Ormat Technologies, Inc. (ORA) Q2 2016 Earnings Report, Transcript and Summary

Good morning, and welcome to the Ormat Technologies' Second Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Jeff Stanlis with Hayden IR. Please go ahead.

Thank you, operator. Hosting the call today are Isaac Angel, Chief Executive Officer; and Doron Blachar, Chief Financial Officer; and Smadar Lavi, Vice President of Corporate Finance and Investor Relations. Before beginning, I would like to remind you that the information provided during this call may contain forward-looking statements relating to current expectations, estimates, forecasts, and projections about future events that are forward looking as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements generally relate to the company’s plans, objectives, and expectations for future operation and are based on management’s current estimates, projections, future results, or trends. Actual future results may differ materially from those projected as a result of certain risks and uncertainties. For a discussion of such risks and uncertainties, please see the Risk Factors as described in Ormat Technologies' Annual Report on Form 10-K filed with the SEC. In addition, during the call, we will present certain non-GAAP financial measures such as EBITDA and adjusted EBITDA. Reconciliations to the most directly comparable GAAP measures and management’s reason for presenting such information is set forth in the press release that was issued last night, as well as the slides posted on our website. Because these measures are not calculated in accordance with U.S. GAAP, they should not be considered in isolation from the financial statement prepared in accordance with GAAP. Before I turn the call over to management, I would like to remind everyone that a slide presentation accompanying this call may be accessed on the company’s website, at ormat.com, under the Events & Presentations link that is found on the Investor Relations' tab. With all that said, I would now like to turn the call over to Isaac Angel. Isaac, the call is yours.

Thank you very much Jeff and good morning everyone. Thank you for joining us today for the presentation of our second quarter 2016 results and our outlook for the remainder the year. Starting with slide four, we delivered another good quarter in the second quarter, with double-digit topline growth as well as increasing profitability. Our focus on improving our operational and manufacturing efficiency continues to be the main driver for margin expansion and improved results. Our growth continues to be broad-based as both our product segment and electricity segment improved year-over-year. Our electricity segment delivered over 14% increase, reaching $104 million due to higher electricity generation and new expansions coming online. Our product segment grew approximately 13% to $56 million, benefiting from several large contracts signed in the previous years. Overall, total revenue grew 14% to approximately $160 million. In addition, we again achieved high gross margin levels in both segments of our business, supporting nearly 7% increase in net income and approximately 20% increase in adjusted EBITDA. We have been focused on efficiency and operational excellence in every aspect of our business and those efforts are reflected in our results. I will elaborate on the progress we made on our plans for the future after Doron reviews the financial results. Doron?

Thank you, Isaac and good morning everyone. Let me start by providing an overview of our financial results for the three months ended June 30, 2016. Starting with slide six, for the second quarter of 2016, total revenue increased 13.8% to $159.9 million compared to $140.5 million in the second quarter of 2015. On slide seven, revenue in the electricity segment increased 14.4% to $104 million in the second quarter of 2016, up from $90.9 million in the second quarter of last year. On slide eight, revenues in the product segment were $55.9 million, an increase of 12.7% compared to $49.6 million in the second quarter of last year. Moving to slide nine, gross margin in second quarter of 2016 increased to 41.2% from 36.1% in the second quarter 2015. Our electricity segment gross margin increased to 40.2%, due largely to new expansions coming online, the transition to a new fixed-rate PPA for our Heber 1 power plant, higher efficiency in our operating power plants, as well as lower cost to operate our new expansion. Our product segment generated 43% gross margin, another very strong quarter for this segment of our business. This was mainly due to improvements in efficiencies, mainly our manufacturing facility. With shorten lead-times and improved procurement processes, which reduced our raw material cost. In addition, the reduction in commodity prices further reduced the cost of raw materials as well as subcontracting cost. As we indicated during our last quarter conference call, we expect our gross margins in this product segment during 2016 to be higher than normal. Turning to slide 10, operating income for the second quarter of 2016 increased to $51.9 million compared to $38.6 million in the second quarter of last year, representing 34.3% increase. Operating income attributable to our electricity segment was $32.8 million compared to $20.9 million in the second quarter of 2015, representing 56.9% increase. Operating income of the product segment was $19.1 million compared to $17.7 million in the second quarter of 2015, representing 7.6% increase. Moving to slide 11, net income attributable to the company stockholders for the second quarter of 2016 was $24.3 million or $0.49 per diluted shares compared to $14.4 million or $0.28 per diluted share in the second quarter of 2015. Please turn to slide 12. Adjusted EBITDA for the second quarter of 2016 was $81.2 million compared to $67.8 million in the same period last year, which represents a 19.7% increase. Reconciliation of the EBITDA and adjusted are described on the appendix slide. Turning to slide 13, cash and cash equivalents as of June 30, 2016 were $192.6 million. We generated $119.6 million in cash from operating activities and invested $67.8 million in CapEx in the six months ended June 30, 2016. The accompanying slide breaks down the use of cash during the first half. Our long-term debt as of June 30, 2016 stands at $889 million and its payment schedules are presented on slide 14 of the presentation. The average cost of debt for the company stands at 6.1%. On August 2nd, 2016, Ormat Board of Directors approved payment of a quarterly dividend of $0.07 per share for the second quarter. The dividend will be paid on August 30, 2016, to shareholders of record as of closing of business on August 16, 2016. In addition, the company expects to pay a quarterly dividend of $0.07 per share in the next quarter. That concludes my financial overview. I would like now to turn the call to Isaac for an operational and business update. Isaac?

