo in Scandinavia and Genie Japan. As discussed in our earnings release, we account for the results of Orbit Energy, our joint venture operating in the UK, using the equity method, and its results of operations are not consolidated in our revenue or gross profit. During the quarter, we provided Orbit with an additional $1.5 million of capital, resulting in a net loss of Orbit Energy of that amount, compared to a net loss of $867,000 in the year-ago quarter. Our Genie Energy Services division increased revenue by $859,000 to $4.6 million. Consolidated gross profit in the second quarter more than doubled from the year-ago quarter, increasing by $10.5 million to $19.5 million. As I noted in my opening, we had a difficult quarter a year ago. The operating environment was weak on low consumption and mark-to-market loss in our forward hedge book. This quarter, we benefited from the strong consumption levels of Genie Retail Energy, and our consolidated gross margin rebounded to 25.6% from 14.7% in the year-ago quarter. The decrease in meter acquisition expense at GRE helped us to reduce consolidated SG&A expense by $2.3 million to $16 million. The rebound in GRE's margin and reduced customer acquisition spend helped drive a $12 million improvement in our consolidated income from operations, which is $2.7 million compared to a loss from operations of $9.3 million in the year-ago quarter. Adjusted EBITDA reflects the equity and net loss of equity method investees of $1.2 million was positive $3.5 million compared to negative $9.1 million a year ago. Earnings per share was $0.06 per share compared to a net loss of $0.29 per share in the year-ago quarter. Our balance sheet continues to provide us with strategic flexibility. At June 30th, we had $41.8 million in cash, cash equivalents and restricted cash, and working capital of $49.1 million. Cash provided by operating activities in the second quarter was $16.4 million compared to cash used in operating activities of $3.1 million in the second quarter of 2019. The swing is attributable in large part to the change in year-over-year income, as well as the unwind of cash collateral that was posted in the first quarter of 2020 that was returned in the second quarter in support of the hedge book. As Michael mentioned, we continue to be diligent about returning value to our shareholders. This quarter, we repurchased over 200,000 shares of Genie Class B common stock for $1.5 million. To wrap up, we met the various challenges of the COVID-19 environment to post a strong second quarter, significantly improving on the financial results of the same period a year ago. Strong consumption per electricity meter and reduction in customer acquisition spent keyed substantial year-over-year improvement in our bottom-line results. That concludes my discussion of our financial results. Now, Operator, back to you for Q&A.

We will now begin the question and answer session. To ask a question, you may press 1, then 4 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your registration, please press the 1, then 3. At this time, you will pause momentarily to assemble our roster. Our first question is, is from the line of Aaron Shafter from Great Mountain Capital Management.

Please go ahead. Hi. Congratulations on yet another strong quarter. Not only was it a vast improvement over Q2 of 2019, but you can build on Q1 of this year in which you set some records for the company. So now that you've gone a year showing strong results from the fluke bad quarter last year, do you expect the market to recognize that Genie stock is underpriced?

Hi, Aaron. Thanks for the good wishes and good to hear from you again. We don't really know what's going to happen in the market. We think we should get a little bit of a boost, but, you know, we'll wait and see how the market reacts. And, you know, as we've discussed in previous quarters and as we did this quarter, we'll be diligent in repurchasing if opportunity comes our way.

Okay, so you did repurchase more than 200,000 shares. And if you see opportunity, we can expect more repurchases?

We try to be strategic about it. So, you know, it all depends on the price and, you know, where we think we are in the quarter.

Okay. And during the call, it was mentioned that you were going to go into some entering some new territories. Can you specify which new territories you're going to be entering?

I'd prefer not to specify. We like to keep that pretty close. But we have mentioned in the past that we have been licensed in Michigan and Georgia, and those are among the two states where we're going to start operating. And then there are a bunch of utility territories within the states that we already operate in. where we hadn't yet had customers, and we're starting to get going there, too.

Okay. And finally, about OPEC and the S-10 well, did I hear correctly that we won't get another update until you're reporting the third quarter results?

I'm hoping we'll have an update. Yeah, I'm hoping we'll have an update before then, but I just want to, you know, set expectations. We were really close. We thought we were going to be able to do the test this past quarter. We thought we had all the visas in place, so we were about to get all the visas in place, and we're missing one approval, and that's all because of the COVID environment. We weren't able to get a visa for an essential worker, and You know, as soon as we get that, we should be able to – he's got to quarantine in Israel for a few weeks, and then we should be able to get going. We just wait until we get the approval.

So we're just waiting on the visa for one worker, and he gets the two weeks in quarantine, and then you should be ready to go? Is that what I understand correctly?

Do I understand that correctly? That's what we're hoping. That's what we've been told.

Okay, so the new corona czar, whatever they're calling them in Israel, announced that he wants to open up the country to at least from certain countries air travel in the next week or two. So I guess we can only hope.

All right.

We can only hope. That's it. Thanks again for – for answering my questions, and congratulations again on another great quarter.

All right, take care. Thanks a lot.

Again, if you have a question, please press the 1 and then the 4. This concludes our Q&A session and conference call. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.