Genie Energy Ltd (GNE) 2018 Q3 法說會逐字稿

Good evening, and welcome to Genie Energy's Third Quarter 2018 Earnings Call.

(Operator Instructions) In its presentation, Genie Energy's management team will discuss financial and operational results for the 3-month period ended September 30, 2018.

Any forward-looking statements made during the 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 that 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, which is a non-GAAP measure.

Management believes that Genie Energy's adjusted EBITDA provides useful information to both management and investors by excluding certain expenses that may not be indicative of Genie Energy's or the relevant segment's core operating results.

The Genie Energy earnings release, including a reconciliation of adjusted EBITDA or net income, is available on the Investor Relations page of the Genie Corporation website, and that's www.genie.com.

The earnings release has also been filed on form with the 8-K with the SEC.

Please note that this event is being recorded.

And I would now like to 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 2018 Earnings Call.

Today, we will discuss our operational and financial results for the 3-month period ended September 30, 2018, as well as some more recent developments.

My remarks will focus on our strategic and operational progress, and then Avi Goldin, our Chief Financial Officer, will discuss the quarter's financial results.

Following Avi's remarks, we will be glad to take your questions.

Strategically, we made significant progress in the third quarter on each of our 3 previously announced priorities: simplifying our business by focusing intensively on our retail energy provider and energy service business, while winding down our oil and gas exploration program; diversifying our sources of revenue to mitigate both market and regulatory risk; and opening and investing in new offerings in geographic markets for long-term growth.

In furtherance of the first goal, in September, we divested a majority interest in Atid, our drilling services subsidiary operating in Israel.

The deal accelerated our ability to curtail operations in Israel and conserve significant cash, while still preserving a minority stake in that business.

Also, in Israel, Afek is awaiting the permitting it needs to initiate its final test in one of its completed wells, and if all contingencies work out, could complete the work as early as end of the year.

I expect that the total spend on our oil and gas program, including expenses at Afek and GOGAS, will minimally impact our consolidated financial results in the fourth quarter and possibly Q1 next year.

Overall, the restructuring process continue to improve the profitability and is expected to positively impact year-over-year comparisons on our bottom line for several more quarters.

With the oil and gas exploration program no longer a substantial part of our story, we are assessing corresponding changes to our quarterly reporting so that our reporting structure more closely aligns with our management structure and business strategy.

In the fourth quarter, we expect to begin reporting a new segment, Genie Energy Services.

GES will focus on commercial markets and will include results from Diversegy, our rapidly growing energy brokerage service; GE Solar, including Prism Solar Technologies, more on that in a moment; and other business initiatives focused on the efficient use of energy resources.

We also think it is likely that we will add a separate segment to report on our growing international retail energy provider businesses once it reaches critical mass.

We hope these changes will help our investors better understand our business and evaluate results going forward.

Now I want to touch on our other strategic goals, risk mitigation through revenue diversification and investment in long-term growth initiatives since they often go hand-in-hand.

Last week, we announced the acquisition of a majority stake in Prism Solar Technologies, a manufacturer of high-efficiency solar panels based in New York.

We will team with Prism's second-largest shareholder, Plus EnerG, to provide complete solar solutions for commercial clients.

We expect Prism to play an important and synergistic role in the larger energy services business as we expand our offerings along the commercial energy value chain.

From a growth perspective, we believe that Prism will be EBITDA accretive in 2019.

We hope to share more information on our solar projects over the next few months.

We are also seeking revenue diversification and growth by expanding to new retail energy markets overseas.

In the U.K., Orbit Energy is doing well, adding customers at a healthy rate.

In Japan, we expect to begin enrolling customers as early as the end of the year.

Both markets are very large with relatively favorable competitive environments.

In aggregate, they offer significantly enhanced flexibility for optimizing our investment in customer acquisitions.

Now with the big picture in place, I want to cover a few operational highlights from our current Genie Retail Energy business.

The third quarter's year-over-year revenue increase was driven by strong margins and increased electricity consumption, up 7.3% compared to the year-ago quarter.

That increase reflects the warmer weather this summer compared to last year as well as our efforts to require higher-value meters, while pulling back from certain markets with lower-than-average meter consumption and higher regulatory risk.

The return of low-income customers in New York pursuant to orders from the New York Public Service Commission was also a factor as those meters were generally relatively lower consumption.

These factors more than compensated for customer attrition over the past year.

Our bottom line benefited substantially from the pullback in customer acquisitions.

We added 45,000 new meters this quarter compared to 111,000 in the year-ago quarter and, thereby, nearly half their acquisition expense compared to the third quarter of 2017.