Thank you, Doron. Starting with slide 16 for an update on operations. Ormat delivered double-digits top and bottom-line growth during the second quarter, clearly demonstrating that we're making solid progress against our multi-year strategic plan. Moving to slide 17, the key area of focus for Ormat's new management for past few years is to drive efficiency where we could to improve margins and overall profitability. We continue to make improvement in all aspects of our value chain. On the product side, we are focused on reducing manufacturing lead-time, improving procurement to lower our material cost, and improving management control. In the electricity segment, in addition to the improvements mentioned above, we're also focused on optimizing the operations of our power plant. We're evaluating each project, adjusting the output to match the resource, targeting expansions and upgrades where we can and centralizing operations to reduce costs. The process translates into a significant and sustainable improvement in gross margin and adjusted EBITDA margin. Turning to slide 18, another goal was to expand our electricity generation, both organically and inorganically, and we continue to make notable progress against these objectives. Electricity generation during the quarter was 1.3 million megawatt hours, an increase of 10% -- 10.8% compared to the last year. This increase was due to the commencement of the second phase of Don Campbell which come online in September 2015 as well as Plant 4 of the Olkaria III complex in Kenya, which come online in January this year. Generation was also positively affected by the high performance in the McGinness Hills complex. Note that while the revenues in the electricity segment increased approximately $13 million year-over-year. The cost of revenue in this segment actually decreased slightly. In addition as we indicated in our last quarterly call, we're working to monetize the Don Campbell 2 plant and further strengthen our balance sheet. As part of joint venture with Northleaf Capital Partners, we have completed the required power generation tests under the agreement to determine the final terms for closing which we expect to take -- which we expect to take place during the third quarter. Following the closing, Ormat will contribute -- Ormat Nevada will contribute Don Campbell 2 to ORPD and Northleaf will buy their interest share for a total amount of approximately $43 million. Turning to slide 19, as I mentioned, inorganic growth is another key part of our strategic plan. On July 5th, 2016, we completed the acquisition of Bouillante Geothermal Plant for approximately $18.6 million. This acquisition is immediately accretive to the earnings. GB owns and operates a 14.75 megawatt Bouillante Geothermal Plant located on the island of Guadeloupe, a French territory in the Caribbean. The Bouillante Plant currently generates approximately 10 megawatts with an expansion potential to up to 24 megawatts of capacity and Greenfield with the potential for additional 20 megawatts. We have plain modifications to the existing equipment as well as to further develop the asset, with a potential of reaching a total of 45 megawatts in phase development by 2021. Ormat together with CDC, a French state-owned financial organization, acquired approximately 8% interest in GB in the proportion of 75 to Ormat and 25 to CDC, which means that we acquired approximately 60% of the project. This acquisition marks another achievement in our strategic plan to expand our business to new geography. With CDC, an ideal partner, as CDC's profession with the French regulation and experience in investment that serve the economic development trends. Together with BRGM and CDC, we will continue to develop the Bouillante Geothermal Plant. Turning to slide 20, for an update on projects under construction. We added 10 megawatt to our portfolio from the Bouillante acquisition and plan to add another 150 and 280 megawatts by the end of 2018, by bringing new power plants online and expanding existing plants. The expansion plan includes the Platanares geothermal project in Honduras, in which construction and drilling activities are ongoing and equipment is on its way to the site. We expect to reach commercial operation before the end of 2017. We also initiated construction of Tungsten Project in Nevada. We expect Tungsten to generate 24 megawatts when it comes online at the end of 2017. Drilling is ongoing and major construction permits as well as interconnection agreements are in place. Dixie Meadows is at earlier stage and is expected to generate approximately 15 to 20 megawatt. We believe that both Dixie and