GNE - NYSE

Good morning and welcome to Genie Energy’s Second Quarter 2022 Earnings Call. [Operator Instructions] Please note this event is being recorded. I will now turn the call over to Brian Siegel of Hayden IR.

Thank you. With me today are Michael Stein, Genie Energy’s CEO; and Avi Goldin, Genie Energy’s CFO, who will discuss operational and financial results for the 3 months period ended June 30, 2022. 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 we filed periodically with the SEC. Genie assumes no obligation to either update any forward-looking statements that we 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 its measure of adjusted EBITDA provides useful information to both management and investors that supplement our core operating results. Our 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 in the earnings release to their respective segment’s income from operations for all periods presented. Our earnings release is posted on our Investor Relations page at genie.com and has been filed on Form 8-K with the SEC. I will now turn the conference over to Michael Stein, Genie’s Chief Executive Officer. Michael?

Thank you, Brian. Welcome to Genie Energy’s second quarter 2022 earnings call. Today, I will provide some color on our second quarter results and then discuss our strategy moving forward. After my remarks, Avi Goldin, our Chief Financial Officer, will provide a deeper dive into our financial results. After Avi, we will be glad to take your questions. The second quarter is typically our lowest consumption period of the year due to seasonally lower energy consumption during the spring. Despite this, we recorded record profitability in both income from operations and adjusted EBITDA easily the most profitable second quarter in our history. As I have mentioned in recent quarters, we adapted to the current period of high energy prices to optimize our portfolio of businesses, while deliberately reducing our customer acquisition efforts to preserve margins. This strategy, combined with the work of our excellent risk management team, positioned us to generate the record profits we have delivered so far this year. Looking at our segments, Genie Retail Energy, or GRE, generated record Q2 gross profit of $29 million and adjusted EBITDA of nearly $15 million. This strong performance was driven by our careful forward commodity hedging and customer acquisition strategies, which position us well in this volatile market. Genie Retail Energy International, or GREI, also reported strong results. Similar to GRE, we significantly slowed marketing efforts and optimized our hedges moving into the winter season. GREI’s results in this quarter were heavily impacted by the $35.8 million mark-to-market gain on our hedge position due to the extraordinary run-up in power markets in Europe. Genie Renewables revenue grew from $2.3 million to $3.8 million sequentially. The revenue increase was generated primarily by our CityCom Solar subsidiary, which provides customer acquisition, billing and management services for third-party community solar developers. We believe that our CityCom subsidiary and the other promising businesses within our renewables segment will continue to grow revenue in the second half of the year. Finally, we opportunistically repurchased 639,000 shares of common stock and redeemed $2 million in par value of preferred stock. This, combined with our regular $0.075 quarterly common dividend and the base dividend on the outstanding preferred stock, totaled nearly $9 million in capital returned to shareholders during the quarter. Now, I will provide a quick overview of our business and strategy moving forward. Genie Energy owns REPs and services and portfolio of retail customers in diverse deregulated markets in the U.S. and internationally. We actively manage our REPs and customer bases both geographically and within geographies. In anticipation or response to evolving market conditions, we invest in customer acquisition and growth during some periods, while doing others such as the most recent three quarters when we have seen rapidly rising energy market pricing, we reduced our growth investment or take other steps to manage our obligations to customers to drive higher margins. Underlying our strategy is our risk and mitigation team, which, among other things, hedges our forward obligation and as I mentioned earlier, works to allow us to preserve margins during times of price volatility. In the U.S., our REPs operate in 16 of 20 deregulated states as well as Washington, D.C. GRE’s asset-light model has proven to be remarkably flexible and resilient, generating positive cash flow across a wide range of challenging market conditions, including the current period of extraordinary energy price volatility. While our customer base management strategy has led to throttle back our customer acquisition engine at present and even selectively trim our customer base, our mid to long-term strategy is to grow, but to do so opportunistically when market conditions warrant. Our customer expansion programs include increasing our market share in existing territories, expanding into new areas and offering additional products and services to our installed base. Our Genie Renewables segment seeks to generate outsized returns for multiple high-growth potential opportunities related to solar energy generation. This segment consists of Genie Solar, which markets a full suite of solar procurement and installation services; CityCom Solar, which as I mentioned earlier, provides customer acquisition, billing and management services for third-party community solar developers; and Diversegy, a full service energy broker. In recent quarters, I have mentioned that our solar strategy includes creating value with robust returns by putting our strong balance sheet to work. I am excited to say that over the past few weeks, we took a major step forward on this path with the formation of Sunlight Energy Investments an investment vehicle structure to generate stable, predictable returns for participants through ownership of Genie Renewables originated commercial, community and utility-scale of generation projects and also projects developed by third-parties. Genie will serve as Sunlight’s general partner, but we expect to source most of the capital from outside investors, who will participate individual projects as limited partners. We believe that Sunlight will provide attractive financial returns for Genie and outsized investors will increase the win rate on new projects, creating significant value for Genie over the medium to long-term. In our international business, as I mentioned earlier, the second quarter results benefited from very significant mark-to-market gains on our forward electricity hedges. Given the continued volatility in overall global economic and geopolitical