Ormat Technologies Inc (ORA) 2015 Q1 法說會逐字稿

Good morning and welcome to the Ormat Technologies first quarter earnings 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 of [Hayden MSRR]. Please go ahead.

Thank you, Daniela. 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 we begin, we 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 operations and are based on management's current estimates and projections, future results or trends. Actual 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 Securities and Exchange Commission.

In addition during the call, the Company will present non-GAAP financial measures, such as EBITDA and adjusted EBITDA. Reconciliations to most directly comparable GAAP measures and management 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 the Company's website. Because these measures are not calculated in accordance with US GAAP, they should not be considered in isolation from the financial statement prepared in accordance with US 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 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, Jeff and good morning, everyone. Thank you for joining us today for the presentation of our first quarter 2015 results.

Starting with slide 4, the first quarter was the seventh quarter with some expected headwinds, in which we progressed with our expansion plan and began executing our initiatives to set the stage for our next growth phase. Just a few weeks ago, we conducted a successful Analyst Day in New York City and discussed our multi-year plan designated to elevate our march from a leading geothermal company to a recognized global leader in the larger renewable energy industry. This ambitious plan involves extending our geographic reach and expanding our technology to capture a larger portion of high temperature geothermal market with our proven binary systems as well as with third-parties' steam technology. Over the long term, we are focusing on growing our customer base around the world.

Moving to slide 5, our financial results as expected were affected by lower commodity prices, one-time expenses related to the restructuring transaction, as well as normal quarterly fluctuations in revenue recognition for our Product segment. While these factors collectively resulted in large quarterly revenues and net income, we are reiterating our revenues and adjusted EBITDA guidance for the full year. This morning, we announced a new $98.8 million EPC contract for a geothermal project in Chile. This contract is our first product win in the emerging Chile market and it's evidence of our continued focus on expanding our geographic reach.

I'll provide some additional remarks regarding our progress after Doron reviewed the financial results, Doron?

Thank you, Isaac and good morning, everyone. Let me start by providing an overview of our financial results for the quarter ended March 31, 2015.

Starting with slide 7. Total revenue for the first quarter of 2015, $120.2 million compared to $142.4 million in the first quarter of 2014, with 75% of it coming from the Electricity segment in 2015. In our Electricity segment, as you can see on slide 8, revenues were $90 million in the first quarter of 2015 compared with $94.8 million in the first quarter last year. The decrease was mainly due to the lower energy rates resulting from lower oil and natural gas prices of $6.6 million, and lower generation at Puna power plant of $3.1 million as a result of last summer's hurricane. The decrease was partially offset by the February 2015 commencement of the McGinness Hills Phase 2 power plant in Nevada, adding $3.6 million of revenues and by a reduction in net loss on derivative contracts on oil and natural gas prices year-over-year.

In the Product segment on slide 9, revenues were $30.3 million compared to $47.6 million in the first quarter of 2014. As you already know, our Product segment is characterized by fluctuations in quarterly revenue. The decrease in the first quarter is primarily due to the timing of revenue recognition and specifically this quarter, due to the allocation of manufacturing resource for expedited construction of the Don Campbell Phase 2 project in order to commence commercial operation towards the end of 2015, three months earlier than anticipated. As planned, we'll remain on schedule with our contracts with third-party customers and on track with our full year guidance. We expect revenues in the second half of the year to be strong.

Moving to slide 10. Company combined gross margin for the first quarter was 36.6% compared to 37.5% in the first quarter of last year. In the Electricity segment, gross margin was 38.2% compared to 39.8% last year and in the Product segment, gross margin was 31.9% compared to 32.9% in the prior year quarter.

Moving to slide 11. First quarter operating income was $29.9 million compared to $42.6 million in the first quarter of 2014. The difference in operating income was primarily due to the decline in revenue and a one-time expense of $3.4 million related to the restructuring transaction. Operating income attributable to our Electricity segment in the first quarter of 2015 was $24 million compared to $30.9 million in prior year quarter. Operating income attributable to our Product segment was $5.9 million compared to $11.7 million in the first quarter of 2014.

Moving to slide 12. Interest expense net of capitalized interest for the first quarter of 2015 was $17.8 million compared to $20.5 million last year. This decrease was primarily due to the lower interest expense, a result of debt repayment partially offset by increase in interest expense related to a new loan to finance the construction of the McGinness Hills Phase 2 project from August 2014.

Moving to slide 13. Net income attributable to the Company's stockholders for the first quarter of 2015 was $10 million or $0.21 per basic and diluted share compared to $21.6 million or $0.47 per basic and diluted share in the first quarter of 2014. Please move to slide 14. Adjusted EBITDA for the first quarter of 2015 was $65.3 million compared to $73.4 million in the same quarter last year.