Tungsten, may qualify for the production tax credit. We have taken us from the Menengai project in Kenya to the slow progress in the resource development and verification. In Sarulla, Indonesia, for the first phase, engineering and procurement has been substantially completed and construction is in progress with major activities relating to mechanical and electrical equipment installation. Major equipment including Ormat's OEC and Toshiba's steam turbine has arrived to the site and currently installed. The drilling of production and injection wells for the first phase is completed. For the second phase, engineering and procurement has been substantially completed, infrastructure work is in progress, and most of the equipment to be supplied by Ormat was delivered. For the third phase, engineering and procurement is still in progress, infrastructure work is in progress and manufacturing of equipment to be supplied by Ormat is underway as planned. Currently, for the second and third phases, drilling activity is still going and project achieved today based on preliminary estimates, approximately 70% of the required production capacity and approximately 15% of the required injecting capacity. The project is still facing delays, mainly in field development of the second and third phases and certain cost overruns resulting from delays and excess drilling costs. As a reminder, Ormat holds 12.75% equity interest in the project corresponding to approximately $60 million equity investment, covering Ormat share based on the current project plan. With respect to Ormat's role as a supplier, all contractual milestones under the supply agreement were achieved. The consortium expects that the first phase of operations to commence towards the end of 2016 and the remaining two phases of operations are scheduled to commence within 18 months thereafter. The project, I just described as well as additional projects under various stages of development are expected to support our expansion by the end of 2018. Besides the investments in new projects, we're continuing our exploration and business development activities to support future growth. If you could please turn to slide 21, you would see that our CapEx requirement for the balance of 2016 stands at approximately $135 million. We plan to invest a total of approximately $94 million in capital expenditures on new projects under construction and enhancement and additional $41 million are budgeted for exploration activity. Development of new projects, investment in new activities that reflects expenditure under the new strategic plan, and maintenance CapEx for operation -- for operating projects. In addition, $31 million will be required for debt repayments. Turning to slide 22, for an update on our product segment. We continued to win orders and strengthen our backlog, which as of August 2nd, 2016, stands at approximately $228 million. During the second quarter, we added 36 million EPC and supply contract that we secured in May with Eastland Group for a geothermal project located in New Zealand. Under the contract, Ormat will provide its air-cooled Ormat energy converter. The construction of the project is expected to be completed in 2018. We have been operating in Turkey for many years and expect to continue and operate in the coming years. The event in Turkey didn't have a material impact on electricity needs of Turkey or the ambition plan for renewable energy. We are now in the final negotiation stages of a new supply contracts in Turkey and we're very optimistic in the future as the turbulence has been behind us. We are -- turning to slide 23 for our 2016 guidance. We are reiterating our 2016 full year revenue guidance and increase our adjusted EBITDA guidance. For the year, we expect total revenue to be between $620 million and $640 million. We expect revenue in our electricity segment to be between $410 million and $420 million. For the product segment, we expect revenues to be between $210 million and $220 million. We expect 2016 adjusted EBITDA to be between $310 million and $320 million. We expect annual adjusted EBITDA attributable to minority's interest to be approximately $17 million. This amount assumes the inclusion of the second phase of Don Campbell power plant in joint venture with Northleaf. In summary, I'm very pleased with the strong results we delivered in the first half of the year. Ormat remains well-positioned for success with a healthy balance sheet, a strong pipeline, and a balanced portfolio of operational and third-party projects around the world. Thank you for your continued support and now I would like to open the call for questions. Operator?

