Ormat Technologies, Inc. (ORA) Q1 2017 Earnings Report, Transcript and Summary

Good day, and welcome to the Ormat Technologies' Q1 2017 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would like to turn the conference over to Jeff Stanlis, Investor Relations. Please go ahead.

Thank you, Francisca. Hosting the call today are Isaac Angel, Chief Executive Officer; Doron Blachar, Chief Financial Officer; and Smadar Lavi, Vice President of Corporate Finance and Investor Relations. Before beginning, we would like to remind you that 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 and 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 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 non-GAAP financial measures such as EBITDA and adjusted EBITDA. Reconciliations to the most directly comparable GAAP measures and management's reasons for presenting such information is set forth in the press release that was issued last night, as well as, in 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 statements 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 and Presentations link that's found under the Investor Relations' tab. With all that said, I'd now like to turn the call over to Mr. Angel. The call is yours.

Thank you very much Jeff, and good morning, everyone. Thank you for joining us today for the presentation of our first quarter 2017 results and our outlook for 2017. Starting with Slide 4, the first quarter was an excellent start of 2017 for Ormat building on the momentum we generate in 2016 as we delivered another quarter of strong growth and profitability. We continued to improve our operational efficiency, improving our profitability profile and we are well positioned to deliver consistent growth. Recent M&A activity has created new and exciting opportunities for us and it dwells our ability to achieve our stated goal of evolving into a recognized leader in renewable energy. Our Electricity segment had a strong quarter delivering 7.3% growth reflecting at generation coming online and the return of Puna to full capacity as we continue to adjust capacity to maximize efficiency and bring new phases online. In addition, our product segment delivered a strong quarter driven by the timing of revenue recognition. During the quarter we signed new contracts to support our product backlog. Near the end of the first quarter, Ormat closed the acquisition of the business and assets of Viridity Energy Inc., a company engaged in demand response, energy management and storage of energy. As most of you know, demand respond and energy storage are two of the fastest growing segments of the energy industry, and this acquisition accelerates our entry into the space. Integration is already underway and we are promoting several storage opportunities in the East and West Coast. Turning to Slide 5, last week we announced that ORIX Corporation, one of the world's leading diversified company with operations in 36 countries will acquire an approximately 22% ownership position in Ormat by purchasing approximately 11 million shares of Ormat common stock from FIMI, Bronicki Investments, and senior members of management. Additionally we entered into strategic partnership agreement with ORIX which is one of Asia's leading investors in the renewable energy sector and has a growing portfolio of renewable energy investments around the world. ORIX is a clear supporter of clean, reliable day sales power and the seizure - as an increasingly important component of the world's overall energy mix. With ORIX significant presence around the world, access to capital and strong positioning throughout Asia, we believe Ormat can enhance and accelerate its strategic growth plans in the renewable energy market. Following the meeting and discussions I had with ORIX management in the last several weeks, we expect that this collaboration will expand the number of quality of growth opportunities that Ormat's enjoys around the world and particularly in Asia. We expect closing to occur in the third quarter of 2017. Under the terms of a new commercial and corporation agreement between the company, Ormat have exclusive rights to develop, own, operate and provide equipment for all ORIX geothermal energy projects in all markets outside of Japan. In addition in Japan, Ormat will have certain rights to serve as a technical partner or invest in ORIX geothermal energy projects. Also ORIX will assist Ormat in obtaining project financing for each geothermal energy project from a variety of leading providers of renewable energy debt financing which ORIX has relationships in Asia and around the world. On the related agreements, ORIX will have the right to designate three persons to our board which will be extended to include nine members. ORIX will propose a fourth person that will be mutually agreed by Ormat and ORIX to serve as an Independent Director in our Board. In addition for so long as ORIX entitled to board representation, ORIX will be subject to certain customary standstill restrictions including an effective 25% cap on its working rights. ORIX will also have certain customer registration rights with respect to the shares of Ormat common stock that it will own. I will elaborate on the progress we made and our plan for the future after Doron reviews the financial results. Doron?