At September 30, we served 342,000 meters comprising 275,000 RCEs.

Looking ahead, we expect to gradually increase our investment in high-consumption meter acquisitions and stabilize, if not build, our customer base as measured in RCEs during the fourth quarter.

To wrap up, we made good progress and passed some significant milestones in pursuit of our strategic objectives in the third quarter.

We continue to sharpen our strategic focus, mitigate risks and pursue growth with initiatives in promising new markets.

Meanwhile, our shift to higher-consumption meters and a modest spend on new meter acquisitions contributed to a very strong quarter financially.

Now here is Avi Goldin to discuss those financial results in greater detail.

Thank you, Michael, and thanks to everyone on the call for joining us this evening.

My remarks today cover our financial results for the third quarter of 2018, the 3-month period ended September 30.

Throughout my remarks, I will compare this quarter's results to the third quarter of 2017, focusing on the year-over-year rather than on the sequential comparison, the moves consideration the seasonal factors that are characteristic of our retail energy business.

The third quarter, which covers the summer months, typically captures our highest levels of electricity consumption for the year, driven by the demand for air conditioning.

Sales in natural gas, on the other hand, tend to be relatively low in the period.

As we discussed in our earnings release, results this quarter were impacted by legal accruals that reduced revenue by $3 million and increased SG&A expense by $200,000.

We also reversed a prior legal accrual that reduced SG&A expense by $1.7 million.

The net impact of the 2 reduced income from operations and EBITDA by $1.5 million.

For comparison purposes, it's important to note that in the year-ago quarter, Genie Retail accrued $1.5 million related to a pending regulatory matter in New Jersey.

The accrual decreased revenue by $1.3 million and increased SG&A by $200,000.

The third quarter of 2018 was a strong financial quarter particularly with respect to our bottom line for reasons I will detail later in my comments.

Consolidated revenue in third quarter increased to $71.8 million from $69.5 million.

As Michael discussed, average electric consumption per meter increased 26% compared to the year-ago quarter, more than enough to offset the year-over-year decrease in electric meters served.

Gross profit decreased to $21.3 million from $21.8 million, reflecting in part the impact of the accruals and reversal of revenue.

Consolidated SG&A expense decreased to $13.9 million from $19.5 million, primarily as a result of the reduced meter acquisition expense and the reversal of a legal accrual.

We incurred no exploration expense in the quarter, pending the issuance of the Afek well test permits.

During the quarter, we completed a divestiture of the majority of our position in Atid.

The combined effects of this transaction and our Israel operations was a loss of $1.1 million.

That compared to $1.2 million in expense in the year-ago quarter.

The accelerated meter acquisition program at Orbit Energy, our JV operating in the U.K., led to a $767,000 equity loss compared to $159,000 in the year-ago quarter.

We expect to continue investing in the business, as it scales for some time to come.

Our consolidated income from operations was $6.5 million compared to $1.4 million in the year-ago quarter.

Consolidated adjusted EBITDA was $8 million compared to $3.3 million in the third quarter of 2017.

Genie Retail Energy contributed $9.8 million of adjusted EBITDA in the quarter compared to $5.4 million.

GRE's adjusted EBITDA contribution for the first 9 months of the year totaled $24.5 million.

EPS for the quarter totaled $0.21 per share compared to $0.02 in the year-ago quarter.

Our balance sheet continues to strengthen.

At September 30, we reported $47.2 million in cash, cash equivalents and restricted cash and net working capital of $52.2 million.

Supported by our financial and operating results this quarter, our Board of Directors again declared a quarterly dividend to our common stock of $0.075 a share.

To sum up our financial results this quarter, strong per-meter consumption drove our top line increase.

A significant decrease in domestic customer acquisition expense resulted in year-over-year improvement in our bottom line results, even as we ramped up our investment in customer acquisition in the U.K. Our bottom line results also continue to benefit from curtailed spending in oil and gas exploration.

That concludes my remarks and third quarter's financial results.

I will now turn the call back to the operator for Q&A.

(Operator Instructions) And our first questioner today will be [R.

Tarshish] with [Nar Estate Capital Management].

I actually have a couple of questions.

For the well in Israel, you said, you hopefully, you can get some information by the end of the year.

Are you going to be holding off to report it on your -- in other words, are you going to be giving information as soon as you have it?

Or is it going to be held off till the next conference call?

Thanks for the question.

This is Michael Stein.

I would say that if the results are material, one way or another, we would likely report on it in some way before the next earnings call.

I would say either positive or negative is a fair way.

Okay, fair enough.

The second question I have is it, if the well is dry, are there any other wells -- in the hoppers, are there any other wells out there or any other areas to explore?