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Paul Coster with JPMorgan. Please go ahead.

Yes, thanks for taking the questions and congratulations on a good quarter. A few quick ones. First off, Menengai, what's caused that to pushed out and should we just assume it’s a non-starter at this point or is it really a 2019 deliverable now?

Paul, I don't know if you recall the structure of the deal in Menengai, but the structure is such that we are buying the resource -- the steam from the local company and the project consists three providers and about 110 megawatts of steam supply to be converted to electricity. At this stage, we're not sure that the resource can support overall -- the whole amount of steam, therefore, we took the Menengai thing and put it on a lower probability. We're not still closing it, but we're waiting for clarifications from the local supplier that the amount of steam will be at least 110 megawatts and that's why and we took it out from the immediate supply.

Got it. Can you give us a quick update on your energy storage initiatives and when you think they might become a material consideration as well -- Alevo I'm thinking here?

Yes, the Alevo project is proceeding as planned and will be operational by the end of year. And we're working on initiative -- on additional initiatives as we speak. I'm very optimistic and I think and I expect that we'll come up with additional project or activities of this field very soon.

Finally, the relationship with Toshiba has been placed now for quite a while, what is the result of it so far? And how is it going to translate into shareholder value do you think?

We only have one project that we win together in 2013 and as we speak, we're told, we are working on a second one. So far even though it's been slow -- it's quite slow than expected, I'm pleased with the results. We have a very good connection with the Japanese and Toshiba. And I still believe very much that this partnership will create, at the end of the day, a large shareholder value for us and for them.

Okay. Thank you.

Thank you.

[Operator Instructions] Our next question comes from Dan Mannes with Avondale Partners. Please go ahead.

Thanks. Good morning, everyone and a nice quarter.

Thank you, Dan.

Sure. A couple follow-up questions here. As it relates to the Tungsten and Dixie, it looks like you took down your output assumptions for these plants. Is this just since you're kind of earlier stage on those, you're still assessing the resource or is there may be a little bit of a change here?

Not really Dan. What we decided to do, we have more than expected projects in the pipeline and so we're trying to minimize the risk and not to fit them all as this company did two years ago. And we're going again on steps on -- or smaller steps. At the end of the day, we believe both projects can provide much higher outputs than the first stages. It's simply risk management from our side. If you noticed, we didn't change the total number that we will be delivering by the end of 2018. It will simply consist small projects in order to make it. If I recall right, and correct me if I'm wrong, thereon Tungsten has the second phase towards the end of 2018.

Okay, great.

Well, on Tungsten basically I would say that -- as Isaac said, we decided to go on phase approach like we did with Campbell and like we did with McGinness and Olkaria and we believe that the resource is stronger than what we initially thought. However, what we decided is to go to a third phase of approximately 24 megawatts and following this phase and assuming everything will be supported -- support our current estimations, we will have a second phase that will probably live beyond 2018. So, it will probably come in later stages, but as all of you know it's based on the resource as well.

Understood. And on a related comment, as it relates to about Dixie, Tungsten, and also Menengai, I looked at your CapEx expectations for the year and it looks like you took down a pretty good amount particularly on development expenses versus what you expected even only a quarter ago. Is that primarily Menengai is that -- or is there something else impacting your CapEx expectations?

Its -- I suppose it's probably -- is primarily Menengai which has been delayed and not beyond that.

Okay. The other thing I wanted to ask about with both Dixie and Tungsten and any other U.S. development, can you talk a little bit more about the current PPA environment, both from a corporate perspective as well as the utility perspective right now?

Dan you know as we're very, very conservative company and if we wouldn't have -- if we are not optimistic on the chances to sign the right PPAs, we wouldn't develop those projects. But unfortunately at this stage, I cannot elaborate on the PPAs as we're in different stages of both negotiation and approval.

