Genie Energy Ltd. (GNE) CEO Michael Stein on Q4 2021 Results - Earnings Call Transcript

Mar. 10, 2022 12:02 PM ETGenie Energy Ltd. (GNE), GNE.PA
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Genie Energy Ltd. (NYSE:GNE) Q4 2021 Earnings Conference Call March 10, 2022 8:30 AM ET

Company Participants

Michael Stein - Chief Executive Officer

Avi Goldin - Chief Financial Officer

Conference Call Participants

Aaron Shafter - Great Mountain Capital Management

Jason Lustig - J. Goldman

Operator

Good day and welcome to Genie Energy's Fourth Quarter and Full Year 2021 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] On this morning's call Michael Stein, Genie Energy's Chief Executive Officer; and Avi Goldin, Genie Energy's Chief Financial Officer will discuss operational and financial results for the three and 12-month periods ended December 31st, 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 their 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 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 8-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

Thank you operator. Welcome to Genie Energy's fourth quarter and full year 2021 earnings call. Today I will go through a brief overview of our business and opportunities followed by a discussion of our fourth quarter results, Avi Goldin, our Chief Financial Officer will then provide a deeper dive into financial results, and then we will be glad to take your questions.

During 2021, some portfolio management moves as well as some weather anomalies complicated our financial statements. These factors include the sale of our Japanese business and our orderly withdrawal from the UK market, which led to classifying our UK operations as discontinued, plus the impact of winter storm Uri last February.

As a result, we will provide pro forma information in our investor presentation that will be posted on our website after the filing of our 10-K next week to give investors a view of how the existing businesses have performed historically as well as for future comparisons.

Despite these factors, we grew revenue by 2% during the year and gross margin expanded by 220 basis points to 28.8%. We also finished the year with our strongest balance sheet in many years. In the meantime, I'm going to quickly review our businesses before I go into our fourth quarter results and outlook for 2022.

Genie Energy owns a portfolio of assets that offer attractive investment opportunity within the energy space. And our diversification both as to our offerings and geographically reduces our risk profile, while providing upside opportunities as we saw in Q4.

In the U.S. our Asset-light Genie Retail Energy business or GRE for short, 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 did in the fourth quarter. Our second business Genie Retail Energy International is an emerging growth business that has become profitable with improving margins.

Currently this business operates in Finland and Sweden. Longer term this business affords the opportunity to expand into a handful of other European countries, bringing the potential total addressable market to more than 22 million meters over the next few years. Our Genie Renewables business provides entree into multiple opportunities that can lead to outsized growth.

During 2021 to improve margins, we refocused our solar operations on projects rather than panel manufacturing. Now, as we discussed last quarter, we are leveraging our strong balance sheet to pursue opportunities to move up the solar value chain through project finance. 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 fourth quarter results, GRE was in a strong financial position which led to mark-to-market gains on our commodity positions and allowing us to focus our sales and marketing operations on higher-margin customers. As some of our low-margin municipal aggregation customers came off contract, we saw a significant jump in gross margin, gross profit, and adjusted EBITDA despite revenue and total customers served being down as compared to the fourth quarter of 2020.

GREI had a particularly strong quarter with 64% revenue growth and a 38% gross margin. Similar, to our domestic business, we were favorably positioned relative to energy prices and were able to benefit from mark-to-market gains and focus our sales and marketing on higher-margin customers. Additionally, given the volatility in energy prices, our strong financial position allowed us to take advantage of a small consolidation opportunity to increase our customer base.

Genie Renewables grew revenue by 19%, gross profit by 26% and generated a gross margin of 22%, all significant increases from the year ago quarter. While these numbers were significant improvements year-over-year, we expect continued revenue and gross profit growth as solar projects are constructed and more of their revenues are realized.

Looking to 2022, despite the continued volatility, high energy prices and Russia's invasion of the Ukraine our strongest management keeps us confident that the first quarter will be strong. We continue to monitor the situation and tailor our risk management decisions for the short and mid-term periods to the current political environment.

The combination of our very strong balance sheet and financial positioning for the winter season will allow us to begin reinvesting in sales and marketing activities and grow our retail customer base in the U.S. and Scandinavia. Genie Renewables is also in a strong position for growth. Currently Genie Solar is under contract to install more than 10 megawatts in 2022, which if constructed and completed will generate approximately $15 million of revenue, a tremendous increase over our 2021 revenue.