Turning to slide 15. Cash and cash equivalents as of March 31, 2015 were [$7.7 million]. We generated $83.1 million in cash from operating activities. The accompanying slide breaks down the use of cash during the quarter. Our long-term debt as of March 31, 2015 and the payment schedule are presented in slide 16 of the presentation. The average cost of debt for the Company stands at 6.1%.

On May 6, 2015, Ormat Board of Directors approved payment of a quarterly dividend of $0.06 per share for the first quarter. The dividend will be paid on May 27, 2015 to shareholders of record as of closing of business on May 19, 2015. In addition, the Company expects to pay quarterly dividend of $0.06 per share in each of the next two quarters.

That concludes my financial overview. I would like now to turn the call to Isaac for operational and business update. Isaac?

Thank you, Doron. Starting with slide 18 for an update on operations.

In February, the second phase of our McGinness Hills geothermal power plant in Nevada began commercial operations. This complex has an annual generation capacity of 72 megawatts and sells its electricity under a power purchase agreement with NV Energy. In Heber 1 enhancements, we intend to drill an additional well in 2015 and perform upgrade to surface equipment following which we expect the capacity of the complex to reach 92 megawatts with a higher capacity factor than current performance.

Our portfolio generation in the first quarter was similar to the first quarter 2014, mainly due to lower generation as expected in Puna. As part of management's new operational approach, we are focused on profit optimization and while it may translate to a reduction in generation at some plant, we expect the profitability will continue to improve as it has been.

Moving to slide 19. In March, we signed a 20-year agreement with Southern California Public Power Authority for the 19-megawatt second phase of our Don Campbell project in Nevada. As Doron just mentioned, we now expect this phase to come online by the end of 2015, approximately three months ahead of schedule. In Olkaria, we are on schedule with the construction of a 24-megawatt plant in Kenya. [Floor plan] is expected to bring the complex generation capacity to 134 megawatts in the second half of 2016. And with regard to Sarulla, Indonesia, the consortium is continuing field development at the site. First phase is expected to commence operation in 2016 and the remaining two phases are scheduled to commence within 18 months thereafter. The projects I just described as well as additional projects on the various stages of development are expected to add between 90 megawatts to 115 megawatts by the end of 2017.

Besides the investment in new projects, we are continuing our exploration and business development activities to support future growth. If you could please turn to slide 20, you will see our CapEx requirements for the remainder of 2015. We plan to invest a total of $112 million in capital expenditures on new projects under construction and enhancement. An additional $39 million are budgeted for development and exploration activity, maintenance capital for operating projects and investment in machinery and equipment. In addition, $61 million will be required for debt repayment.

Slide 21 provides an update on the Product segment. As I mentioned at the beginning of the call, we have secured a new $98.8 million contract positioning our product backlog as of May 6, 2015 at record of $387 million. This robust backlog will support our financials in the next two to three years.

Let me continue my review of business update on slide 22. Last week, we closed the equity transaction with Northleaf Capital Partners under which Ormat contributes certain geothermal and recovered energy generation power plant into a newly established holding company and Northleaf acquired 36.75% equity interest in the joint venture for a purchase price of $162.3 million. Ormat will continue to consolidate the entity and its assets, as well as provide day-to-day management, operations and maintenance control over the project. The purchase price and the percentage interest acquired by Northleaf were adjusted based on the Canadian dollar versus US dollar exchange rate and were affected by the devaluation of the Canadian dollar against the US dollar. The purchase price implies an aggregate transaction value of approximately $442 million.

Moving to slide 23 for a regulation update. Global demand for renewable energy remains strong as awareness increases for the positive value of geothermal as compared to intermittent renewable technology. More and more leaders and policymakers are raising the standards for renewables. In January of this year, California Governor Jerry Brown announces he would like to raise the renewables portfolio standard target to 50% by 2030 from his current goal of 33% by 2020. In March, House and Senate committees in Hawaii unanimously approved legislation to raise the state's renewable portfolio standard from 40% by 2030 to 100% by 2040. The state has excellent wind, solar, geothermal, biomass, hydropower, ocean energy resources to transform the island's fuel mix to clean energy.

We are also seeing similar initiatives in other parts of world as well. At the Fifth African geothermal conference this past October, Tanzania's Vice President call off African nations and their partners to use the potential of geothermal in the region as a catalyst for achieving the continent's economy, social and environmental development inspiration. Leaders in the region clearly understand that the sustainable and affordable energy supply is essential for realizing economic and social development, especially renewable energies such as geothermal present a viable option towards that specification of generation mix and thereby increasing power supply reliability.