risks, we are now taking steps to optimize this position and reduce our forward obligations in the market, starting with the sale of our Swedish book. We expect to be able to provide more details on this effort during our third quarter earnings call. Looking to the remainder of the year, at GRE, we currently expect adjusted EBITDA to remain strong and to exceed historical seasonal averages. We expect that Genie Renewables will contribute $15 million to $20 million of revenue for the year and are looking forward to sharing more about our work in solar development space over time. In summary, we had record bottom line results during the first half of the year and we expect to continue to generate strong year-over-year consolidated adjusted EBITDA expansion in the second half. We have also taken several steps to lay the foundation for long-term growth in our emerging renewable businesses. And finally, we continue to fulfill our commitment to return capital to shareholders. Now over to Avi Goldin for his discussion on our Q2 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 3 months ended June 30, 2022. Throughout my remarks, I will compare the second quarter of 2022 results to the second quarter of 2021, focusing on the year-over-year rather than a sequential comparison to move seasonal factors characteristic of our retail energy businesses. The second quarter is typically characterized by reduced levels of per meter electricity and gas consumption compared to the peak heating and cooling seasons of the first and third quarters, respectively. Overall, Genie Energy had a very strong second quarter, achieving record profitability driven by strong performance in our domestic retail business as well as gains due to the mark-to-market increase of our international forward hedges. Our results continue to be positively impacted by the decision in late 2021 to optimize the value of our forward hedge book by reducing customer loaded response to increasingly volatile wholesale electricity prices both in the U.S. and internationally. This approach has helped the company deliver record margins and income. As Michael noted, we also continued to return capital to our shareholders through our dividends and acquisition of both our common and preferred stock. Turning now to the second quarter P&L. Consolidated revenue decreased 1.8% to $75 million. This decrease was from GRE where sales fell 5.7% to $63.2 million, reflecting reduced electricity sales due to lower meter counts partially offset by higher electricity rates and increased gas sales. Not only have gas prices risen substantially over the past year, but we are selling more gas after entering new gas-only markets during the last four quarters in a relatively high average consumption gas meters, thus boosting average gas consumption per meter. Electricity consumption per meter, which began to significantly decline last quarter as more workers return to the office, declined slightly compared to the year ago period in the second quarter. Revenue at GREI climbed 14.6% year-over-year to $8.1 million as electricity prices increased, which more than offset consumption declines resulting from fewer meters served. Revenue at Genie Renewables climbed 61.2% to $3.8 million. Results this quarter were driven by growth within the CityCom Solar business, which leverages our sales and marketing expertise to acquire and manage customers for community solar programs. Consolidated gross profit increased 218% to $67.5 million as gross margin increased to 89.9% from 27.8% in the year ago quarter impacted by the mark-to-market gain on our international hedges. GRE’s gross profit increased 58.3% to $29 million and gross margin rose to 45.9% from 27.4%. The increases largely reflect the optimization of our risk management portfolio in advance of the recent increase in energy prices. Gross profit at GRI increased to $37.7 million from $2 million in the second quarter of 2021 also as a result of the appreciation of the value of our forward hedges and demand side management. Gross profit at Genie Renewables was $817,000 compared to $922,000 a year ago. Consolidated SG&A expense, including corporate overhead, increased to $19 million from $16.7 million a year earlier, reflecting a modest increase in GRE’s customer acquisition spend and general overhead. Consolidated income from operations was $48.5 million. At GRE, income from operations was $14.4 million compared to $5.4 million a year ago on the strength of our increased gross profit. GREI delivered $36.4 million in income from operations compared to $144,000 in the year ago quarter. The increase was driven by the factors I have discussed earlier. Genie Renewables posted a loss from operations of $519,000 compared to income from operations of $334,000 as we continue to invest in our solar businesses. Consolidated adjusted EBITDA was $49.1 million this quarter compared to $5.5 million in the second quarter of fiscal 2021. Through the first two quarters of the year, we have generated $74.8 million in adjusted EBITDA. Net income attributable to Genie Energy increased to $34.5 million compared to $5.4 million in the second quarter of 2021, and earnings per diluted share in the second quarter increased to $1.30 from $0.19 in the year ago quarter. Turning now to our balance sheet. On June 30, cash, restricted cash and marketable equity securities totaled $67.2 million or $2.58 per diluted share. Net working capital increased $29.7 million during the quarter to $125.8 million. Our cash balance declined compared to last quarter as we move cash to the administrator of our former UK business as the insolvency process there moves forward. During the quarter, we repurchased 639,000 shares of our Class B common stock for $4.4 million at an average purchase price of $6.90 per share. We also redeemed $2 million worth of our preferred stock. Looking ahead, we are well positioned for a solid second half. At GRE, the second half outlook is strong, although we expect the year-over-year gains will be more modest than what we achieved in the first half of the year. Our balance sheet provides plenty of support to ramp up customer acquisition efforts where market conditions warrant. Given the current electricity pricing environment in Europe, we have taken initial steps and are exploring additional options to reduce GREI’s forward obligations and optimize our position. We will have a further update on our plans for the business in the third quarter. Finally, we are very excited about the range and depth of opportunities for Genie in the solar generation and related businesses. We are moving quickly to build out our infrastructure and leverage our balance sheet and relevant expertise and the expectation that will be able to generate attractive long-term returns for shareholders. Now operator, back to you for Q&A.