Beyond this contracted business, we have a strong pipeline of potential new contracts that we hope to win in 2022. In addition to building these systems, we have become involved in the financing of commercial scale and community solar projects. These activities have the potential to provide us with our own electricity generation assets that could yield attractive cash flows for years to come. We expect to have more to share about the progress of such projects in the coming quarters.

In 2022 together with our Diversegy and CityCom Solar businesses, the other two entities that comprise Genie Renewables, we think that overall revenue for the segment could approach $20 million approximately triple its 2021 revenue.

In summary, we finished the year on a high note with a strong cash position. We have fully recovered from Winter Storm Uri and repositioned our business portfolio to continue to generate both growth and cash. As a result of the strength in operations and balance sheet, we recently resumed our common stock dividend, which is currently yielding nearly 5%. We also announced an authorization to buyback our preferred stock over time, which we anticipate will begin during the second quarter.

Thank you for your time today, and I look forward to sharing our results for Q1 in early May. Now over to Avi Goldin for his discussion of our Q4 financial results.

Avi Goldin

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 and 12 months ended December 31, 2021 with a focus on the fourth quarter's results. When discussing the quarterly results, I compare the fourth quarter of 2021 to the fourth quarter of 2020 to remove from consideration the seasonal factors that are characteristic of our Retail Energy business.

During the fourth quarter, we completed our withdrawal from the United Kingdom's retail energy market. Operating results, assets and liabilities of Orbit Energy are reflected as discontinued operations for all current and historical periods presented in our filings and in my remarks. Our fourth quarter and full year 2021 consolidated financial results were both strong, highlighted by increased revenue, gross profit, adjusted EBITDA and earnings per share compared to the year ago quarter and prior year respectively. The gains reflect our decision driven by volatility in energy markets and other factors to focus on near-term profitability and cash generation, as well as the inherent strength of our business model, which enabled us to pivot to changes in the marketplace, while maintaining prudent risk-managed strategies.

Fourth quarter consolidated revenue increased 5.3% to $84.7 million. This revenue growth was generated primarily by Genie Retail Energy International where sales increased 64.3% to $15.5 million, reflecting the continued growth of our customer base, and an increase in power prices compared to the year ago quarter. At GRE, revenue decreased 2.9% to $67.9 million. The decline in electric meters served that Michael referred to and a slight decrease in electric consumption per meter more than offset a strong increase in revenue per kilowatt hour sold. Revenue for our renewables business increased by 19% to $1.3 million from $1.1 million.

Full year 2021 consolidated revenue climbed 1.9% to $363.7 million led by a 62.8% increase in GREI revenue to $44.4 million. GRE revenue increased 2.4% to $311.8 million, as increased per meter electricity consumption and revenue per kilowatt hour sold were partially offset by a decline in the average number of electric meters served. Genie Renewables revenue declined as we focused the business towards higher margin services and away from low margin panel sales.

Consolidated gross profit in the fourth quarter increased 53% to $29.6 million as both GRE and GREI delivered strong margin performance as well as increased mark-to-market valuations of our forward supply hedges, reflecting of the rising commodity price environment. At GRE, gross profit increased 31.3% to $23.4 million. Gross profit benefited from an increased value of our hedges as well as reducing exposure to certain customer segments. Gross profit at GREI climbed 223% to $5.9 million reflecting growth in our customer base and mark-to-market gains associated with certain of our forward supply hedges, while at Genie Renewables gross profit increased to $288,000.

Full-year consolidated gross profit increased 10.3% to $104.9 million led by GREI, where full year gross profit increased 147.3% to $11.2 million. At GRE, exceptionally strong margins in the second half of the year drove a 2.9% increase in gross profit to $90.9 million. Genie Renewables gross profit increased 26% to $2.8 million.

Consolidated SG&A expense for the fourth quarter increased 4.4% to $18.9 million. At GRE, SG&A expense increased 21% to $15.3 million, primarily driven by increased customer acquisition spending. At GREI, SG&A expense decreased 51.8% to $1.1 million, primarily as a result of the sale of Genie Japan in May of 2021.

Full year consolidated SG&A expense decreased 1.9% to $71.7 million, primarily reflecting the sale of Genie Japan which took place early in the second quarter. Our consolidated income from operations increased by $9.4 million to $10.7 million in the fourth quarter, while adjusted EBITDA quadrupled to $12.5 million.

