Genie Energy Ltd.

Good day and welcome to Genie Energy's third quarter 2021 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by a zero. On this morning's call, Michael Stein, Genie Energy's chief executive officer, and Avi Golden, Genie Energy's chief financial officer, will discuss operational and financial results for the three-month period and it's September 30th, 2021. 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 the remarks, management may make reference to adjusted EBITDA, a non-GAAP measure. Management believes that Genie Energy's measure of adjusted EBITDA provides useful information to both management and investors that supplement Genie Energy's core operating results. The Genie Energy earnings release includes a reconciliation of consolidated adjusted EBITDA to its nearest comparable gap measures, consolidated net income, and income from operations for all periods presented. In addition, adjusted EBITDA for applicable segments are reconciled to their respective segments' income from operations for all periods presented. The Genie Energy earnings release is posted on the investor relations page of the Genie Corporation website, genie.com, and has been filed on a form 8-K 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 star then 1 on your touchtone phone. To withdraw your question, please press star then 2. 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 third quarter 2021 earnings call. Today, we plan to start the call with an update on the Oriel spinoff transaction and our ongoing exits from the UK retail market and discuss how this impacts our growth strategy moving forward. I will also provide a review of our operational high-level financial results for the three months ended September 30th, 2021. Avi Golden, our Chief Financial Officer, will then provide a deeper dive into the quarter's financial results, and then we will be glad to take your questions. As we previously announced, our plans for an Oriel Energy equity offering and spinoff during fiscal year 2021 were derailed by market conditions impacting our Orbit subsidiary in the UK. This market has faced increasing challenges over the past eight weeks as the regulatory body in the UK decided not to raise price caps to keep up with significant spikes in wholesale energy costs. As a result, 19 energy supply companies have already filed for bankruptcy. In response to these factors, after the third quarter closed, we pivoted and began to work with the UK regulators on an orderly exit from this market. Talks are ongoing and we anticipate providing an update when we have finalized an arrangement with the regulators. In Q3, Orbit's loss from operations increased from $4.2 million last year to $16.4 million this year due to asset write downs and incremental bad debt expense of $10.5 million related to the planned exit from the UK market. On a go-forward basis, once we have agreement with the regulators, we will classify Orbit's operating results as discontinued operations. Regardless, we are no longer investing in this business and currently expect no material negative cash impact from its operations in future quarters. I want to be clear that Orbit was unprofitable and a relatively immature business compared to our cash-generating US and Scandinavian operations. Additionally, the regulatory environment in the U.K. is very different than in the U.S. and Scandinavia as it instituted price caps after we entered the market and made it impossible to pass on extraordinary spikes in wholesale costs to customers. So where does this leave us moving forward? As I stated last quarter, G&E Energy owns a portfolio of assets that offer an attractive investment opportunity within the energy space, and our diversification both within markets and geographically reduces our risk profile as we saw in Q3. At the corporate level, it leaves us with a strong debt-free balance sheet, a major competitive differentiator that we expect will get stronger over the next couple of quarters as we both generate cash from operations as well as exit the UK market, which required additional investment of growth capital. It leaves us with a profitable asset like GE Retail Energy Business, or GRE for short, that has demonstrated a resilient ability to generate cash in a variety of market conditions. This business currently operates in 17 of 27 deregulated states plus Washington, D.C., and our mid- to long-term strategy is to opportunistically grow when market conditions warrant by taking share in existing states, expanding into new states, and offering additional products and services to our installed base. We will also at times take steps to slow growth and protect margins over a shorter time horizon when market conditions are not as favorable, which is what we are doing this winter. It also leaves us with two growth arms. First is our emerging growth business in Scandinavia, which will in the immediate term constitute Gini Retail Energy International, or GREI for short. This business is already adjusted EBITDA positive, and we expect to see increased profitability in 2022. Longer term, this business affords the opportunity to expand into a handful of other European countries, bringing the total potential, total addressable market to more than 30 million meters over the next few years. Our Gini Renewables business is another exciting growth opportunity. Over the past year, we have taken steps to significantly improve its margins and, as we recently discussed, have the opportunity to move up the solar value chain through project finance by leveraging our strong balance sheet. We believe this initiative will provide attractive financial returns, increase the win rate on new projects, and contribute more meaningfully to top-line and adjusted EBITDA growth. Moving to our third quarter performance, we reported a record 37% gross margin and generated record adjusted EBITDA. GRE was the main driver behind this strength, delivering a record 40% gross margin and a 23% adjusted EBITDA margin. Market-to-market gains in our financial hedge growth and continued high per meter consumption rates drove this strong performance. Customer acquisition at GRE has not returned to full pre-COVID strength, but our return rate remained below typical pre-COVID levels at 4%. GREi grew its meter base by nearly 6% and reported strong gross margins despite the situation in the UK. We believe our Scandinavian business is outperforming