[Operator Instructions] Your first question for today is coming from Aaron Shafter with Great Mountain Capital Management.

Hi, guys. Congratulations on a second consecutive record-setting quarter. I had some questions last quarter, but I guess there were some problems with you being able to press the button right or something going wrong. I’m glad I’m able to ask you at this time. My first question is related to the buyback. The – you said that you bought back shares at an average price of $6.90 and the stock went out at $9 on Friday and is currently – in pre-market is trading a bit at $9.63. So it’s a lot higher than when you did the buybacks. But on a PE basis, it looked like it was a little bit cheap before. Now it looks really cheap. Do you still see yourselves doing buybacks at these levels?

Hi, Aaron. Thanks for the questions. First of all, if we ever have that problem again in the future, obviously, you can reach out to us with any questions you might have. In terms of the buyback, we still have plenty of runway left on the authorization that the Board has given us on the buyback. We will as always, continue to assess best use of cash and value when making that decision. As you know, we’re also buying – we’ve been buying back the preferred and attempt to give some money back to shareholders. So we’re trying to balance a bunch of different things. It’s always on the table.

And recently – I mean, right now, it’s close. I haven’t really done any updated calculations yet. No one here has done them, but maybe we should, about what – where the stock would have to be for Genie to get back into the Russell 3000 and then being the Russell 2000 indices. Is that something that you guys follow at all?

So we’re obviously aware of the timing and the potential for that. They don’t publish the exact specific metrics. So it’s hard to say where the cost is exactly going to be. But we know from prior experience that it is around this area, so…

Okay. Yes. And I mean recently when the stock was trading above $10 at least by our calculations that was – you definitely would have qualified. You mentioned the sale of your Swedish book and worried about being able to hedge properly and in Europe, given the situation there. I’m wondering if you can lay out exactly right now which markets you’re operating in Europe and in particular, and in – outside the U.S. in general?

Sure. So yes, we sold our Swedish customers. So we’re no longer serving Swedish customers. Instead what we’re doing is essentially profit taking on the value of the hedge book that we had built up for those customers, and the value of the hedge book is well in excess of what we felt the value of the customers are and would be. And since we sold the customers, there is nothing precluding us from going back into that market whenever we please. Literally, if we wanted to, tomorrow, we can start marketing again in Sweden. But for the moment, we’re not serving Sweden customers. So a little bit of a complicated answer there, I would say we are still potentially in that market, even though, as of the moment, we’re not serving customers actively there. In Finland, we are still serving customers. As Avi mentioned, we’re actively looking for ways to maximize the value of those hedges as well. And ideally, we’re looking to do it in a way there as well that would allow us to continue marketing at some point in the future if that’s something we deem is in the best interest strategically of the company. Those two are the only ones where we have license entities ready to market when we decide we want to and ready to serve customers when we want to. We are not operating in the retail energy space anywhere else internationally.

Okay. Okay, that covers it. Thanks very much. Keep up the good work.

Thank you.

Your next question for today is coming from Yehuda Fruchter with Onboard [ph] Global.

Hi, good morning, guys. I am a private investor. I have a couple of questions here. The first thing is just on – I am trying to understand the balance sheet and the cash flow statement, because the cash went down pretty significantly year-over-year, quarter-to-quarter. And then also you have this line of net cash used in investing activities of discontinued operations $50 million what have this year. If you kind of explain what’s going on there and what the [indiscernible] is going forward?

Sure. This is Avi. So, over the course of the past, I would say, a little bit over a year, we have been looking to optimize our position in the UK market, specifically exiting that market. And in the tail end of the year of 2021, there was a series of transactions that moved some cash to the U.S. that we, over the course of the first half of the year, moved back into the UK pending that resolution. And because that entity is currently in the hands of the administrators that are working through a process there, it’s not on our balance sheet, and it all flows through as within that discontinued operations line on the balance sheet. So, for all intents and purposes, as the money went back in, it moved from cash into that other current assets.