At GRE, fourth quarter income from operations and adjusted EBITDA climbed to $8.3 million and $8.8 million respectively, propelled by the strong gross profit margins on electricity sales. At GREI income from operations increased to $4.7 million from a loss from operations of $547,000 in the year ago quarter. And adjusted EBITDA increased to $4.9 million from $46,000. The gains reflected the sale of Genie Japan and the mark-to-market valuations of our forward electricity hedges.

Genie Renewables continued toward profitability, trimming its loss from operations to $439,000 from $1.2 million in the year ago quarter while increasing its top line contribution. For the full year, consolidated income from operations totaled $33.1 million and adjusted EBITDA was $37.7 million. Note, that figure includes the $10 million net impact of Winter Storm Uri in Texas, $3.4 million in losses incurred by Genie Japan prior to its sale in May of 2021 and approximately $150,000 of shutdown-related expenses incurred by Genie Oil and Gas during the year. Absent those items, adjusted EBITDA for the year would have been $51.3 million. Diluted EPS from continuing operations were $0.90 in 2021 compared to $0.41 in 2020. Discontinued operations contributed an additional $0.21 compared to $0.03 a year earlier.

Turning now to balance sheet. At December 31, cash, restricted cash and marketable securities totaled $103.5 million. Working capital was $86.1 million and non-current liabilities totaled just $2.4 million. Subsequent to the end of the quarter, cash and current liabilities were both reduced by $21.1 million related to the orderly exit from the UK market. This will be reflected in our first quarter balance sheet.

To wrap up, the fourth quarter's robust margins reflecting our careful approach to risk management and focused scope of operations drove strong results in the second half of 2021 and we expect to build on that progress in the year ahead. Our balance sheet has never been stronger and our cash balance and no debt provides strategic flexibility to expand our business and return value to shareholders.

Now operator, back to you for Q&A.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] Your first question for today is coming from Aaron Shafter with Great Mountain Capital Management. Aaron, your line is live.

Aaron Shafter

Thanks, Operator. Congratulations on a strong quarter, especially the numbers from your international division. A month ago, you issued a press release announcing that you were resuming the dividend and you were going to be doing some preferred share buybacks. And I'm wondering, if you can shed any light on those – the preferred share buybacks. How you expect that to go? Do you intend to buyback all the preferred shares or just a certain amount over time depending upon conditions, or on any kind of schedule? Any light that you can shed on that specifically?

Michael Stein

Hi, Aaron, thanks for the support and kind words. Yes, so the Board authorized us to buyback up to $1 million worth of preferred per quarter. Obviously, the Board always has the opportunity to change their minds either to stop doing that, or to increase it at any point in time. But the current authorization is that staged process. We did not yet, buy back any of the preferred. I think we mentioned in the earnings release that – or in one of our remarks can't remember that, we plan on starting that buyback in the second quarter.

Aaron Shafter

All right. And you stated during the prepared remarks, your cash flow has been very strong your balance sheet is extremely strong, and especially your cash holdings. And I'm wondering besides looking for new opportunities, is there any possibility of an increase in the dividend?

Michael Stein

So we did just approve the dividend, just reinstated dividend only a few weeks ago. So, I don't envision that, we're going to change it right away. But again, that's always up to the Board, and I'm sure, we'll be revisiting that and talking about it next quarter – as early as next quarter when we meet.

Aaron Shafter

And finally, not really financially related but as the – have you considered doing some type of video call where you don't see us but we see you and we get to see what you look like in – when you're speaking. Something like a Zoom call or something or a one-way Zoom call?

Michael Stein

It's a good idea. We're happy to do something like that. We'll consider it for future calls.

Aaron Shafter

Okay. All right. Thanks and good luck.

Michael Stein

Thanks, Aaron.

Operator

Your next question for today is coming from Jason Lustig with J. Goldman. Jason, your line is live.

Jason Lustig

Hey, Michael. Hey, Avi. Nice job. Great execution in the quarter. Can you talk about the growth in renewables a little bit? I mean, you talked about the backlog. And I think I heard – I think I heard that you have $15 million of revenue in the backlog already. Can you just talk a little bit about the cadence of that backlog and how it burns off throughout the year?

Michael Stein

So the way the revenue in the renewables business mostly works is -- or let's say the way that the trajectory from sale to revenue recognition is as follows. We contract with the customer to build a solar array. Then we go for planning and permitting and start executing on the plan to actually build. We only recognize revenue in phases as we complete certain milestone portions of the project.