Or if this well is dry, then pretty much it's going to be completely over?

I think for Genie Energy in the Golan Heights, I think it's safe to say that it will likely be over.

We never say never, but we are not currently planning to drill any other wells beyond that one at this time.

And the next questioner today will be Aaron Shafter with Great Mountain Capital Management.

First, sort of an off-beat question.

I'm wondering why you switched the earnings release and conference call to after the close instead of before the close as you've done in previous quarters.

Is there a reason why?

Honestly, it's mostly out of convenience.

We have, one member of our team drives a very, very long way, and I think it's a little bit better for him in the morning than to do it in the afternoon.

Also, I feel like we're a little bit more sharp at the end of the day than we might be at the beginning of the day.

Okay.

All right.

Second, regarding the Prism acquisition.

You talked about -- you mentioned some synergies at the top of the earnings announcement.

I'm wondering if you can expand on that at all.

Yes.

So one of the things we hadn't really -- we never really have been talking about the Genie Retail Energy services division, but that division has been engaging in commercial -- medium-size to large commercial sales for quite some time.

So we think that there's certainly some synergy there in terms of the sales activities.

We also believe that kind of being a fully -- in a way, a fully integrated retail provider gives us advantages in both directions, both for our legacy retail business and for the retail services division across the board.

And finally, on Afek, which the previous caller asked some questions about.

You think that the -- you expressed during the call that there's a possibility that you'll get the results of the testing before the end of the year.

Does that mean that you think that the final approvals are imminent?

Last time, last call, you thought it would be a month, it could be 3 months.

You really didn't know, and I'm wondering if you can just expand upon that at all.

So the way we would describe it is we're feeling increasingly confident that it will be relatively soon and that what we're looking to do on the well shouldn't take an extended period of time.

Our initial hope is that it's going to be a reasonably small scope of activity and that's sort of supporting the statement about things by the rest of the year.

The potential does exist for some of the stuff to either get dragged out either because the work requires an extended period of time but the hope is that we'll be able to get on and off pretty quickly.

And the next questioner today will be [Dave Canum] with [Canum Wealth Management].

A couple of questions.

The first one is, if you could speak about the international JV in the U.K. I mean, I apologize, I'm driving, so I wasn't able to pick a part of the press release on my desktop.

So if you could just reiterate what you said.

What was the loss that was contributed and approximately what is the time line for that to start being cash generative?

And then the second question relates to capital allocation that despite that drain there of -- it looks like, I believe, we've generated about $16 million, $17 million of free cash flow after CapEx, dividend year-to-date, finding ourselves in an over-capitalized position.

Why are we not buying back our stock aggressively at these prices, while we still have the opportunity?

Todd, thank you very much for your questions.

This is Avi.

So to take it in order, the equity loss in the U.K. was $800,000 for the quarter.

We expect that for the foreseeable future, that's going to be an investment for us.

So let's call it sort of to the initial phases of 2019.

So that should be an expectation.

And it's part of a broader strategy as we've outlined.

For a little bit of an answer to your second question, you're taking some of the cash generating performance and investing in places that we think can be part of the sort of the long-term growth story as well, driving 2019, 2020 time frame.

As it relates to your second question about the cash flow generation, we are very pleased with the financial performance and what we've been able to do with the balance sheet.

That being said, as you've seen with some of the things we've been doing, we have some exciting places to put some of that money within the short-term as well as continuing to pay our dividend and continue to sort of investigate other avenues for growth.

Specifically as it relates to buybacks, we do have an authorization.

It's something that we consider and we keep an active eye on, on a regular basis, if the stock is at a point where we want to.

And it's part of the picture that we do evaluate on a recurring basis.

So where we sit right now, we're pretty pleased with the capitalization in the balance sheet.

We think we have the capitalization that we need to do pretty much execute on the plan that we have in front of us and some of the strategic initiatives that we want to put into play.

But sure, if the cash position tend to grow, we would continue to consider places to put it, and everything is on the table.

Year-to-date, what is our adjusted EBITDA for the first 9 months and the anticipated CapEx for the full year?

So CapEx for the full year is not material.

From a capital perspective, we don't have a tremendous amount of spending on -- most of what we capitalize in terms of just now are sort of some small investments in our sort of internal platforms and systems like that.

If you're looking at general corporate adjusted EBITDA to date at the consolidated level -- so really, you're looking for full year-to-date, is that correct?

Yes, adjusted EBITDA for the first 9 months.

Sure.

It's $18.4 million.

And then from there, obviously, some dividends and the investments we've been making.

Okay.

So we're at a run rate probably to generate $25 million free cash flow for the year.

So we basically have an investment that's yielding 25%.

