Genie Energy Ltd (GNE) Q3 2021 Earnings Call Transcript

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Genie Energy Ltd (GNE -0.20%)
Q3 2021 Earnings Call
Nov 5, 2021, 2:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to Genie Energy's Third Quarter 2021 Earnings Call. [Operator Instructions] On this morning's call, Michael Stein, Genie Energy's Chief Executive Officer; Avi Goldin, Genie Energy's Chief Financial Officer, will discuss operational and financial results for the three-month period ended September 30, 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 and 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 GAAP measures, consolidated net income and income from operations for all periods presented. In addition, adjusted EBITDA for applicable segments are reconciled to their respective segment's 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 eight-K with the SEC. After today's presentation by Genie Energy's management, there will be an opportunity to ask questions. [Operator Instructions] 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.

Michael Stein -- Chief Executive Officer

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 spin-off transaction and our ongoing exit from the U.K. 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 30, 2021. Avi Goldin, 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 spin-off during fiscal year 2021 were derailed by market conditions impacting our Orbit subsidiary in the U.K. This market has faced increasing challenges over the past eight weeks, as the regulatory body in the U.K. 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 U.K. 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 U.K. 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 U.S. 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 it is impossible to pass on extraordinary spikes and wholesale costs to customers. So where does this leave us moving forward? As I stated last quarter, Genie 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 U.K. market, which required additional investment of growth capital.

It leaves us with a profitable asset-light Genie 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 Genie 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 Genie 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 the strength, delivering a record 40% gross margin and 23% adjusted EBITDA margin. Mark-to-market gains in our financial [had 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 churn rate remained below typical pre-COVID levels at 4%. GREI grew its meter base by nearly six percent and reported strong gross margin despite the situation in the U.K. 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 activities 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 U.K. situation. Now over to Avi Goldin for his discussion of our Q3 financial results.

Avi Goldin -- Chief Financial Officer

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 30, 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 to seasonal factors that are characteristic of our retail energy business. I'd also like to point out that there are some moving parts this quarter and 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 U.K. 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 is generated mostly by GREI, where 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 in 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 and 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 2Q's overall consumption was offset by higher average sales for 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 is $1.3 million, a decrease from $1.6 million in the year-ago quarter. As Michael mentioned, the decline in revenue was not unexpected and was offset by improved margins. We're 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 results, with increased contributions from all three of our reporting segments.

In addition to strong underlying business performance, we benefited from a reduction of cost 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 reflecting consolidation into Orbit Energy, which added $10.7 million in SG&A expense, including customer acquisition expenses. The decision to explore an exit from the U.K. 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 in 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 in the 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 U.K. 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 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 the 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.

Questions and Answers:

Operator

Thank you. We will now begin our question and answer session.[Operator Instructions]

Thank you. Our first question today is coming from Aaron Shafter at Great Mountain Capital. Your line is live. You may begin.

Aaron Shafter -- Great Mountain Capital. -- Analyst

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 U.K., 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, hard cap, whether or not that existed before or after you purchased the outstanding amount of Orbit that your former partners held?

Michael Stein -- Chief Executive Officer

Hi Aaron, how are you? So 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. So this is a situation that we could never possibly envisioned. And it's a situation where we believe it's kind of a force majeure kind of a situation that the -- unfortunately, regulators are not, in our opinion, appropriately responding to.

Aaron Shafter -- Great Mountain Capital. -- Analyst

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

Michael Stein -- Chief Executive Officer

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

Aaron Shafter -- Great Mountain Capital. -- Analyst

Okay. And before this, your big surprise was early in the year, you had the once-in-100-year situation and a crazy weather in Texas. Is there any progress at all on getting any more relief from that?

Michael Stein -- Chief Executive Officer

Yes. So we -- I think Avi mentioned in his remarks, we got another -- you may recall last quarter, we announced that we got about $1.5 million of relief from the Texas government. This quarter, we announced that we got, I believe, the number was $1.9 million still of a relief from Texas, and we continue to work with other industry representatives to try to get more.

Avi Goldin -- Chief Financial Officer

Okay. And just to be clear, that the funds will flow through expected start at 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.

Aaron Shafter -- Great Mountain Capital. -- Analyst

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 five dollar a share, more than 20% that's -- that your purchase price was 20% higher. I'm wondering if you have plans to maybe increase buybacks given the -- what would seem to you to be an attractive level for the shares.

Michael Stein -- Chief Executive Officer

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 our strategy, our general feeling about it is much the same.

Aaron Shafter -- Great Mountain Capital. -- Analyst

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 looking at more like investors with the preferred?

Michael Stein -- Chief Executive Officer

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

Aaron Shafter -- Great Mountain Capital. -- Analyst

Okay. And are there any other markets that you're in that have this type of hard cap on rates that the U.K. has?

Michael Stein -- Chief Executive Officer

No. None at that.

Aaron Shafter -- Great Mountain Capital. -- Analyst

Can we assume that you don't plan on going into entering any markets that have a hard cap on rates?

Michael Stein -- Chief Executive Officer

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

Aaron Shafter -- Great Mountain Capital. -- Analyst

Okay. Great. Thanks and goodluck going forward..

Michael Stein -- Chief Executive Officer

Thank you.

Operator

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

David Canham -- Canham Wealth Management -- Analyst

Good morning. Thanks for taking my question. 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 for discussion now?

Michael Stein -- Chief Executive Officer

So I think it's probably something that's going to come up, if I had to guess, after next quarter. We did not -- 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.

David Canham -- Canham Wealth Management -- Analyst

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 shrunk in share count. So while I wish you much luck in the future, I hope you don't get hit by any of these crazy events anymore. Hopefully, it will be smooth sailing going forward. Good luck.

Avi Goldin -- Chief Financial Officer

Thank you.

Michael Stein -- Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 24 minutes

Call participants:

Michael Stein -- Chief Executive Officer

Avi Goldin -- Chief Financial Officer

Aaron Shafter -- Great Mountain Capital. -- Analyst

David Canham -- Canham Wealth Management -- Analyst

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