the competition for higher margin customers and has delivered positive income from operations of $4 million year-to-date. Looking to Q4, we are shifting our short-term tactics to preserve margin and maximize cash flow. This is a move we have made from time to time based on market conditions. As such, we are currently positioned favorably with our hedges and forward contracts relative to the pre-winter run-up in wholesale energy and natural gas prices, allowing us to focus more acutely on high margin customer acquisition while reducing overall sales costs. Additionally, we have some low margin aggregation deals that are coming off the books, which should further improve our financial profile to invest in sales activity heading into the spring. Genie Renewables will continue to focus on customer acquisition and adding new projects. We have begun on a limited basis to offer financing to our solar system offerings, which we believe will both help us win new business and increase project returns. In summary, we are excited about our potential and look forward to updating you further on performance and growth initiatives next quarter, as well as on the developing UK situation. Now, over to Avi Golden for his discussion of our Q3 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 September 30th, 2021. Throughout my remarks, I compare the third quarter 2021 results to the third quarter of 2020. Focusing on the year-over-year rather than the sequential comparisons moves into consideration the seasonal factors that are characteristic of a retail energy business. I'd also like to point out that there are some moving parts this quarter that make an apples-to-apples comparison somewhat challenging. For example, we acquired the part of Orbit Energy's equity that we didn't already own in the fourth quarter of 2020. So while our third quarter 2020 results were not consolidated into our financials, they were in the third quarter of 2021 under Genie Retail International. On the flip side, we sold our Japanese operations in early Q2 2021, while in Q3 2020, a full quarter of Genie Japan revenue was recorded under GREI. And finally, we are assessing the impact of our planned exit from the UK market. I'll provide some color on these impacts throughout my part of this call. That said, results from this quarter were generally strong relative to last year. Consolidated revenue increased 18% to $113 million. The top-line increase was generated mostly by GREI, where the revenue increased to $25.5 million from $5.8 million in the year-ago quarter, mainly reflecting the consolidation of the results at Orbit Energy in the current period. For comparison, Orbit generated $15.1 million in revenue in the Q3 2020, which was not reflected on our reported revenue figures. Revenue at Genie Retail Energy, our domestic retail business, decreased 3% to $86 million. Driven by a decline in both electricity meters served and consumption, while natural gas saw an increase in meters of consumption per meter. It is important to note, while down from last year, consumption per unit remained above pre-COVID levels for the season. The decreased overall consumption was offset by higher average sales per commodity unit. We also saw increased churn from the prior quarter, albeit below historical levels. Additionally, we continue to be limited in access to our traditional face-to-face marketing channels that generally drive growth. Revenue for our renewables business was $1.3 million, a decrease from $1.6 million in the year-ago quarter. As Michael mentioned, the decline in revenue is not unexpected and was offset by improved margins. We are excited about the potential of this segment as we continue to expand into higher-margin, renewables-focused businesses, including our commercial solar installations, community solar projects, and system financing. Consolidated gross profit increased 55% to $42.4 million, and gross margins expanded by 700 basis points, a very strong third-quarter result. With increased contributions from all three of our reporting segments, in addition to strong underlying business performance, we've benefited from a reduction of costs due to the approval of the plan for the State of Texas' reimbursement of expenses related to winter storm URI, as well as some mark-to-market gains in our forward financial contracts, as wholesale prices have increased heading into the winter. Consolidated SG&A increased to $28.9 million from $18.8 million. The increase primarily from GRE International and reflects the consolidation at Orbit Energy, which added $10.7 million in SG&A expense, including customer acquisition expenses. The decision to explore and exit from the UK market resulted in a $6.7 million write-down in intangible assets, as well as approximately $3.8 million in bad debt expense above normal levels. Our consolidated income from operations totaled $6.9 million compared to $8.5 million a year ago quarter, The key driver here was, again, the impact of Orbit Energy I just mentioned. Adjusted EBITDA increased 58.5% to $15 million compared to $9.5 million a year ago quarter. Genie Energy's loss per diluted share was $0.10 compared to EPS of $0.24 in the year ago quarter. In addition to the $0.26 per share negative impact from the UK write-off of assets, our bottom line was negatively impacted by an unrealized loss of $5.3 million on marketable securities predominantly our investment in Rafael Holdings. Note that Rafael reported disappointing news last week, and we reasonably expect an additional unrealized loss in the fourth quarter as the stock was down sharply. Turning now to the balance sheet, at quarter end, cash, restricted cash, and marketable securities was totaled $48.6 million. Working capital was $44.4 million. To wrap up, our financial results from operations were strong. Our balance sheet is also in good shape, and with a planned exit from the U.K., we would expect to see lower rates of ongoing cash burn and a higher adjusted EBITDA. We continue to believe the value of our hedging, geographic diversification, and other risk mitigation strategies are a competitive differentiator and will allow us to grow the business and invest in other attractive opportunities. Now, operator, back to you for Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Thank you. Our first question today is coming from Erin Shafter at Great Mountain Capital. Your line is live. You may begin.

