Earnings Call Transcript - GNE Q4 2022

Operator, Operator

Good morning and welcome to Genie Energy's Fourth Quarter and Full Year 2022 Earnings Call. Please note, this event is being recorded. I will now turn the call over to Brian Siegel of Hayden IR.

Brian Siegel, IR Representative

Thank you. With me today are Michael Stein, Genie Energy's CEO; and Avi Goldin, its CFO, who will discuss operational and financial results for the 3 months and full year ended December 31, 2022. Any forward-looking statements may differ during this conference call for the general or specific in nature, are subject to risks and uncertainties that may cause actual results to differ materially from those statements. These risks and uncertainties include but are not limited to, those discussed in the reports that we file periodically with the SEC. Genie assumes no obligation to 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 we forecast. During their remarks, management makes 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, which is posted on the genie.com IR page, 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. I will now turn the conference over to Michael Stein, Genie's Chief Executive Officer.

Michael Stein, CEO

Thank you, Brian. Welcome to Genie Energy's year-end 2022 earnings call. This quarter capped off a very strong year in which we delivered record fourth quarter and full-year gross margins and profits. While energy prices remained high, we saw less volatility than the previous quarters, and we were able to continue to benefit from the combination of being well positioned from a risk management perspective and our limited customer acquisition efforts at GRE. Looking at our 2 segments, Genie Retail Energy, or GRE, generated a record Q4 gross profit margin of 44.4% and adjusted EBITDA of $20.9 million. During the quarter, our retail book grew modestly as we largely remained on the sidelines in terms of customer acquisition, excluding a small acquisition of book customers in the Midwest and Northeast. Genie Renewables, or GREW, revenue growth reflected an increase in the services we provided to third-party customers. Additionally, we made some investments in resources to support our vertically integrated strategy to develop solar power generation projects. From a capital allocation perspective, we redeemed $8.4 million in par value of preferred stock while paying our regular $0.075 quarterly common dividend and the base dividend on the outstanding preferred stock for a total of approximately $10.5 million in capital returned to stockholders during the quarter. Now, I'll provide a quick overview of our business and strategy. GRE owns and operates Retail Energy Providers, or REPs, that service a portfolio of retail customers in 17 of 28 deregulated states and Washington, D.C. We actively manage our REPs and their customer bases, both geographically and within geographies. In response to evolving market conditions, we will invest in customer acquisition and growth during some periods, while reducing our growth investment or obligations to customers during other periods to drive higher margins as we did in calendar 2022. Underlying our strategy is our risk mitigation team which, among other things, hedges our forward obligations to preserve margins during times of price volatility. In terms of customer acquisition, our programs seek to increase market share in existing territories, expand into new areas, and offer additional products and services to our customer base. Our Genie Renewables segment seeks to generate outsized returns from multiple high-growth opportunities related to solar energy generation; our business currently provides services to third-party solar farm owners and operators ranging from a full suite of solar procurement and installation services to customer acquisition, billing, and management services. As we move forward with our own projects, the strength of our vertical integration strategy will become more evident as we provide these services to our internally owned projects. Transitioning to our 2023 outlook, we currently believe we can generate $40 million to $50 million, well above our pre-2022 normalized $25 million to $30 million range. In addition, we expect we can materially grow our customer base and we will continue to be on the lookout for fairly valued M&A opportunities. Looking to the first quarter at GRE, wholesale energy costs are stabilizing at lower levels relative to the past year, while many utilities we compete against are locked into higher supply costs. Accordingly, we moved back into customer acquisition mode in many jurisdictions and expect to see double-digit customer growth over Q4 with continued solid gross margins and profits. Looking to the full year for GREW, we expect to complete construction of at least a few Genie-owned projects while continuing to evaluate a large pipeline of potential opportunities. We expect GREW to grow into a major national player in solar generation and consultative energy services spaces. The work we are doing now will set us up with assets that can provide attractive returns for many years to come. In summary, we had record bottom-line results for 2022. We have also taken several steps forward in our efforts to generate long-term growth in our emerging renewables businesses. And finally, we continue to fulfill our commitment to return capital to our stockholders. Now, I'll turn the call over to Avi for his discussion of our Q4 financial results.