And perhaps we're deploying some of our cash into other areas that don't have that same return such as -- I don't know, in the long run maybe this solar acquisition will generate returns significantly higher than that.

But the U.K. JV, I don't know.

I have no problem with a balanced approach, but why -- it just seems to me that the sure thing is investing in a company with a 25% free cash flow yield just keep buying stock until it doesn't make sense anymore, maybe we won't stop.

Just a small message for the board there.

Otherwise, you guys -- keep up the good work.

And if you could just touch a little bit on the opportunity in Japan.

I believe you had mentioned that to me when I was out there a number of months ago.

Can you give me an update there what the opportunity is?

Yes, sorry.

So just 2 things, I guess, and I'll -- one of them will be the Japan point.

We do generally think that the opportunities that we're investing in do have either similar or greater expectations for -- not just for long-term similar returns to us and the investors together.

So that goes for solar, that goes for the JV in the U.K. and that goes for Japan.

Some of those things have a more near-term horizon, and some of them have a longer-term horizon.

But almost all of those -- all 3 of those activities and all other activities that we look at, we look at from -- with the lens, with the perspective of we're trying to build a long-term business that has real opportunities for growth.

So we're not content to continue to be just a "$25 million a year EBITDA" business.

We want to be a lot better than that.

In particular, when it comes to Japan, so Japan is currently the largest deregulated market in the world.

It is about twice the size of the residential deregulated market in the U.S. -- as the one in the U.S. And it is a brand-new market.

It's only a little over a year old.

And we see, in terms of the way they structured -- in terms -- they structured -- the deregulating framework there, in terms of the way the regulators structured it, we see that it is a good, sustainable model.

So just like our business started with entering the deregulated space early on, and as a result, gave us a little bit of an advantage over our competitors, who came a little bit later in our space today, we think Japan can be something similar.

We think we hired the right management team to execute on our plan, and we're extremely excited about it.

So obviously, we thank our shareholders for being excited with us and encouraging us and our productivity.

And the next questioner today will be [Anthony McKaysee], a private investor.

You've done a great job in terms of generating cash, EBITDA, et cetera.

What are your plans for investor outreach?

I realized last time, you mentioned that all of a sudden, you have a different investor base, a one that is not focused, obviously, on oil and gas.

If you're not going to buy stock back then it would seem to me that, as a way to enhance shareholder value, you may want to spend some money going to some conferences or perhaps nondeal roadshows just to get more people interested in what I think selfishly is a materially undervalued stock.

Tony, thanks for the question and the encouragement as always.

Obviously, we agree with you in terms of it being undervalued.

We are actually supposed to attend a conference, I think, this month, if I'm not mistaken.

Next week, sorry, in Florida.

Next week in Texas.

Sorry.

Next week in Texas, sorry.

So we're set to go to that conference.

We definitely have -- we continue to have shareholder or potential shareholder calls.

It's a process.

I think it's a little bit of a process, and I think we've seen a little bit of positive movement over the last, let's say, 3 to 6 months.

And hopefully, with the things we're doing, we'll continue to see positive movement.

Yes, and if I can make a suggestion, I think on prior call or not -- one of the other prior calls, you've made a suggestion.

Having conference calls at 5:30 in the evening is really unusual.

In my opinion, it makes more sense to release the results in the evening then have something in the morning.

People have a chance to digest the information.

They have a chance to potentially even look at the Q. It just seems more in keeping with what companies ordinarily do rather than releasing your results and then an 1.5 hours later, in the evening, have a call.

I just think what you're doing is shooting yourselves in the foot.

Less people are apt to do or to want to join a conference call at 5:30 in the evening.

That's my opinion.

But most companies -- this is unusual.

So I'll leave it at that.

Thanks again.

So I hear you, and we'll definitely take an advisement -- under advising.

But just to be -- this is the most active shareholder call we've had in years.

Just the number of questions and the number of comments, you're active.

So I don't know if that's because we reached out to a few shareholders and potential shareholders in the last few moments and kind of more are joining or they're more interested in asking questions or maybe it just happened to be a coincidence and worked out that way.

But...

I would suggest the reason you had more interest is because your results are outstanding.

There's a direct correlation -- there's a direct correlation between the number of people that ask questions and your results.

So all I'm saying is...

Well, Flattery will get you everywhere.

Flattery will get you everywhere.

All I can say is I think you'd be best served at the conference calls in the morning.

That's all.

End of conversation.

I appreciate it.

(Operator Instructions) And there looks to be no further questions at this time.

So this will conclude our question-and-answer session and today's conference call.

Thank you for attending today's presentation, and you may now disconnect your lines.