Thank you, Isaac and good morning everyone. Starting with revenues on Slide 7. For the first quarter 2017 total revenues were $189.9 million up 25.3% compared to $151.6 million in the same period last year. This increase was attributable to both our electricity and product segment in which revenues increased by 7.3% and 69.5% respectively compared to the corresponding period in 2016. Moving to Slide 8, first quarter 2017 revenue in our electricity segment were $115.8 million compared to $107.9 million in the same period last year. This increase was primarily attributable to the consolidation of power Bouillante outlined in Guadeloupe effective July 5, 2016 with revenues of $5.4 million for the quarter and an increase in generation at our Puna power plant gives a successful improvement of the results performed. Moving to Slide 9, first quarter 2017 revenue for our product segments was $74.1 million compared to $43.7 million over the same period last year representing an increase 69.5%. This increase was primarily due to the start of revenue recognition from two new geothermal project in New Zealand and China that we started to construct in the first quarter of 2017 and are scheduled to be completed by mid-2017 and the end of 2017 respectively. The increase was also driven by the start of approximately $17 million in revenue recognition from our new project in Turkey partially offset by other projects in Turkey several of which were completed at the end of last year. The increase in our product segments revenue was partially offset by a decrease in revenues from our geothermal product in Chile, which is close to completion and due to timing of revenue recognition and different product. As you know, our product segment is characterized by fluctuations in quarterly revenue. This quarter represents approximately 33% of our full-year expected revenues based of the midpoint of our guidance which remains unchanged. Moving to Slide 10, for a look at our gross margin. For the first quarter, gross margin decreased from 42.1% in the first quarter of 2015 to 39.2% in the first quarter of 2017. Our electricity segment gross margin increased to 43% in the first quarter of 2017 up from 41% in the same period last year primarily due to higher efficiency in certain operating parts. In our product segment, gross margin decreased 33.3% in the first quarter of 2017 mainly due to different product mix and different margins and various sales contract we enter into for the this segment during this period, as well our final cost associated with our project in Chile. As we indicated previously, we expect gross margins to be lower in 2017 than in 2016. Moving to Slide 11. Operating income for the first quarter of 2017 was $59.5 million compared to $50.5 million for the first quarter of 2016, 17.7% increase year-over-year. The increase in operating income was primarily attributable to the interest in our gross profit in both our electricity and product segment primarily due to the interest in revenue. Operating income attributable to our electricity segment for the first quarter of 2017 was $40.9 million an increase 17.6% compared to the first quarter of 2016. Operating income attributable to our product segment increased by 18% to $18.6 million in the first quarter 2017 compared to $15.8 million in the first quarter of 2016. Moving to Slide 12. For the first quarter of 2017, net income attributable to the company's stockholders was $35.3 million or $0.70 per diluted share compared to $29.3 million or $0.59 per diluted share for the first quarter of 2016. Please turn to Slide 13. Adjusted EBITDA for the first quarter of 2017 was $91.8 million compared to $80.2 million in the same period last year which represents an increase of 14.4% mainly related to the electricity segment. Reconciliation of the EBITDA and adjusted EBITDA are described on the appendix slide. Turning to Slide 14, cash and cash equivalent as of March 31, 2017 were $174.1 million compared to $230.2 million as of December 31, 2016. The accompanying slides breaks down the use of cash for the period. As you can see, we generated $71.5 million in cash from operating activities during the first quarter of 2017. Our long-term debt as of March 31, 2017 was $956.1 million net of deferred financing cost and it's payments schedules are presented on Slide 15 of the presentation. The average cost of debt for the company is 5%. On May 8, 2017 Ormat's Board of Directors approved payment of a quarterly dividend of $0.08 per share for the first quarter of 2017. The dividend will be paid on May 31 2017 to shareholders of record as of closing of business on May 22, 2017. In addition, the company expects to pay quarterly dividend of $0.08 per share in the next two quarters. That concludes my financial overview. I would like now to turn the call to Isaac for an operational and business update. Isaac?

