Genie Energy Ltd (GNE) 2018 Q4 法說會逐字稿

Good morning, and welcome to Genie Energy's Fourth Quarter and Full Year 2018 Earnings Call.

(Operator Instructions)

In this presentation, Genie Energy's management team will discuss financial and operational results for the 3- and 12-month periods ending December 31, 2018.

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 these reports that Genie Energy files periodically with the SEC.

Genie Energy assumes no obligation either to update any forward-looking statements that they may have made or may make or to update the factors that may cause actual results to differ materially from those that they forecast.

During these 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 segments' core operating results.

The Genie Energy earnings release, including a reconciliation of adjusted EBITDA to net income, is available on the Investor Relations page of the Genie corporation website, www.genie.com.

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

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Michael Stein, Genie Energy's Chief Executive Officer.

Please go ahead.

Thank you, operator.

Welcome to Genie Energy's Fourth Quarter and Full Year 2018 Earnings Call.

Today, we will discuss our operational and financial results for the 3- and 12-month periods ended December 31, 2018 as well as more recent developments.

My remarks today will focus on our business strategy and operational results.

Avi Goldin, our Chief Financial Officer, will follow with an overview of our financial results.

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

During and subsequent to the fourth quarter, we made good progress expanding our retail business into new geographies in the U.S. and overseas and diversifying resources of revenue.

Both of these efforts are intended not only to grow our business but also to mitigate commodity and regulatory risk.

Let me get to begin by updating you on our international retail expansion effort.

In January, we closed on the acquisition of the majority stake in Lumo Energia, a fast-growing, Helsinki-based supplier of renewable electricity to households throughout Finland.

Lumo is positioned to pursue continued expansion in Finland and eventually in the 12-plus million meter deregulated Scandinavian market.

Orbit Energy, our London-based JV that operates in Great Britain, is revving up its meter acquisition engine.

After winning approval to begin full commercial operations earlier last year, Orbit enrolled meters at a good pace in the fourth quarter.

Our international expansion program also includes Japan.

We acquired a license to operate in Japan during 2018 and began enrolling customers there this year.

The Japanese retail market was partially deregulated in 2016 for homeowners and small businesses and is set for full deregulation next year.

The opportunity in Japan is huge, 85 million potential customers purchasing over $60 billion a year in electricity.

We are extremely excited about the potential.

Through these 3 overseas initiatives, we have already acquired 50,000 international retail meters by the end of February.

Turning now to our domestic retail energy supply business.

We narrowed and reduced the scope of our domestic customer acquisition program in 2018 to acquire higher consumption meters, diversify geographically, respond to unfavorable regulatory developments in certain states, and to strengthen our balance sheet.

As a result, we served 250,000 customer RCEs at the end of the year, a decrease of 48,000 compared to December 31, 2017.

Looking ahead, we are well positioned for domestic meter growth in 2019.

In fact, in the first 2 months of 2019, we have already seen an increased pace of meter enrollment in the U.S. We expect to continue to grow our meter base by ramping up customer acquisitions within our current markets, entering some new utility territories and expanding into the country's largest deregulated electricity market, Texas, this year.

Texas has over 7 million residential and commercial customers that are currently served by independent retail energy providers.

We have obtained a license there and are putting together an acquisition program specifically tailored to the local markets.

We expect to begin acquiring meters in Texas during the second quarter of this year.

Between our expected growth in the U.S. and internationally, we feel confident that we can return to approximately 450,000 total meters served worldwide.

As I mentioned at the outset, we are seeking to diversify our sources of revenue.

One way, we're accomplishing this through investment in energy solutions businesses that can both contribute financially in the near term and which offer outsized long-term growth potential.

Those acquisitions and initiatives that are not part of our retail energy supply business are held in our Genie Energy Services division.

We acquired a majority stake in Prism Solar Technologies, a manufacturer of bifacial high-efficiency solar panels based in New York during the fourth quarter.

Prism fits well with that strategy, and I will have more to say about its prospects in the coming quarters.

Also, within our Genie Energy Services division, Diversegy, our commercial energy advisory services company, continues to grow at a healthy clip.

Reflective of the Prism acquisition and Diversegy's growth, Genie Energy Services revenue increased to $4 million in the fourth quarter 2018 compared to $488,000 in the year-ago quarter.

To wrap up.

We are investing to build out our retail supply business internationally, including our initiatives in Great Britain, Scandinavia and now in Japan.

Domestically, we expect to return to meter growth, in part, by adding some new utility territories and by entering the market in Texas during the first half of this year.

We are also excited about the potential of Prism, Diversegy and the other businesses within Genie Energy Services.

Now to discuss the fourth quarter and full year financial results, here is Genie's CFO, 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 fourth quarter and full year 2018, the 3- and 12-month periods ended December 31.