The acknowledgment of the renewables' benefit and regulations support as well as energy shortage in many of the developing countries create opportunities for Ormat. The multi-year plan that was presented (inaudible) is based on the strength and opportunity. For those of you that were unable to attend our Analyst Day, you can review the webcast on our website.

In my opening remarks, I mentioned that the main terms of our plan, this plan is new for us and it has several moving parts and a long-term view. We recognize that investors are eager to understand the underlying metrics and [can track or evaluate our] progress. We are committed to providing meaningful tools to help investors track our progress as we actively implement our plan. I'm confident that we will be able to capitalize on the opportunities before us and believe Ormat is uniquely positioned to succeed in the evolving renewable energy market.

Turning to slide 24, we reiterate our 2015 revenue guidance despite the current oil and natural gas prices, which translates to a $26.6 million reduction in revenues compared to last year. We expect the Electricity segment revenues to be between $380 million and $390 million and Product segment revenues to be between $180 million and $190 million for total revenues of between $560 million and $580 million. We also reiterate our adjusted EBITDA guidance of $280 million to $290 million for the full year, which is also impacted, of course, by current oil and natural gas prices. We expect Northleaf's portion of the 2015 adjusted EBITDA guidance to be approximately $14 million.

That concludes our remarks for today. Thank you for your continued support. Operator?

We will now begin the question-and-answer session. (Operator Instructions) Dan Mannes, Avondale Partners.

A couple of questions here. First on the Chilean award, number one, that is included in the guidance number, in the backlog number and can you provide the name of the developer of the project?

At this time, Dan, it's obviously as we said it's in Chile. It's with a Chilean development company, but we cannot really disclose the name of the holding company as we are not allowed to at this stage. And it is, Dan, it is in the backlog of $387 million.

Got it. Given the fact that it's going to start working this year, any thoughts on that, maybe providing some upside to the guidance or to the opportunity for product sales in 2015?

At this stage, we are reiterating our numbers and we are not expecting any upside coming from this project. As you probably understand, we are working on it for a few months already.

Understood. The second question is, I looked at your CapEx guidance for the balance of the year, I think it was roughly $150 million. When you gave CapEx guidance for the full year, I think you said it was right around $250 million and you only spent $40 million in the first quarter. So I'm wondering, where there either some projects that were deferred or alternatively, you have things coming cheaper than expected?

It's a -- some of it's a combination, but more the first one. Some tenders in the US that were delayed from NV Energy and some projects that have been delayed for a couple of weeks, [last month]. So this delayed some of the CapEx to next year.

Okay. On the Northleaf transaction, now that that's closed, can you maybe talk a little bit about how the accounting is going to work, and as you think about adjusted EBITDA, are you going to include the outflows to them in your adjusted EBITDA or that will be excluded, I just wanted to make sure we're thinking about it correctly as it relates to your guidance?

From the accounting standpoint, since we are consolidating the subsidiary, all of the numbers are going to be included 100% within our numbers. Northleaf is going to have an income related to non-controlling shareholder, that's going to be the line where you will see the part that Northleaf is entitled to. Currently, our guidance is $280 million to $290 million, looks at the 100% of the Company. What we've said is the relevant part for Northleaf is about $14 million [profit].

So the $280 million, $290 million does not exclude the $14 million -- the roughly $14 million annually that'll go out to Northleaf?

Yes, that's right.

Okay. Not to quibble, but for the tax equity transactions you do include that, that is included in your adjusted EBITDA. So it seems like you are treating the two a little bit differently?

Dan, what we have done this quarter in order to be fully transparent, we gave out a specific number that relates to Northleaf. As we go through this end of the quarter into all the accounting, we will look into it, but we thought it's important, you will know the number, the 100% the Northleaf number in order for you to do your valuation either way.

Understood. I just wanted that clarification. And then lastly, I know you just had your Analyst Day recently and I know it's probably a little bit early. Just wonder if there is any update that's worth discussing in terms of some of the non-geothermal initiatives, anything you can give us in terms of what you're doing for instance in solar?

We have lots of initiatives on all subjects we discussed during the Analyst Day, but nothing that we can come up and say is concluded. And we are very optimistic on our new initiatives on geographical expansion, we just mentioned on Chilean thing and also on technology and customer base, but nothing that we can talk about right now.

Understood. We'll look forward to updates in future quarters. Thank you.

Thank you very much, Dan.

Mark Barnett, Morningstar Equity Research.

For me today, just a couple of more general questions. Obviously, the moves in Hawaii are very supportive move. I'm just wondering what do you think if you could talk about the potential on island for a further geothermal development in terms of maybe size of the addressable resource.