Thank you very much Doron. Starting with Slide 17 for an update on operations. The power generation in our power plants increased by 2.2% from the first quarter of 2016 to 1.4 million megawatt hours in the first quarter of 2017 mainly due to the increase in generation at our Puna power plant due to high performance and the consolidation of our Bouillante power plant. Turning to Slide 18 for an update on our backlog. We continue to support our backlog which as of May 8, 2017 stands at $207 million with $30 million of new contracts we won mainly to Turkey. Together with the existing projects, the Turkish contract is a significant share in our current backlog. As we have previously indicated, we expect these new contracts in Turkey to result in overall lower margin for our product segment compared to the previous years. Turning to Slide 19, in Sarulla Indonesia, the first unit with the 110 megawatt capacity commenced operation in March 2017 or much share in the first unit is 14 megawatt and we started to generate income from our 12.75% equity investment in Sarulla consortium which is recorded in the P&L under equity income of industries. We continue to share our expertise as work continues on the second and third units of the Sarulla project that are expected to come online by 2017 and 2018 respectively. For the second phase of the power plant, engineering and procurement has been substantially completed. Site construction is in progress and all of the major generating units including those to be supplied by Ormat were delivered. For the third phase engineering, procurement and construction work at the site are in progress and manufacturing of equipment to be supplied by Ormat is underway as planned. Drilling for the second and third phases of the power plant is ongoing and the project has achieved today based on preliminary estimate 100% of the required injection capacity, and approximately 65% of the required production capacity. We are continuing with the construction of the 35 megawatt Platanares geothermal project in Honduras. This project which we expect to reach commercial operation by the end of 2017 will sell its power with national utility of Honduras. We expect the project to generate an annual revenues of approximately $33 million under the 15-years DoD agreement. We also initiated construction of Tungsten Mountain project in Nevada. We expect Tungsten to generate 24 megawatt when it comes online at the end of 2017. Dixie Meadows is at earlier stage, drilling is ongoing and this project is expected to generate approximately 15 megawatt to 20 megawatts by the end of 2018. We believe that both Dixie and Tungsten Mountain will qualify for the production tax credit. In Kenya we started the construction of the 10 megawatt repowering that will increase Olkaria III complex were 150 megawatts during 2018. In Guadeloupe, we are planning to increase Bouillante - to increase the capacity of Bouillante by an additional 10 megawatts that will be added by the end of 2018 or early 2019. Another exciting progress is done in McGinness Hills complex in Nevada where we are developing a third phase to be added to the current 86 megawatt complex. We started drilling activity and we are in advanced stage of securing PPA. We now expect the third phase to be 48 megawatts and upon its completion, McGinness Hills will be our largest complex in the U.S. with the generating capacity of over 130 megawatts. The projects I just described, as well as additional projects under various stages of development are expected to support our goal to add between 200 and 210 megawatts by the end of 290. Additionally, our M&A team continues to monitor the market and proactively search for acquisition opportunities that will be attractive to Ormat. Turning to Slide 20. As I mentioned, we closed the acquisition of the business and assets of Viridity Energy Inc. on March 15, 2017 for $35 million. Viridity brings to Ormat nearly a decade of expertise and leadership in demand response, energy management and storage. Using proprietary software and solutions, Viridity serves primarily retail energy providers, utilities and large industrial and commercial clients. Viridity gives us a solid and established presence in this market including expertise, brand recognition and loyal customer base and most importantly our proprietary software and solution product platforms that optimize energy management, demand response and energy storage. We are proceeding with our efforts to unlock significant new value in the energy storage markets and generate longer-term incremental revenue and operating income. Additionally, we continue to monitor opportunities in the solar PV market that will meet our business plan requirements. Turning to Slide 21. Our estimated capital needs for the remainder of 2017 include approximately $125 million with construction of new projects, and enhancements or existing power plants. In addition, we estimate approximately 72 million for development of new projects, maintenance CapEx or operating plans, exploration activity and enhancement of our manufacturing facilities. In the aggregate, we estimate total capital expenditures of approximately $197 million. In addition, we expect $53 million for debt repayment. Please turn to Slide 22 for a discussion of our 2017 guidance. We are reiterating our guidance for the full-year 2017. We expect total revenues between $680 million and $700 million with electricity segment revenues between $460 million and $470 million and product segment revenues between $220 million and $230 million. We expect 2017 adjusted EBITDA between $340 million and $350 million for the full year. We expect annual adjusted EBITDA attributable to noncontrolling interest to be approximately $23 million. We still expected lion shares of our annual product segment revenues and profits to be recognized during the first half of 2017 due to final delivery of projects. This concludes our prepared remarks. Now I like to open the call for questions. Operator, if you please.