Before I begin, I would like to note that following the acquisition of Prism Solar in the fourth quarter, we have modified our segment disclosure.

Beginning with this quarter, we are now reporting a new segment, Genie Energy Services, or GES, which will be comprised of our solar business and our Diversegy brokerage business.

Additionally, pending the outcome of the work we are hoping to do shortly at Afek, we are reporting Genie Oil and Gas as a segment comprised of Afek and our minority position in Atid drilling.

Throughout my remarks, I will compare the fourth quarter's results to the fourth quarter of 2017 as well as the full year comparisons.

Focusing on the year-over-year rather than sequential comparison removes some consideration the seasonal factors that are characteristic of our retail energy business.

Typically, the fourth quarter is one of our 2 low-consumption quarters, falling between the peak cooling season of the third quarter and the peak heating season of the first quarter.

Consolidated revenue in the fourth quarter decreased to $62.8 million from $73.1 million.

The decrease largely reflects the 23% year-over-year decline in average meters served that was driven by the reasons that Michael detailed in his remarks.

Full year revenue, however, increased to $280.3 million in 2018 from $264.2 million.

For the full year 2018, the decline in average meters served was less impactful and was offset by an increase in average consumption per meter for both electricity and natural gas as well as increased revenue per units sold in both commodities.

Revenue at GES was $4 million in the quarter compared to $500,000 in the fourth quarter of 2017.

Gross profit in the fourth quarter decreased to $14.7 million from $26.8 million.

Full year gross profit decreased to $76.5 million from $85.5 million.

The decreases primarily reflect the decline in meters served and electricity cost increases that outpace revenue per kilowatt hour sold.

Consolidated SG&A expense in the fourth quarter decreased to $14.9 million from $16.7 million.

Full year SG&A expense declined to $60.6 million from $79.4 million.

Both decreases primarily reflected reduced meter acquisition expense and reduction in corporate expenses.

Exploration expense in the fourth quarter was nil, as Afek suspended operations pending the issuance of the well test permits, that compares to $2.3 million in exploration expense in the year-ago quarter.

Also, in the year-ago quarter, we wrote off $6.5 million in capitalized exploration expense.

Full year exploration expense was $244,000 compared to $4.9 million a year ago.

We continue to work towards the conclusion of the well program and expect the work to take place in the first half of 2019.

Losses in ventures, which we account for using the equity method, namely our Orbit Energy venture in the U.K. and our drilling company in Israel, was $1.3 million versus $406,000 a year-ago quarter.

For the full year, the equity loss totaled $3.4 million compared to $565,000 in 2017.

As I mentioned last quarter, we expect to continue investing in our U.K. energy supply joint venture as well as our other international retail energy suppliers as we look to build the business there.

Our consolidated loss from operations was $1.8 million compared to income from operations of $429,000 in the year-ago quarter.

The decline reflected a reduction in meters served and a narrowing of our gross margin as a result of the rise in electricity commodity costs.

These 2 factors are partially offset by the reduction in meter acquisition expense.

Overall, in the year-ago quarter, we benefited from a strong pricing and consumption environment that was not replicated in the fourth quarter of 2018.

Full year income from operations was $8.5 million compared to a loss from operations of $6.5 million in 2017, reflecting our strategic decision to focus on our retail energy business and the resultant reductions in exploration expense and related overhead.

In the fourth quarter, consolidated adjusted EBITDA was negative $554,000 compared to positive $8.9 million in the fourth quarter of 2017.

Full year adjusted EBITDA totaled $17.9 million compared to $7.3 million in 2017.

Genie Retail Energy contributed $2.1 million of adjusted EBITDA in the quarter and $26.9 million for the full year, including the international investments.

Diluted EPS for the quarter totaled $0.47 compared to a loss per share of $0.01 in the year-ago quarter.

This quarter, we benefited from a release of a valuation allowance on a deferred tax asset, which generated a benefit from income taxes of $14.1 million compared to provision for taxes of $1.3 million in the year-ago quarter.

The removal of the valuation allowance is driven by the reduction of spending in oil and gas exploration and a profitable outlook for the company.

Our balance sheet remains strong.

At December 31, we reported $44.2 million in cash, cash equivalents and restricted cash and working capital, current assets less current liabilities of $47.1 million and no debt other than the minimum drawn in our credit facility.

By way of comparison, a year earlier, we reported $31.9 million in cash, cash equivalents and restricted cash and working capital of $35.4 million.

Supported by of our financial operating results this quarter as well as our positive outlook, our Board of Directors again declared a quarterly dividend in our common stock of $0.075 a share.

To wrap up this review of our financial results, the fourth quarter tapped a strong 2018.