We just won a tender of 25 megawatts, which is additional to our existing power plant in Puna. We are negotiating with HELCO the final steps of this tender. As we already -- we are in Hawaii for many years and the advantages of geothermal are well known in the island. I think geothermal will be a larger part of the upcoming green energy. We cannot predict what's going to be the exact megawatt at the end of the day, but we are very optimistic regarding Hawaii.

So there is likely a fairly long runway there, even if the projects are smaller in size, like the 25 megawatt?

They are small, but we are building in stages. So it fits our strategy to build 25 megawatt, another 25 megawatt and then another one.

Right. Okay. I know you aren't able to disclose your partner in the Chilean project. But more generally speaking, could you just give us an update on the remuneration structure for geothermal. And then, whether the bulk of the resource there is at that higher-end of the heat spectrum or whether there is a some lower heat potential there as well?

At this stage, it's very difficult to predict. We know that the resource is there. We are not carrying the risk of the exploration. We are already with the supplier and our product was chosen. Obviously, we competed with [steam power] solution providers and others. But in general, we are very happy with the win because it's comparatively high temperature and still the partner choose us -- our binary solution and not somebody else. And as you understand from the amount, it's a fairly big power plant.

Right. Okay. I was just -- maybe I was mistaken, I was -- but, you are also maybe undergoing some exploration on your own in Chile or did I misinterpret (multiple speakers)?

No, we have our own exploration in Chile, but this one is not the case. This is completely a different site which is explored by our partner, and we are not carrying any exploration liabilities in this particular site.

Okay, I understand that. All right, thank you.

Thank you.

(Operator Instructions) JinMing Liu, Ardour Capital.

First question about your cost for your Electricity segment, [about $55 million plus $6 million] was the lowest number in like three, four years on a quarterly basis. So anything specifically happened during the quarter, did you improve the cost at some of your more troublesome power plant like most probably or you just -- the seasonal thing happened there?

Jin, as you know, and we discussed this issue lately -- it's last year actually, we are working very diligently on cost reduction and sometimes it's even coming on the expense of generation, but at the end of the day, you'll see our bottom line is improving as we are becoming more cost effective on each and every power plant. We have a very, very precise plan to work on each and every power plant and as we speak, we are starting to see the results of this plan.

Okay. Just for my understanding, how much was the Puna issue contribute for the cost reduction during the quarter?

In Puna, we have a generation issue, which started last summer with the new hurricane. We actually announced that we're going to get -- we are going to solve this issue at the second half of 2015 which we intend to do so. And it's lower by $3 million comparing to last year and as I said, we expect to be back online on full production during the second part of this year.

Okay. Good. Switch to your backlog numbers, can you provide us a breakout between EPC contracts and the just pure equipment sale, for thus far your backlog numbers?

First of all, all our backlog relates to our product sales. As you mentioned in part of them, we also provide EPC but we never gave this breakdown between the product and the EPC part. But you know what, while you're asking it is something that we should think about and maybe we can -- let me think about it and maybe we can break it for you [from] next quarter.

Okay. Thanks for that. Lastly, regarding the Northleaf transaction, just one quick question there. For the future dividends payable to Northleaf, whether those payments will be in the Canadian dollar or US dollar?

The transaction is US dollar and we operate in US dollar. The only impact for the Canadian dollar was the funding, all the investment of Northleaf. Going forward, there is no impact of Canadian dollars on our results or dividend or any other parameter.

Okay. So there is no currency risk associated with that. Okay, good. Thanks a lot.

Thank you very much.

Ella Fried, Leumi.

Could give us an update on the impact of the technology diversification plans that you're having on the Company's CapEx in the next two years?

As I said during the conference call, it is an ongoing process. And we are working on the technology diversification very diligently as I said. But we don't have the accumulated CapEx numbers that we can provide as of now. I'm expecting that before the end of this year, we will come with -- and as I said also, you really don't have -- we didn't provide you yet enough data by means of numbers and results on this issue.

I know.

And we intend to do so within the next few months. And we'll provide you more color numbers, results and CapEx. And if I can add, especially on prior to any additional initiatives or new projects that will go over the last couple of years, we've had a CapEx for further -- around $200 million mark, a little bit above, little bit below. Going forward -- this year and then going forward, this is a relative number that seems relevant going forward.

Thank you. And another question, can you give us maybe some rough estimate about the profitability level of the Product segment in the next three quarters till the end of 2015?

We gave you our estimations for the whole year. The guidance actually is -- we have reiterated the numbers. So, if you take $30 million out of the number gives you the remaining of the year concerning to Product. As you probably know, we are far from being flat during the quarter.

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

I'd like to thank you very much for joining us this morning and for your ongoing support. And see you in our tours with the investors or the next future calls. Thank you very much and have a nice day.

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