Ormat Technologies, Inc. (ORA) Q2 2017 Earnings Report, Transcript and Summary

Good day, and welcome to the Ormat Second Quarter 2017 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, that today's event is being recorded. I would now like to turn the conference over to Mr. Robert Fink of Hayden IR. Please go ahead, Mr. Fink.

Thank you, operator. 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, forecast 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 Technology's 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 earlier this morning as well as in the slides posted on the company's 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 Investor Events and Presentations link that's 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, Rob, and good morning, everyone. Thank you for joining us today. Starting with Slide 4. This was a strong quarter for Ormat as we executed our business plan, expanded our business and drove improved efficiency. For the second quarter, we delivered strong revenue growth of more than 12%, an increase in adjusted net income of more than 21%. Our top line growth was the result of solid performance from both our operating segments, with our Electricity segment delivering a year-over-year revenue increase of 7.5%, mainly due to greater power generation, while our product segment grew 21%. A key goal for management during the last three years was to streamline our operations across the entire value chain. The goal was to reduce lead times and improve efficiency within our product segments, and in our Electricity segment to adjust operation at each property based on the year. The ultimate goal was to improve profitability. We have been successful in this effort as evidenced by the improvement in our gross profit and adjusted EBITDA in the second quarter, underlying the strength of Ormat's business. These strong results in the first half gave us confidence to reiterate our full year guidance. I will elaborate on our outlook and further discuss the progress we made after Doron reviews the financial results. Doron?