[Operator Instructions] The first question comes from Noah Kaye of Oppenheimer. Please go ahead.

Hi Isaac, and Doron, good morning. Another nice quarter. First Isaac you mentioned that the plan rated capacity again sales went up a bit, I think Bouillante is now at the higher end of your prior estimated range. So can you just help us understand what drove the increase in estimated capacity, the resource actually better or did you just develop better engineering solutions to tap it [ph]. Thanks.

Noah, thank you very much and good morning. And I understand you were asking about McGinness III right?

Yes, McGinness III so the capacity went up from 45 previously to 48. So can you just help us understand what droves the increase in the expected capacity?

Okay. As I explained numerous times before, we are developing all our projects around the world on stages, we prefer to go on smaller stages even though we knew that in McGinnis Hills we have a larger resource just from the beginning. We developed Phase 1 about three years ago then the second phase about a year and a half ago and since then we ran different models on our resource and we understand that the resource can support the next development that we are doing right now which will be 48 megawatts and according to our expectation this might not even be the last stage.

Okay, that's good color thank you. Second obviously with the backlog seeing some roll off at the Sarulla. May be you could talk about your view on and your visibility to replacing and growing the products backlog now with the opportunity you said that you see and maybe that’s a good way to tie-in the news on the ORIX Corporation strategic partnership. What are your expectations for replacing backlog, what are you seeing out there in terms of opportunity? Thank you.

Okay Noah. First of all as you recall our strategy holds for a higher increase on our Electricity segment and our Product segment that did bring - was determined for ORIX land or agreement come in place. Even though Ormat and specifically our sales and marketing teams are surprising us all over again and this year product sales are obviously higher than expected during our fall last year. And still our expectation is that this particular agreement with ORIX will open new horizons specifically in the Far East it might affect positively of course our product segment. But I want to be very careful in not change anything on our expectation as of now and just to remind you that the deal is not even closed yet.

And an apart from ORIX how would you assess the activity out there for the products business, what do you think is the potential to replace some of the backlog that will roll off as you complete to roll?

As we speak now or I'm very optimistic about our replacement for the upcoming reminder of this year and the beginning of year with new contracts coming from specifically Turkey, New Zealand, and the U.S. And as I said before for the rest of 2018, 2019 and 2020 there might be additional countries that will come into the loop as we continue.

Great. And if I could sneak one more and it's on Viridity. We were at the Energy Storage Associated Expo recently, it seems like grid storage is really starting to turn the corner here with financing and models business models product models that do make sense. So would be helpful to understand what are your expectations for the Viridity platform to do more energy storage projects what do you see in the pipeline at Viridity with respects specifically to energy storage and how long do you think it will be before there is something significant announcement in terms of the number of new storage projects? Thanks.

First of all you’ll recall that our main reason to acquire Viridity businesses whilst it’s for energy storage. But to our positive surprise also the DR market is making some positive steps specifically in the East Coast which is bringing some serious opportunities in this business. But as you said before we can also feel that the energy storage market is turning the corner in the state but not only in the state and we are taken numerous project that we are involved in but unfortunately I will not be able to provide you a specific number. But just to say that I am cautiously optimistic and also happy that we did this investment.

Okay, great very much, we'll look forward to more details great execution and Doron see you a bit later today at our conference. Thank you.

The next question comes from Brad Meikle of Craig-Hallum. Please go ahead.

So with the ORIX investment, how much potential do you think is there for realistically geothermal development in Japan. It looks like there is only 500 megawatts it’s been developed out of the 300 gigawatts peak load. So seems to be a drop in the bucket and obviously geothermal fairs quite well with all the solar being deployed with the higher capacity factor. So do you think you actually be able a bit bring any projects to market in Japan?