So in my remarks when I said, we have a backlog of about 10 megawatts about $15 million in revenue what I was referring to is that in 2021, we came to an agreement with customers to build that. And now we are in various stages in 2022. We are in various stages of the process of building those. When exactly how that revenue comes whether it's more first quarter, more second quarter, more third quarter or fourth quarter is really just depending on too many factors to be able to get into now. But assuming we are able to construct in the time lines that we expect to construct those projects that revenue number should hold up.

Jason Lustig

Okay, great. And can you help me understand the gross margin and SG&A profile of these kinds of projects?

Michael Stein

Sure. So I think what we saw in the fourth quarter, which was around mid-20s in the renewables for gross margin is something that we can expect to see going forward. SG&A is mostly salespeople, because all of the building of the project goes into cost of goods.

Jason Lustig

Okay. And then I guess if we take a step back, can you talk about some of the -- I think you alluded to this a little bit earlier but can you talk about some of the longer term plans within that segment. Talk a little bit about financing some of the projects and the community solar as well. Just want to better understand the various opportunities and perhaps even the growth profile that you're hoping to achieve as we think several years out into the future.

Michael Stein

Yeah. So what we do or what we're looking to do in community solar we've done already a little bit is really two parts of the community solar or maybe three parts of the community solar value proposition. Number one is we're looking to lock in sites where we can build Community Solar projects in favorable jurisdictions. And when we lock in those sites, we have to follow that up with planning and permitting and engineering as well as locking in the incentives related to Community Solar. So we're on the development side of Community Solar. Number two is, we'll probably want to self-finance some of those Community Solar projects, the ones that we think are most in line with our return requirements. And then number three, we're actively involved in the customer acquisition side of the community solar business, because when a developer puts up an array of solar, they need to find the customers to consume the energy generated by the solar field. So that's kind of our business, our core business and we're looking for customers for electricity and natural gas. It's a very easy fit for us to be looking for customers to be the offtakers of that Community Solar. So those are the three parts of Community Solar we participate in. And it's -- I think we're on our way we're progressing and we think it will bring value over time.

Jason Lustig

Okay. And then just digging into the results a little bit. On the GRE side, I forgot the comment that you made in the third quarter call, but I had thought or expected that SG&A would have been down in the quarter, given that you were pulling back on customer acquisition I think you said. But I think it ticked up sequentially. Can you talk a little bit about what happened between the call at the time and then the end of the quarter that led to that change?

Avi Goldin

So this is Avi. Thanks for the question. So broadly speaking, customer acquisition is still a little bit challenging relative to where we had been kind of in the pre-COVID environment, just given the difficulty in some of our channels. But we have started to accelerate within the fourth quarter, putting more money back into the field to try to get more customers where we can. And as well as we're seeing some growth in some of our other channels, within the commercial channel as well. So what you saw in the fourth quarter was a calculated decision to try to accelerate the sales activity with the understanding that it's a little more expensive right now than it was in the pre-COVID environment to acquire customers.

Jason Lustig

Got it. Okay. And then can you reconcile that tick-up in spend with the decline in RCEs?

Avi Goldin

Yes. So the overall decline in RCEs is a function of both the aggregation deal that we alluded to in the remarks. Those are kind of onetime large baskets of customers that move off, as well as strategic decision within the fourth quarter to allow certain customer segments that aren't as profitable to not renew. So, as we've said, we take a very structured portfolio approach, where we see opportunity to add customers with good margins we'll look to add. And in situations where we think there's opportunity to take margin and let the base shrink a little bit, we're comfortable doing that as well, knowing that on the other side we'll be in a position to put the capital back to work growing the base again.

Jason Lustig

Right. That makes sense. How many aggregation customers were there in the quarter that rolled off?

Michael Stein

Somewhere in the neighborhood of 40,000 customers.

Jason Lustig

Okay. All right. And then, I guess just lastly on the exit from the UK. What remaining items as we sit here today or I guess as of quarter end and also today, but what remaining items are there to exiting?

Michael Stein

The company is currently in administration in the UK. We aren't -- the Genie parent is not incurring any new costs related to that to like exiting aside for whatever the administration is doing in order to close things out. We're just working with the administrators as best as we can to try to make that -- speed that up progress it and exit as soon as possible.

Jason Lustig

Okay. Thank you, very much for the time. Nice job.

Michael Stein

Thank you, Jason.

Avi Goldin

Thank you, Jason.

Operator

This concludes our question-and-answer session and conference call. Thank you for attending today's presentation. You may now disconnect.

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