Thank you, Isaac, and good morning, everyone. Starting with revenues on Slide 6. For the second quarter of 2017, total revenues were $179.4 million, up 12.2% compared to $159.9 million in the same period last year. This increase was attributable to both our electricity and product segments. Moving to Slide 7. Second quarter 2017 revenues in our electricity segment were $111.8 million compared to $104 million in the same period last year. This increase was primarily attributable to the consolidation of our Bouillante power plant in Guadeloupe effective July 5, 2016, with revenues of $5 million for the second quarter and an increase in generation at our Puna power plant due to successful improvement of the resource performance. Moving to Slide 8. Second quarter 2017 revenues for our product segment was $67.6 million, up 21% compared to the $55.9 million for the same period last year. The increase is mainly due to revenue recognition of $46 million in the second quarter of 2017 for projects in Turkey that started this year, partially offset by other projects in Turkey which were completed during 2016. The increase was also partially offset by a decrease in revenue from our geothermal project in Chile, which is close to completion, the timing of revenue recognition and a different product mix. Moving to Slide 9 for a look at our gross margin. For the second quarter, combined gross margin decreased from 41.2% in 2016 to 39.3%. Our electricity segment gross margin increased to 41.5% in the second quarter of 2017, up from 40.2% in the same period last year, primarily due to higher efficiency in operating power plants. In our product segment, as previously noted, gross margin has decreased to 35.7% in the second quarter of 2017, mainly due to the additional costs associated with our project in Chile, as well as different product mix and different margins in various sales contracts we entered into for the segment during this period. As we indicated previously, we expect gross margin for the product segment to be lower in 2017 than in 2016. Moving to Slide 10. Operating income for the second quarter of 2017 were $53.2 million compared to $51.9 million for the second quarter of 2016, a 2.4% increase year-over-year. The increase in operating income was primarily attributable to the increase in our gross margin in our electricity segment driven primarily by the increase in revenues, which was partially offset by an increase in general and administrative expenses. The increase in general and administrative expenses was mainly due to $2.9 million expenses, that relate to a $2.1 million non-cash charge for stock-based compensation expense associated with the acceleration of the vesting period of the stock option as part of the ORIX transaction and $0.9 million of costs associated with ORIX transaction and other Ormat M&A activities. Excluding the $2.9 million one-time charges, general and administrative expenses as a percentage of total revenue decreased year-over-year from 5.5% to 5.2%. Excluding the one-time charges, the year-over-year growth in operating income was 8%. Operating income attributable to our electricity segment for the second quarter of 2017 was $36.1 million, an increase of 10.1% compared to the second quarter of 2016. Operating income attributable to our product segment decreased by 10.7% to $17 million in the second quarter of 2017 compared to $19.1 million in the second quarter of 2016. Moving to Slide 11. Our strong financial performance has enabled us to take specific steps to streamline our capital structure and strengthen our balance sheet. The result is a meaningful decrease in our interest expense. For the second quarter of 2017, net interest expense was $14.5 million compared to $18.4 million for the second quarter of 2016. This decrease was primarily due to the prepayment in September 2016 of $250 million of our senior unsecured bonds which bore an interest at a fixed rate of 7% per annum through the issuance of senior unsecured bonds, totaled $204 million, which bear average interest of 4.2%. Lower interest expense as the result of principal payments of long-term debt and revolving credit lines with banks, and a $1.1 million decrease related to the increase in interest capitalized to projects, partially offset by an increase in interest related to the Don A. Campbell I project finance debt. Moving to Slide 12. Based upon anticipated increased profitability in the U.S. and changes in our tax structure during the second quarter of 2017, we released a portion of our valuation allowance against the U.S. deferred tax asset, as it is more likely than not that the deferred tax asset will be utilized. In addition, we accrued withholding taxes for expected future dividends to the U.S. from our Israeli subsidiary. The net impact of $5.5 million is reflected in income tax provision in the income statement. As a result of these changes, we expect our global effective tax to increase in the future periods. However, we still do not expect any cash tax payment in the U.S. due to our NOLs and production of foreign tax credits. Please turn to Slide 13. For the second quarter of 2017, net income attributable to the company's stockholders was $35 million or $0.69 per diluted share compared to $24.3 million or $0.49 per diluted share for the second quarter last year. Adjusted net income attributable to the company stockholders and diluted EPS, excluding the $5.5 million and $0.11 per diluted shares of the one-time benefit, related to the impact of tax restructuring was $29.5 million or $0.58 per diluted share. Please turn to Slide 14. Adjusted EBITDA for the second quarter 2017 was $88.1 million compared to $81.2 million in the same period last year, which represents an increase of 8.5%, mainly related to the increased profitability of the electricity segment. Reconciliation of the EBITDA and adjusted EBITDA are described on the appendix slide. Turning to Slide 15. Cash and cash equivalents as of June 30, 2017, were $118.4 million compared to $230.2 million as of December 31, 2016. The accompanying slide breaks down the use of cash year-to-date. As you can see, we generated $114.2 million in cash from operating activities during the first six months of 2017. Our long-term debt as of June 30, 2017 was $937.6 million, net of $16.4 million of deferred financing costs. And each payment schedules are presented in Slide 16 of the presentation. The average cost of debt for the company is 5%. On August 3, 2017, Ormat Board of Directors approved payment of a quarterly dividend of $0.08 per share for the second quarter of 2017. The dividend will be paid on August 29, 2017 to shareholders of record as of the close of business on August 15, 2017. In addition, the company expects to pay quarterly dividends of $0.08 per share in the next quarter. That concludes my financial overlook. I would now like to turn the call to Isaac for an operational and business update. Isaac?