Avi Goldin, CFO

Thank you, Michael, and thanks to everyone on the call for joining us this morning. My remarks today cover our financial results for the 3 and 12 months ended December 31, 2022. Throughout my remarks, when discussing the quarterly results, I will compare the fourth quarter of 2022 to the fourth quarter of 2021 to remove from consideration the seasonal factors that are characteristic of our Retail Energy business. The fourth quarter is typically characterized by seasonally reduced levels of customer consumption as it falls between the third quarter's peak cooling months and the first quarter's peak heating months. With our strong fourth quarter results, Genie capped off an exceptional year, highlighted by record levels of gross profit, income from operations, adjusted EBITDA, and earnings per share. Throughout the year, we executed our strategy of optimizing the value of our market position and building the foundation for future growth of our Retail Energy and Renewables businesses, all while further enhancing our already strong balance sheet and returning significant value to our common stockholders. Now, let's look at the quarter and full-year results. Fourth quarter consolidated revenue jumped 17.6% to $81 million from $69 million in 2021. At GRE, fourth quarter revenue increased by 13% to $77 million, increased per unit electricity, and gas revenues more than compensated for the decrease in electricity volume sold. As we discussed in recent quarters, most of 2022, we moderated our meter acquisition spend as part of our larger strategy to manage consumption in a rising commodity price environment. At Genie Renewables, fourth quarter revenue climbed to $4.4 million from $1.3 million as a number of our Genie solar projects reached critical milestones in the quarter. Full year 2022 consolidated revenue decreased 2.4% to $316 million from $323 million in 2021. At GRE, full year revenue decreased 2.5% to $304 million from $312 million as the decrease in electricity meters served was substantially but not wholly offset by higher per unit electricity and gas revenues. At Genie Renewables, full year 2022 revenue inclined to $11.6 million from $7.6 million on commercial solar sales. Now turning to gross profit. Consolidated gross profit in the fourth quarter increased to $35 million from $24 million, powered by a strong increase in per unit electricity margins, driven by our successful efforts to maximize the value of our former commodity positions. For the same reason, consolidated gross profit for the full year increased to $155 million from $92 million. Lower spending at Genie Retail was partially offset by higher expenses within Genie Renewables during the fourth quarter, driving a 4.2% decrease in consolidated SG&A to $17.2 million from $17.9 million. Full year SG&A increased 11% to $75 million from $67.5 million. The SG&A increase was driven in part by higher sales expenses at GRE and investment within Renewables. While sales activity was moderated in the year at Genie Retail, the year-ago period was still impacted by COVID-related sales restrictions. Consolidated income from operations in the fourth quarter increased to $15.5 million from $5.8 million. At GRE, income from operations increased to $20.6 million from $8.3 million, reflecting especially strong margins in electricity sales as we monetize our forward commodity positions. And at Renewables, the fourth quarter loss from operations declined to $1 million in 2022 from $439,000 in 2021 as we continue to invest in the people and resources to pursue the robust opportunities within this segment. Full year 2022 consolidated income operations increased to $77.8 million from $24.1 million. At GRE, full year income from operations increased to $92.6 million from $34.7 million, primarily reflecting the robust margin on electricity and gas sales. At Genie Renewables, the full year loss from operations was $3.5 million compared to income from operations of $251,000 in 2021, again reflecting the investments we are making to accelerate growth opportunities in solar. The same strategy led to our substantial increases in consolidated income from operations and also generated record fourth quarter and full year levels of adjusted EBITDA. Fourth quarter consolidated adjusted EBITDA increased to $18.5 million from $7.3 million. And for the full year 2022, adjusted EBITDA nearly tripled to $83.2 million from $27.8 million in 2021. For the fourth quarter of 2022, net income attributable to Genie common stockholders decreased to $16.2 million from $27.6 million in the fourth quarter of 2021. The decrease resulted entirely from $28.7 million contributed by discontinued international operations in the year-ago quarter compared to $4.5 million in the fourth quarter of 2022. For the full year 2022, net income attributable to Genie common stockholders increased to $85.9 million from $27.6 million. Discontinued international operations contributed $30.4 million in 2022 compared to $11.7 million in 2021. Earnings per diluted share in the fourth quarter decreased to $0.61 from $1.06 in the fourth quarter of 2021, as diluted EPS from discontinued operations fell to $0.17 from $1.10 in the year-ago quarter. Fourth quarter diluted EPS from continuing operations increased to $0.44 from a loss of $0.04 in the year-ago quarter. Earnings per diluted share in the full year 2022 increased to $3.26 from $1.05 in 2021. Diluted EPS from continuing operations increased to $2.28 from $0.62, while diluted EPS from our discontinued international operations increased to $0.98 from $0.43 a year earlier. Turning now to the balance sheet. At December 31, cash, restricted cash, and marketable equity securities totaled $105.1 million. Working capital was $128.4 million, and noncurrent liabilities totaled just $4.8 million. During 2022, Genie paid $9.2 million in common and preferred stock dividends, repurchased $4.4 million of our common stock in the open market, and redeemed $11.4 million of our preferred stock. To wrap up, our strong fourth quarter capped off a historically strong 2022. We further strengthened our balance sheet and returned approximately $25 million to shareholders in dividends, buybacks, and redemptions of preferred stock. As Michael mentioned, we are looking forward to an exciting 2023 with strong financial performance and growth across all of our businesses. We expect to continue to leverage our strong balance sheet and the current favorable market conditions to pursue growth opportunities in both our retail and renewable businesses, even as we further strengthen our balance sheet and continue to return value to shareholders of our common stock. Now operator, back to you for Q&A.