Okay Brad, good morning. First of all Japan is one of the leading country on the geothermal potential. The problem until recently was that most of is insured is in those national park - it was impossible to drill in until recently. We know that the local regulation and laws in Japan are changing and due to the fact I believe the agreement with ORIX eventually today represents a higher potential then it would have represented a few years back. So it’s very difficult to determine the exact megawatts but obviously the number that you mentioned are negligible to the actual potential that Japan will present in the upcoming years. And soon enough after this deal close we will sit down with ORIX people and try to see what the actual potential residing in Japan, but you realize that as ORIX being a large global the potential is not only residing in Japan but also additional countries in Southeast Asia, Indonesia being one of them. And I hope and believe that this corporation will strengthen our positioning in Indonesia which is already doing huge steps towards geothermal energy and today Indonesia is one of the growing country in green energy and specifically in geothermal.

Thanks. And also in Japan I mean obviously Toshiba is having a lot of problems related to Westinghouse, the bankruptcy and the nuclear problems. Is that helping you at all competitively with possibly being less of a factor?

If we put aside Toshiba which I don’t want to relate to the company itself of course, no doubt that the calamity that happened in Japan is helping in the growth of green energy in Japan. And we have a technical agreement with Toshiba and we are working together in a few specific projects mainly in Turkey but I don’t think it has the agreement that we have with them has any significant at this stage if we look at it from ORIX standpoint.

All right, thanks. And last question is, obviously you’ve done business with JBIC in Japan from a lender standpoint for your national projects in the past but is the ORIX relationship going to significantly change your access to achieve that maybe higher leverage at a project level internationally which will require either put up less equity perhaps or have this cheaper debt giving you a competitive advantage developing internationally projects? Thank you.

Brad no doubt we worked with JBIC before but we worked with JBIC as a U.S. company. And to your specific question, I'm hoping and expecting but frankly I don't know yet and the future will tell. So in next year calls we will if something change or not but no doubt that here in management we have high hopes on this regard.

Great, thanks very much.

[Operator Instructions] The next question comes from Jeff Osborne of Cowen & Co. Please go ahead.

Good morning and congratulations on the strong results. Just a couple questions from me, I was wondering if you could just touch on the electricity segment and particular you made a big focus over the past couple of quarters in optimizing the power plants. Angel just give us an update on how many of the installed base has been optimized at this point and how much is left to go.

Okay. Jeff, yes we are working diligently in the last three and something years in all our power plants. I should say that we went through half to 60% of the power plants and we still have a lot to go. But it shouldn’t mislead you on the numbers which means that not necessarily the remaining part that we didn’t deal with yet will bring the same efficiencies as we got on the first three years which were quite significant because don't forget and I said that in my previous call we picked up the low hanging fruit just at the beginning. So even though as we have a long way to go, doesn’t necessarily mean that the efficiencies that would come in the future will be another 30% growth on profitability. I expect it to be lower than that but still as I said you about 40% to grow on the power plant side.

Got it, that’s helpful. And then how do we think about the product gross margin cadence through the year. It sounds like Turkey will be ramping up and so what's the trajectory of gross margins for that particular segment second quarter through the fourth quarter given the propensity of Turkey in the backlog?

Okay. Jeff we said in the last two years that you expected profitability on the product segment should be between 30% to 35% and we are still reiterating the number. Q1 in this particular year was a bit lower and I expect it to be on the high side of our expectation for the whole 2017.

Got it, that’s helpful. And the last question I had for Angel is just can you give us an update on what you're seeing in Ethiopia and Guatemala in particular?

And update on Guatemala and Ethiopia, okay, we have as we started some concessions in Ethiopia and we are working diligently on the final PPA that will be signed with the Ethiopian government which I expect to be finalized by the end of this year or beginning of next year. Soon as this will be done we will not start with a big boom, but probably with the first stage of a 50 megawatt or even less than that on one of the five out of the four that we are signing contract for. And also we will operate the first power plant in Bouillante and we will see that everything is okay, we will continue up to road to develop the four - the full 450 megawatt. This is for Ethiopia, on Guatemala we have two operating power plants and we are participating in a tender for the - for a certain megawatt which will be finalized within next few months. We have sufficient length position to develop a third power plant and we are also in a very significant effort to increase our Sarulla power plant from its current situation with larger power plant.

Excellent. Thanks for the details. I appreciate it.

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

Good morning everyone again, thank you very much for your ongoing support. Ormat is doing many, many baby steps and also I hope to join steps towards the future and as I said in numerous times before, I’m very optimistic of the future and thank you for your support.

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