We executed on the strategic plan that Michael outlined in his remarks and are well positioned to take advantage of expansion opportunities in 2019.

Now I'll turn the call back to the operator for Q&A.

(Operator Instructions) The first question today comes from Mike Heim with NOBLE Capital Markets.

Avi, would you kind of repeat the comments you made about the reason for the change in the tax rates, sort of, why the gain this year instead of a charge last year?

Sure.

So as I mentioned, we released the valuation allowance on a deferred tax asset.

So while we were in a position where, for a number of years, the company was actively engaged in the oil and gas business and on a consolidated basis generating losses, there was an allowance on that asset that essentially questions when you're going to be able to use it.

So as a result, it basically sits on the balance sheet as a reduction.

You do an evaluation on a recurring basis that basically looks at your current activity, what your projections are forward.

And with the reduction in spend in the international business, that forward is for a profitable outlook.

So that changes the question of when you're going to be able to make use of that deferred tax asset and when you release that valuation allowance deployed to the P&L.

The next question comes from Aaron Shafter with Great Mountain Capital.

Few questions.

One, are there any plans now or in the future to start giving guidance as to earnings?

At the current moment, we do not have plans to give guidance.

I think one thing we can be sure of is we believe strongly in the continued profitability of the U.S. business, and we will be investing, as we did this year, in some of the international business.

The one we acquired, we expect to be profitable but -- this year, but the other 2, we expect to invest in.

Okay.

I was speaking of the international.

I was wondering if you could speak to how the integration of Lumo Energia, I'm not sure if I'm pronouncing that correctly, but the Finland operation is going on?

It's so far, so good.

The main points of the integration are ensuring good risk management policies and procedures are in place, good auditing practices are being followed.

And definitely, kudos to the team here that got out in front of it really right away.

Sent a few people over there shortly after the transaction.

A few people came here shortly after the transaction, and it's definitely on the right track.

And you spoke about enrollments in both Japan and the U.K., and I'm wondering if you can say, is that going as expected?

Is that going better than expected?

Is it going worse than expected?

If you could characterize the numbers versus your expectations.

Yes.

I would say the U.K. business -- I would say they're going mostly as expected.

In the U.K. business, the -- in terms of customer enrollment, I would say, definitely as expected.

In terms of expected margin, it's a little lower than we were hoping for initially than that we were modeling for.

What we're doing to make up for that is we're working hard with our vendors to ensure that we get kind of the best payment terms possible to sort of limit the need to infuse more cash into the business.

And the team there has done an excellent job of handling those negotiations, so that we can live on a leaner margin, at least initially, earlier on.

In Japan, we really were just getting started with customer acquisition in terms of time to market, building of the team, building the operations, reporting.

We definitely think that's going as planned, if not better.

It's definitely too early to tell from a customer enrollment perspective and a gross profit perspective, et cetera.

Okay.

And finally, regarding the asset.

In the last call and last year in November, you had expressed optimism that you'd received both the permit and be able to finish the testing possibly by the end of the year.

Here, we're at the beginning of March and you still haven't gotten the permit.

And I'm wondering if you could explain what type of troubles that you're running into.

Is it just the bureaucracy?

Is there environmentalists fighting it?

Or why the reason for the delay?

Yes, this is Avi.

So yes, you're correct.

I appreciate that the time line has shifted a little bit from what we said before.

It's a little bit of the bureaucracy, is a fair way to say it.

And then also as we've looked to forward just getting some of the equipment that we require in, sort of shifted the time line a little bit.

But what we have been able to do is fundamentally sort of reduce the operations there while we're waiting, such that there is not a material direct cost to the delay.

And part of the reason that -- for the time line now is we have little more confidence, and I know we said that before, but it's going to happen in a reasonably short time frame and that it is -- so we're going to stay within sort of a cost boundary that's not going to be very larger -- anything close to what we had done in the past.

So your time frame is the first half of this year.

Is that correct?

Can you be any more specific than that?

No.

(Operator Instructions) The next question is a follow-up from Mike Heim of NOBLE Capital Markets.

Just a quick procedural question.

You said Orbit is in -- treated as the equity method, and I'm assuming Finland and Japan will be lumped into retail service.

I guess the question is, when you do meter counts, will that include Orbit's numbers or not in the retail?

So just a quick.

So Orbit, as you mentioned, is the equity method.

Japan and Finland are within retail energy, and we do expect to include their meter numbers within retail energy.

There's actually a small piece of Orbit that's already in there for -- in the fourth quarter.

So if you look at the meter numbers in our press release that we just put out, it notes that Orbit is included in the fourth quarter number.

(Operator Instructions) This concludes our question-and-answer session and our conference call.

Thank you for attending today's presentation.

You may now disconnect.