Operator, Operator

Your first question for today is coming from Aaron Shafter at Great Mountain Capital Management.

Aaron Shafter, Analyst

Congrats on another really strong quarter. I noticed that it was explained that the difference between Q4 in 2022 and Q4 in 2021, the difference in earnings per share was because of discontinued operations. But I didn't see that in the general press release, and I'm wondering why it wasn't included in the general press release because it paints a better picture, then you don't have to drill down somewhat into the gross margins and the operating margins, etc., to see that it was really a strong quarter.

Michael Stein, CEO

We probably could have done a better job of marketing ourselves. You're right. We're a straightforward group. So sometimes we don't really think of moving numbers around. That would make them look better, even when in reality, maybe it's even more indicative of how well the business is doing.

Aaron Shafter, Analyst

Right. I mean, I don't see it as moving numbers around; I just see it as clarifying the situation. So, like when headlines across the wires and people see that earnings per share decreased a bunch, they don't think that it was because there's a problem. And when actually operations were managed very, very well. My other sort of complaint is that I'm wondering if you'd rethink holding the leasing earnings and holding the conference call the day after when daylight savings kicks in and people are still a little foggy.

Michael Stein, CEO

I hear that especially for Avi Goldin, who is actually on the West Coast right now, who's speaking at 5 in the morning, but duly noted.

Aaron Shafter, Analyst

Okay. So you mentioned how much preferred shares were redeemed. I'm wondering if you've got a ballpark figure about how much in preferred shares is still left out there?

Michael Stein, CEO

There's about $7 million worth of preferred shares still outstanding. I expect that at some point this year, assuming we have a strong year, as we expect, I assume by the end of the year, there'll be none left.

Aaron Shafter, Analyst

The recent news in the markets has been focused on the failures of SVB and Signature Bank. I'm curious if Genie has any exposure to those banks. Even if there's no direct exposure, are you reevaluating your bank deposit policies in response to the current market instability?