So, is it possible for you to get that cash back or that cash has just gone now pretty much?

So, the expectation is that some portion of that cash is going to be returned to us when the administration is resolved. But we don’t know at this point exactly what that number is going to be. The asset that you see on the balance sheet reflects our current best estimate of what the ultimate resolution is going to be.

And is there any more cash you need to fund for the UK operations in that respect or no?

No.

Okay. My next question is, I mean how sustainable is this right now? I mean you are not really doing any marketing, these are going down. Is this like the base case? If you did no marketing in the next year, would you consider the business to be able to generate this kind of cash flow going forward? I am talking about the U.S. business.

And so I would say that the – we certainly expect in the next few quarters in the short-term for very strong financial results, given the market and given kind of the portfolio moves that we have made, I mean do with the customers in our hedge book. If you asked us a year ago could we see these kinds of returns, we would not confidently say yes. So, we are a little more careful about what we say and what we say that we are going to expect out into the future. But I would say that the next few quarters look strong.

And there isn’t a certain level of turn in your business and at some point, you have to start with getting new customers when some of these other customers turn off and then if you are not doing the marketing, then this is like a peak kind of earnings situation now, or am I…?

Yes. So, there is definitely more money we could be spending, which would take down ultimate profitability. There is certainly more money we could be spending on marketing. If you look at our P&L, it’s not like we spent no money on marketing spend, we spend money on marketing. But no question about it, to build the book back up again, we would have to spend marketing dollars. How that – that obviously doesn’t affect or touch the question of what kind of gross profits we can generate, it’s really the marketing line item, which figure over the course of the year. If we went back to marketing at full strength, over the course of the full year, would probably be another $5 million, $6 million worth of costs.

Okay. And then just in terms of the growth question with regards to the solar energy, I am trying to understand, you have a lot of different subsidiaries now you started new subsidiaries of financing, which I think is a great direction to go into. But I just want to understand how you see the structure going forward? Is it the financing, that’s the biggest growth area? And then in that case, how the Genie Energy exactly benefit if you are going to have a lot of different private equity investors getting in on the deals, what kind of benefit is Genie going to get in that situation that they are going to be sort of a small shareholder in one of these power deals?

Yes. So, we are taking – you are right, we got a few different subsidiaries in there. And we believe that those subsidiaries represent essentially a complete vertically integrated approach to the solar commercial utility scale commercial industry where exactly I can’t say that all the value is going to come from one place or another. I think the fund that we have set up with the GP-LP structure is obviously going to be a critical piece of us getting really scaling up fast. But what we like about the structure is it gives us a little bit of flexibility in terms of how much we decide to put in versus how much we decide to collect from LPs essentially determining exactly the question or the answer to the question that you are asking, which is how much would Genie benefit specifically from the financing piece versus how much it might benefit from the development of the building of the business and selling the off-take to customers, which are obviously also line items that the Genie family of companies will be benefiting from.

But on the financing front, I mean basically, the money comes back to GNE as a dividend on the power. I mean you are investing in some solar projects, right? So, you are getting the dividend back, right? Is that how the money gets back to you?

So, they are – in the GP-LP structure, yes, I mean you are essentially you own an asset and then you have expenses related to the upkeep of the solar array, which I mean there is small amounts of money that’s related to the operation and maintenance of those facilities and then whatever debt service you might have associated with building the project in the first place. You obviously want to maximize the leverage as much as you can when you build these things and operate these things. And then from there, yes, you have a net income that’s – that gets distributed to the LPs and which like I said, will include Genie. How much exactly over the course of time is the flexibility we would like to have. And then, of course, the GP generates dividends or generate sorry, management fees and incentive fees associated with what it’s able to generate in returns to its limited partners. So, it’s another line item of potential fee income to income.

I will let someone getting the time. Thanks a lot. I appreciate it.

Thanks for joining.

Your next question for today is coming from Jason Lustig at J. Goldman.

Hey. Thanks for the question. Fantastic results for guys. I just wanted to, Avi, clarify a question, an answer to a question you gave earlier. The other current asset on the balance sheet is that that’s the company’s best estimate of cash eventually released from the UK administration.

So, the discontinued operations portion of that is.

Okay. And what is that number today?

18.7.

Okay. And any high-level estimate on the timing?

Well, we also expect, I believe, I mean Avi…

Sorry.

Okay. Fine. Sorry.

So, on timing, it’s really hard to say and I really wouldn’t want to prognosticate. I will say that we are seeing small incremental progress towards the resolution, which might ultimately come in some stages, certain funds coming back and then others being held for some period of time.

Got it. Okay. Thank you very much.