Thank you very much, Doron. Starting with Slide 18 for an update on operations. The power generation in our power plants increased by 2.5% from the second quarter of 2016 to 1.33 million megawatt hours in the second quarter of 2017, mainly due to the increase in generation at our Puna power plant and the consolidation of our Bouillante power plant. Turning to Slide 19. Last week, we announced the closing of the ORIX transaction, in which ORIX Corporation acquired approximately 22% ownership stake in Ormat. As part of this transaction, we implemented certain corporate government exchanges and the Commercial Cooperation Agreement between Ormat and ORIX is now effective. Under the terms of the Corporation Agreement, Ormat will have exclusive rights to develop, own, operate and provide equipment for ORIX geothermal energy projects in all markets outside of Japan. In addition, we will have certain rights to serve as technical partner and co-invest in ORIX geothermal energy projects in Japan. We expect ORIX to assist us in obtaining project financing for our geothermal energy projects from a variety of leading providers of renewable energy debt financing, with which ORIX has relationships in Asia and around the world. We believe this agreement will expand our addressable market and give us access to capital with favorable terms. Turning to Slide 20. During the second quarter, we announced that we received final approval required for the execution of a portfolio PPA with Southern California Public Power Authority, which is called SCPPA. Under the portfolio PPA, SCPPA for the first time in the marketplace, will purchase 150 megawatts of power generated by a portfolio of our new and existing geothermal power plants. SCPPA will resell the entire output to the Los Angeles Department of Water and Power. Energy deliveries under the portfolio PPA are expected to start in the fourth quarter of 2017, and the entire portfolio is expected to be online by the end of 2022 The portfolio PPA has a minimum contract capacity of 135 megawatts and a maximum potential capacity of 185 megawatts, and is for a term of approximately 26 years, expiring in December 31, 2043. It carries a fixed price of $75.5 per megawatt hour and this portfolio PPA is a significant achievement that will enable both, development of multiple new projects as well as the sustainable operation of several of our existing geothermal power plants, thereby strengthening our ability to deliver long-term growth. This portfolio PPA marks our sixth PPA with SCPPA, and emphasizes its appreciation of firm and stable geothermal power to its renewable energy portfolio. Turning to Slide 21 for an update on our backlog. We continue to support our backlog, which as of August 3, 2017 stands at $192 million, with $50 million of new orders, mainly from contracts we won in Turkey. Together with the existing project, the Turkish contracts have 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 segments compared to previous years. Turning to Slide 22 for an update on electricity segment pipeline. The first phase of the Sarulla power plant in Indonesia commenced commercial operation on March 17, 2017, and is performing as expected. The construction of the second phase of the power plant is near completion, and site pre-commissioning activities have commenced. Formal testing on commercial operation under the PPA is expected in the fourth quarter of 2017. Engineering, procurement and construction work for the third phase of power plant is in progress, and we already delivered most of the equipment. Drilling for the second and third phases of the power plant is ongoing, and the project has achieved to date, based on preliminary estimates, 100% of the required injection capacity and approximately 90% of the required production capacity. We are progressing with the construction of the 35 megawatt Platanares geothermal project in Honduras. The required tests for the pre-commissioning stage is ongoing, and we expect to reach commercial operation before the end of the third quarter of 2017. We will own and operate this project under a BOT agreement structure for 15 years from the date of commercial operation. In Kenya, we are currently repowering plant 1 of 139 megawatt Olkaria complex and expect to add approximately 10 megawatts to this complex. The electricity generated by the new unit will be sold under the new amended PPA. The repowering will be completed by the end of 2018. In Guadeloupe, we are planning to increase the capacity of Bouillante by an additional 10 megawatts that will be added in early 2019. In the U.S, we are currently developing the 24 megawatts Tungsten Mountain geothermal power plant in Nevada. The field development has been completed, while site construction is in final stage. The project is expected to be online before the end of 2017. Progress is also done in the McGinness Hills complex in Nevada, where we are developing a third phase to be added to the current 86 megawatt complex. Engineering and procurement is ongoing and drilling is in process. We now expect the third phase of 48 megawatts to be completed by the end of 2018. Upon completion, McGinness Hills will be our largest complex in the U.S. with a generating capacity of over 130 megawatts. Also in Nevada, we are developing the Dixie Meadows project, which is at the earliest stage. Drilling is still in process. We expect a decision on commercial operation date later on in 2017. All the projects we are working on in Nevada are covered by the SCPPA portfolio PPA that I elaborated on earlier. Additionally, we monitor the market and proactively search for acquisition opportunities that will be accretive to Ormat. In the storage on Slide 23, the integration in Viridity is ongoing. We increased the staff in order to support storage activity in the West Coast, in addition to Viridity's activity in the East Coast. We are participating in multiple RFPs. We are also looking at other potential acquisitions in the storage market. We are targeting acquisition prospects that will broaden our capabilities and strengthen our offering globally. Turning to Slide 24. Our estimated capital needs for the remainder of 2017 include approximately $120 million for construction of new projects and enhancement of our existing power plants. In addition, we estimate approximately $20 million for maintenance CapEx to our operation power plants, exploration activity and enhancement of our manufacturing facility. In the aggregate, we estimate total capital expenditures of approximately $140 million for the remainder of 2017. In addition, we expect $33 million for debt repayment for the remainder of 2017. Please turn to Slide 25 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 non-controlling interest to be approximately $23 million. Before I turn the call over to the operator for Q&A, we want to let everyone know that we will be hosting an Investor/Analyst Day on Tuesday, September 26th, morning in New York. Additional details are forthcoming, but please mark your calendars and reserve the date as we have presentations from our senior management team, Viridity management and ORIX. This concludes our prepared remarks. Now I'd like to open the call for questions. Operator, please?