Good morning, guys. Congratulations on some strong numbers. I do have some concerns, though. Avi answered some of them regarding orbit and the situation in the UK, but two other questions relating to that. One is that you mentioned that the regulators there were unwilling to raise the limit on rates. given the extraordinary situation. And I'm wondering if this rule on rates and being basically a hard rate, a hard cap, whether or not that existed before or after you purchased the outstanding amount of orbit that your former partners held. Hi, Aaron.

How are you? The cap was instituted after we entered the market in 2017. It was instituted shortly after. And we were able to see decent margins subsequent to the price cap being instituted. This is a situation that we could have never possibly envisioned. And, you know, it's a situation where we believe it's kind of a force majeure kind of a situation that unfortunately the regulators are not in our opinion appropriately responding to.

And I think Michael mentioned something about updating in the future the situation in the UK. Did I hear that correctly? And what type of update would it be?

It would be an update just on operationally, you know, when and how we got out of, you know, we no longer had any customers to serve. And, you know, what the write-down associated, if any more, would be as a result. Again, we don't believe there will be any negative cash impact. But there may be some more write downs of intangibles.

OK. And I mean, before this, your big surprise was early in the year. You had the once in 100 years situation and crazy weather in Texas. Is there any progress at all on getting any more relief from that?

Yes, so we, I think Gabi mentioned in his remarks, we got another, you may recall last quarter, we announced that we got about a million and a half dollars of relief from the Texas government. This quarter we announced that we got, I believe the number was 1.9 million, it is two, of relief from Texas. And we continue to work with other industry representatives to try to get more. Okay.

And just to be clear, the funds will flow through expected starting sort of the first half of 2022. So the order was formally approved and voted on, but the mechanism by which entities are going to receive their relief should kick in in the first half of 2022. Okay.

You noted in the release that you repurchased 230,000 shares of the Genie Common at $1.4 million. So that roughly works out to $6.08 a share. Yesterday, the stock closed just below $5 a share, more than 20%. Your purchase price was 20% higher. I'm wondering if you have plans to maybe increase buybacks given what would seem to you to be an attractive level for the shares?

We continue to have the authorization from the board to do buybacks. And our position is to do it opportunistically when we think the share price is attractive. So I can't tell you exactly what we're going to do. But, you know, our strategy, our general feeling about it, you know, is pretty much the same.

And related to that, obviously recently the stock has had, the common has had a noted decline, but the preferred stock has had a noted increase. So it seems that investors in the preferred have confidence that you'll be able to continue paying the dividend on the preferred, but investors in the common are concerned about the company in general. How do you convince investors in the common to look at it more like investors with the preferred?

I think we have to execute. We have to execute, catch a few breaks, or not get hit by some of these events that you know, under normal circumstances seem very, very rare. I think with a few quarters of execution and some of this difficulty behind us, I think, you know, hopefully the market will react.

Okay. And are there any other markets that you're in that have these type of hard cap on rates that the UK has? No. Not at the moment. Can we assume that you don't plan on going into entering any markets that have hard cap on rates?

We don't know of any that we're interested in going into right now. And as I said, in the UK, they introduced it after we had already entered the market. We probably would have changed our about entering the market, but, you know, we had been operating for a few years, so, you know, we thought that the regulator was responsible enough with how they set that cap and, you know, would be responsible in a kind of a force majeure situation, but it seems like we were proven wrong in that regard.

Okay. All right. Thanks, and good luck going forward. Thank you. Thank you.

Thank you. Our next question today is coming from David Canham at Canham Wealth Management. Your line is live. You may begin.

Good morning. Thanks for taking my questions. I'm going to keep it simple. I don't have a whole lot. But given, in general, given your outlook on the business going forward, exiting U.K., the prospects for the remaining international, Scandinavia, et cetera, you're going to be generating significant free cash flow. I appreciate the fact that you're buying back stock. What's your view on dividends at this time? Historically, the common has paid a dividend. Is the board's appetite to further shrink the common share count first and then go back to dividends, or is it something up for discussion now?

I think it's probably something that's going to come up, if I had to guess, after next quarter. We have not discussed reinstituting the dividend yet. I think at the time when we suspended the dividend, I think we had indicated we wanted to take about a year to think about it, a few quarters at least. So we're still continuing to think about it.

Okay. I mean, I appreciate the fact that the company is buying back stock. My personal opinion is at these levels, we're better off buying back as much stock as possible. But then once the stock recovers, paying dividends, which would ultimately be more for the remaining common shareholders given a shrunken share count. So, well, I wish you much luck in the future. I hope you don't get hit by any of these crazy events anymore. You know, hopefully it'll be smooth sailing going forward. Good luck. Thank you.

Thank you. Again, if you have a question, please press star then 1. This concludes our question and answer session and conference call. Thank you for attending today's presentation. You may now disconnect.