Michael Stein, CEO

Yes. Scary stuff what's going on. Thank God, we do not have any deposits with Signature or SVB. We tend to put our deposits with even larger financial institutions than those and the ones that are a little bit more run-of-the-mill as opposed to more niche kinds of players. And our money is in very safe, triple-A-rated kinds of instruments. But yes, of course, we're constantly reviewing. And we've been exchanging the flurries of emails over the weekend just to make sure we're all on the same page about where things stand. And we feel pretty good about it, thank God.

Operator, Operator

Your next question is coming from an unidentified private investor.

Unidentified Analyst, Analyst

Yes. Hello, can you hear me?

Michael Stein, CEO

Yes.

Unidentified Analyst, Analyst

Excellent. And I've been a shareholder for a long time. So one question is, like I'm trying to understand the solar farms you're building out. Can you give an example using a $2 million investment? And how would it affect the balance sheet and the income statement?

Michael Stein, CEO

Sure. Absolutely. Avi, would you like to address that? The question is regarding a potential $2 million investment in a solar farm and how the resulting impacts would affect the profit and loss statement and the balance sheet. Do you want to take that, Avi?

Avi Goldin, CFO

Absolutely. When we talk about the solar farms we expect to own and operate as part of our long-term portfolio, we anticipate investing around $2 million in equity. This amount will be adjusted after accounting for tax equity, other incentives, and potential debt for the facility. During the construction phase, our spending may exceed this amount unless we secure construction financing. After recapitalizing the solar field to adjust the equity to $2 million, we would generate revenue from power sales and solar energy credits, which would be offset by maintenance costs, taxes, and financing expenses. This would create cash flow for Genie from the facility. Depending on the facility's nature and location, we expect to hold these facilities with equity ranging from 15% to 30%. For a $2 million example, this could represent a sizable solar facility that needed additional initial investment but would then be recapitalized down to $2 million in equity. I hope this clarifies the question, as there are multiple components at play here, but this illustrates the concept well.

Unidentified Analyst, Analyst

Okay. What I'm trying to understand is when we can start seeing a return on our investment. If we use the lower rate of tens, what kind of returns can we expect from the $2 million?

Avi Goldin, CFO

We are targeting returns on equity for our investments that exceed double digits, with some opportunities reaching as high as 20% or 25%. This gives you an idea of the types of returns Genie is aiming for in the equity portion.

Michael Stein, CEO

So just to add to what Avi is saying. If, let's say, we are looking at a project that has, let's say, somewhere between that 15% to 25% IRR, you’ve got to also think about the tax incentives and the renewable energy certificates, a lot of which comes back in the earlier years. So your payback on the investment might be a lot shorter than, let's say, 6 or 7 or 8 years. But that, once you've gotten your money back, let's say, potentially in 3 years, then you're looking at kind of a return on no equity and it might be a smaller percentage of the original equity. But again, your equity is fully out of the picture at that point.

Unidentified Analyst, Analyst

And so initially, when you build it out, it's like it goes like assets like real estate on the balance sheet? And does that make sense?

Michael Stein, CEO

Yes, it's a capital asset on the balance sheet, yes.

Unidentified Analyst, Analyst

Okay, great. And I have another question about the cash. You still have a lot of cash sitting abroad, like in the U.K., and so when do you expect to get all that back to you?

Michael Stein, CEO

We anticipate receiving a significant amount of cash from wind downs in the next 6 to 9 months. The exact timing and amount are still to be determined, but we remain optimistic about this.

Unidentified Analyst, Analyst

And one other question I had is like now we are going to pay a lot of taxes. So have you considered reducing the cost basis of your Rafael stock?

Michael Stein, CEO

Not sure if we can comment, but we are looking at all different options about how to minimize our tax exposure.

Unidentified Analyst, Analyst

All right. Yes, thanks for the nice quarter and the dividends, we appreciate that. That's all I had.

Michael Stein, CEO

Thank you for being a shareholder.

Operator, Operator

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