[Operator Instructions] And our first question is from Mr. Paul Coster with JPMorgan.

Yes, thank you for taking my question. Well, first off, I wonder if you'd be kind enough to share with us your thoughts on the pipeline opportunities, particularly in New Zealand and Ethiopia?

What opportunities, Paul? Hi, good morning.

Your future development in these type of opportunities in New Zealand and Ethiopia?

Okay, those are two different types of opportunities. In New Zealand, we are particularly talking about product sales. We have few prospects. We already announced that we have won one large deal with a town in New Zealand. We have few more in line that we expect to close either during this year or early next year, and those are simple product sales with EPC. On the other side, the Ethiopian thing is something completely different. It's a new country, a new opportunity. And we have, as you know, we are - I already announced in the last call that we have a few concessions in Ethiopia, which we won and we are in very advanced negotiations with the Ethiopian Government to sign a PPA, so we will be able to develop them on a few stages.

Got it. And then, regarding this faster turns business in Turkey, what's - how saturated is that market? Has it got several years of opportunity ahead of it, or is a sort of one-time opportunity that kind of plays out quite quickly?

The Turkish market is a very large market, backed up by the local government through subsidies to IPPs. The potential and the demand for electricity are still very high. The only problem might be in that, that those subsidies that are driving the market are going to last by the end of this year, and part of them is going to next year. But I know that there is a local, let's say lobby that are trying to prolong those subsidies. So it will be pretty much based on, if the local market will continue to receive subsidies we expect this growth to continue in the Turkish market on geothermal.

And lastly, do you achieve any kind of cost out, sort of economies of scale, by virtue of this sort of magnitude at that Turkish business or is it going to be locked in at this lower gross margin rate moving forward?

Obviously, we achieved lots of scale of economy, otherwise, it was impossible to come back to the Turkish market. And at the end of the day, we are selling at the average gross margins that the company is used to before Sarulla. And as we announced, we expect our gross margins to be, on the product side, around 30% going forward.

Okay, thank you very much.

Thank you.

Our next question is from Mr. Noah Kaye with Oppenheimer. Mr. Kaye?

Yes, good morning. This is Kristin on for Noah. Thank you for taking our questions.

Thank you.

Thank you, Kristin.

I wanted to ask about the product backlog, and get a little bit more detail on that. Obviously seeing some of the roll-off from Sarulla and the completion of the projects in Chile, but how would you access activity out there for the products business and what do you think is the potential to replace some of that backlog?

The Sarulla backlog does not have any significance today in the numbers that we gave, which means that those, the $192 million number has maybe a few million of Sarulla in it. So we are back to square one, which means backlog without Sarulla, which from my point of view, at this point of time, we have a strong backlog on the product side without Sarulla. Obviously, it includes numbers coming from Turkey, from New Zealand and other projects that we have elsewhere.

Okay. And then, I wanted to talk about the SCPPA renewal and just sort of the trend that we've seen in fixed pricing on those PPAs as opposed to inflation index pricing. To what do you ascribe that trend and is that something that we should expect for future projects?

I am expecting that the upcoming PPAs in the U.S. will be not indexed, but I am expecting it to be only in the U.S. For us, for this particular SCPPA PPA, you should bring into account, that part of the portfolio is relating to greenfield, but part of it is relating to existing power plants, which we are already operating and obviously, those power plants are going to be more profitable to us in the future.

Okay. And just one last one. Six months into this new administration, how would you assess the regulatory landscape in the U.S. for project development? Do you see that it's become easier or harder or is it about the same to develop those projects on public lands? And what are you watching in terms of potentially helpful legislation or regulation?