Understood. And then my final question on the product side, I think we're now at six to eight quarters where you've been well under the high 30, if not the 40% margin range. You keep telling us they are going to normalize. I believe you that you think they will normalize, but at what point, do we just assume word any normal?

I'm very optimistic that it will be normalized.

Is that optimistic or pessimistic, Isaac?

I'm kidding. But the thing is you know as we explained two years ago, we're constantly working on efficiency and the question is what's coming first? So, even though, we told that we will not be able to achieve the number that we achieved this quarter and also optimistic about the next one and still those efficiencies are catching up -- catching up and bringing more and more bottom-line, which I'm very pleased of course. At the end of the day, with different mix of deliveries, specifically in 2018, there will be a bit of the decrease in the gross margin specifically in the product side.

Got it. That's helpful. Thanks so much guys.

Thank you.

Our next question comes from Gerry Sweeney with Roth Capitals. Please go ahead.

Good afternoon. Thank you for taking my call.

Thank you.

Thank you, Gerry. Good morning.

Just a quick question, actually most might have been answered, but on your electricity side, obviously margins are very good in the quarter, you discussed better PPA at Heber, operating efficiency, new plants driving those margins. Are there any other sort of temporary benefits that you saw in the quarter, maybe less maintenance work, higher output, et cetera that may have been driving this 40% gross margin or is this sort of -- Dan just eluded to on the product side the new normal on a go-forward base?

On the contrary to what they said on the product side, we are -- we intent to keep our profitability stable on the electricity side. As we make a lot of efficiencies from the operational side of the project. We are, as you mentioned, replacing contracts which are related to gas and natural gas and oil and we will continue to do so in the future. We're unmanning power plants or building them unmanned, the new ones which is immediately affecting the bottom-line. On the electricity side, there is nothing unusual which -- that happened this quarter that will give me -- that will give me any clue that will be different also in the upcoming quarters. At the end of the day, there is a limit to which number we can hit, but we still have a long way to go with the efficiencies in our existing assets and with the profitability of upcoming assets.

Got it. That’s very helpful. I appreciate it. Thank you.

Thank you very much.

[Operator Instructions] We have a follow-up from Dan Mannes with Avondale Partners.

Thanks for indulging me. On the power price side, I was wondering if there's been any hedging activity either as it relates to kind of the open gas position or as it relates to -- I guess the oil position at Puna, any changes particular given the volatility we’ve seen in both oil and gas prices lately?

We, Dan has basically hedged as we mentioned last quarter, we did some hedges at the beginning of the year for 2015. The hedges are hedging basically the PPA so on the net basis; we’re maintaining our overall numbers although accounting-wise, they are not defined as accounting hedges, so they appear in different line items of the revenue. So, the volatility has some impacts of ups and downs, but on total numbers, since we're hedging a specific PPA that shouldn’t impact us. I would say that they are relatively higher gas prices today compared to previous -- to beginning of the year in the previous year. If they will be maintained that will help us obviously next year when we work on our budget.

What about any opportunities for longer term? I mean I think you've locked in a final agreement for [Indiscernible] in 2017, but anything you can do for instance to renegotiate with -- for instance with go on Puna, just maybe take some volatility outgoing for a long-term basis?

Dan, you will appreciate that we will not start negotiations with TECO on the conference call. But on the other hand, as you recall, we were challenging Puna since the tropical storm two years ago and I'm very optimistic today that we're beyond those challenges and the power plant is performing more than well and increasing outputs almost to its maximum, which so far indicates that we did well in the last year and a half to modify change and so on. Now, the challenge remains with North Brawley that we are dealing for last few years and I'm also optimistic, Dan, over there also we'll be able to increase -- to modify and increase and so on.

Great. That's helpful. Thanks.

Thank you very much Dan.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Isaac Angel for any closing remarks.

Thank you very much operator. And as usual I'm optimistic and I'm looking forward to the upcoming quarters and years and we believe that we're -- all the employees of Ormat are behind this and we're taking this company to new places. And thank you very much for your ongoing support.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.