If you watched me six months ago, probably I would have been more alerted than I am now, because pretty much nothing has changed from our point of view. As we are operating at the state level and not necessarily on the federal level, and on the state sides nothing changed. On the federal level, we lost maybe some of the tax credit that there were, but they were at the end of their lifecycle anyhow, so which means that, if you ask me today, I don't really see any difference. Looking for the future, we are still expecting things to change, but as we all know in the states, we don't really know where it's going. So I cannot really predict anything.

Thank you, that's helpful.

Thank you.

Our next question is from Mr. Jeff Osborne with Cowen and Company. Mr. Osborne?

Thank you, good morning. Just a couple of questions on my end on the tax reform slide, can you just talk about what tax rate we should be using for the model, for the remainder of '17 and '18, just given the changes?

As I said from a tax perspective, it's going to be a bit higher this year, maybe closer to the 30%, but you should take into account that from a cash perspective, it doesn't change. We still have significant NOLs and production tax credits in the U.S., so we don't expect to pay taxes in the medium or even longer term in the U.S. as we continue to build new power plants and have additional depreciation in the U.S. So it's mainly an accounting entry, not cash.

Makes sense. I also had a question on the SCPPA win, and congratulations on that, but my understanding and looking at the documents that they filed is that, if I read it right, that you can combine solar with your solution for kind of a grid firming in the event that there was an issue on geothermal production or you wanted to arbitrage between the two? Is, A, did I read that right, and B, have you ever done that in the past?

First of all, good catch, Jeff. I mean, it is a very good point. It's the first portfolio or it's the first PPA that we have signed, that we can combine solar and geothermal. At least, our intention is to provide solar only for auxiliary power, and electrify our pumps and everything that we use in the power plants with solar. Obviously, we don't intend to sell solar power instead of geothermal power, but you will realize that it will help us a lot, to sell net-net and not gross to the utility. And it will also most certainly help us in existing power plants under SCPPA PPA, and also in new power plants, to mitigate on those hot days during summertime that we have loss of generation to the very high ambient temperature, as a matter of fact, we have now in Nevada and California.

Got it. That makes sense. And then also about the SCPPA win, does that eliminate any PPA expirations that you had between now and 2020? I just want to make sure that all the upcoming expirations of PPAs are now kind of satisfied, if you will, for the next couple of years, at least?

Yes, pretty much, this is the case. We are pretty much covered for the next, I don't know how many years. Five years, I think.

Basically, I would say it covers the [indiscernible] in 2018, and in '22, in both two and three [indiscernible]. So all of the coming expiration PPAs are basically re-contracted.

Perfect. And then the last one I had, if you don't mind, is just on the storage side. Can you just talk about the scope of, a two part question, the scope of the RFPs that are you're bidding on, are these kind of larger commercial projects in the single-digit megawatt size or even sub-megawatt or are you looking at more utility scale? That's kind of question one and then question two about additional M&A. I assume you're not looking to take technology risk on some type of chemistry for storage, and you're looking more like kind of system integration or any of the ancillary things like power, electronics and/or software that would manage a storage system. I just want to be clear, as to your M&A strategy there.

Jeff, so let's make it crystal clear. Now first of all, we are looking for projects both behind the meter and in front of the meter on lower scale that will do DR, frequency regulation and voltage regulation. All these projects are either, selling of a solution or mainly operation and making a profit on the DR saving or frequency regulation and voltage regulation. We are not going to be in the battery side at all. We will use existing batteries that are today or future batteries that will come up. We will provide though, the solution to manage and build and operate.

Perfect, thanks so much.

On the M&A side, which was your last question, we are actively looking, both on the geothermal side and for a power plant that we can buy, enhance and operate. And on the storage side, we are looking for companies that will add us value from the technology side or projects that they are ready to develop and we will enter as the developer and build it, basically looking for a pipeline.

Great, that makes sense. If I can squeeze one last one in as well, a followup to Paul Coster's question, just on those new markets, has the RFP from Guatemala been released or do you expect that in 2017?

As far as I know, and I should know, it wasn't released yet.

Go it, thank you.

Thank you.

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

Guys, we had a very good quarter and I would like to welcome our new shareholders and Board members, and thank you very much for your ongoing support, and see you next quarter. Thank you, very much.

And in our Analyst Day. Thank you.

The conference has now concluded. We want to thank you for attending today's presentation. You may now disconnect.