Ormat Technologies Inc (ORA) 2016 Q2 法說會逐字稿

Good morning, and welcome to the Ormat Technologies' second quarter 2016 earnings conference call. All participants will be in listen-only mode. (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 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 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 reasons 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 US 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 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 of the year.

Starting with slide four, we delivered another good quarter in the second quarter, with double digit top line 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 a 14% increase, reaching $104 million due to higher electricity generation and new expansion coming online.

Our product segment grew approximately 13% to $56 million, benefitting 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 a 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 revenues 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 the 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 costs 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 made at our manufacturing facility.

We shortened lead times and improved procurement processes, which reduced our raw materials costs. In addition, the reduction in commodity prices further reduced the cost of raw materials as well as subcontracting costs. As we indicated during our last quarterly conference call, we expect our gross margin 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 a 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 a 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 a 7.6% increase.

Moving to slide 11, net income attributable to the Company's stockholders for the second quarter of 2016 was $24.3 million, or $0.49 per diluted share, 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. A reconciliation of the EBITDA and adjusted EBITDA 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's Board of Directors approved payment of the 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 digit top and bottom line growth during the second quarter, clearly demonstrating that we are making solid progress against our multiyear strategic plan.

Moving to slide 17, a key area of focus for Ormat's new management in the 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 costs, and improving management control. In the electricity segment, in addition to the improvements mentioned above, we are also focused on optimizing the operations of our power plants.

We are 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 margins.

Turning to slide 18, another goal was to expand our electricity generation both organically and inorganically, and we continue to make notable progress against this objective. Electricity generation during the quarter was 1.3 million megawatt hours, an increase of 10.8% compared to last year.

This increase was due to the commencement of the second phase of Don Campbell, which came online in September 2015, as well as Plant 4 of the Olkaria III complex in Kenya, which came online in January this year. Generation was also positively affected by the higher performance in the McGinness Hills complex.

I'll 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 are working to monetize the Don Campbell II plant and further strengthen our balance sheet.

As part of a 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 place during the third quarter. Following the closing, Ormat will contribute -- Ormat Nevada will contribute Don Campbell II 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 immediate accretive to the earnings.

GB owns and operates 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 planned modifications to the existing equipment as well as to further develop the asset, with the potential of reaching a total of 45 megawatts in phased 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 geographies.

We see CDC an ideal partner, as CDC is proficient with the French regulations and experienced in investments that serve the economic development of France. Together with BRGM and CDC, we will continue to develop the Bouillante geothermal power plant.

Turning to slide 20 for an update on projects under construction, we added 10 megawatts to our portfolio from the Bouillante acquisition, and plan to add another 150 to 180 megawatts by the end of 2018 by bringing new power plants online and expanding existing plants.

The expansion plans include 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 the 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 megawatts. We believe that both Dixie and Tungsten may qualify for the production tax credit.

We have taken out from the list the Menengai project in Kenya due to 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 have 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 the equipment to be supplied by Ormat is underway as planned currently.

For the second and third phases, drilling activities are 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 investments, covering Ormat's 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 projects 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 investment in new projects, we are continuing our exploration and business development activities to support future growth.

If you could please turn to slide 21, we will 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 enhancements.

An additional $41 million are budgeted for exploration activities, development of new projects, investment in new activities. This reflects expenditure under the new strategic plan and maintenance CapEx for operating projects. In addition, $31 million will be required for debt repayment.

Turning to slide 22 for an update on our product segment, we continue 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 in supply contracts 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 events in Turkey didn't have a material impact on electricity needs of Turkey or their ambition plan for renewable energy. We are now in the final negotiation stages of the new supply contracts in Turkey. And we are 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 the 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. And we expect annual adjusted EBITDA attributable to minorities' interest to be approximately $17 million. This amount assumes the inclusion of the second phase of Don Campbell power plant in the joint venture with Northleaf.

In summary, I am very pleased with the strong result 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'd like to open the call for questions. Operator?

Thank you, sir. We will now begin the question and answer session. (Operator instructions.) Paul Coster, J.P. Morgan.

Yes. Thanks for taking my questions, and congratulations on a good quarter. A few quick ones; first stop Menengai. What's caused that to be pushed out? And should we just assume it's a nonstarter 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 are not still closing it, but we are waiting for clarifications from the local supplier that the amount of steam will be at least 110 megawatts. And that's why we took it out from the immediate supply.

Okay, got it. Can you give us a quick update on your energy storage initiatives and when you think they might be come a material consideration as well, of Alevo I'm thinking here?

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

Finally, the relationship with Toshiba. It's been in place 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 are working on a second one. I'm -- so far, even though it's quite slower 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 day, a large shareholder value for us and for them.

Okay. Thank you.

Thank you.

(Operator instructions.) Dan Mannes, Avondale Partners.

Thanks. Good morning, everyone, and nice quarter.

Thank you, Dan.

Sure. A couple follow up questions here. As it relates to 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 was there maybe 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 are trying to minimize the risk and not to hit a wall as this Company did two years ago. And we are going again on steps -- or smaller steps.

At the end of the day, we believe both projects can provide much higher output 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 of more projects in order to make it.

If I recall right, and correct me if I am wrong, Doron, Tungsten has a second phase toward the end of 2018.

Okay, great.

Am I right?

We are -- on Tungsten, basically I would say that, as Isaac said, we decided to go on a phased 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 sub-phase of approximately 24 megawatts. And following this phase, assuming everything will be supported -- supports our current estimation, we will have a second phase that will probably be beyond 2018, so we can probably come at later stages. But as always, it's based on the risks verse rewards.

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

Principally it is probably -- it is primarily Menengai, which is being delayed, and not beyond that.

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

Dan, you know us. We are a 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 that we are 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 straight quarters where you've been well into the high 30%, if not the 40% margin range. You keep telling us they're going to normalize. I believe you that you think they will normalize. But at what point do we just assume we're at a new normal?

I am very optimistic that it will be normalized (laughter).

Is that optimistic or pessimistic, Isaac?

No, I am kidding. But the thing is, as we explained two years ago, we are constantly working on efficiency. And the question is what's coming first.

So, even though we thought that we will not be able to achieve the numbers that we achieved this quarter and are also optimistic about the next one, still those efficiencies are catching up and bringing more and more bottom line, which I am very pleased, of course.

At the end of the day, with the different mix of the deliveries, specifically in 2018 there will be a bit of a decrease in the gross margin, specifically in the product side.

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

Thank you.

Gerry Sweeney, Roth Capital.

Good afternoon. Thank you for taking my call.

Thank you, Gerry.

Thank you, Gerry. Good morning.

Just a quick question, actually most of mine have been answered, but on the electricity side. Obviously margins were very good in the quarter. You discussed better PPAs at Heber, operating efficiencies, 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, etc., that may have been driving this 40% gross margin, or was this sort of, as Dan just alluded to on the product side, the new normal on go-forward basis?

On the -- well, contrary to what I said on the product side, we are -- we intend to keep our profitability stable on the electricity side. As we make lots of efficiencies on 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 also in the future.

We are unmanning power plants or building them unmanned, the new ones, which is immediate affecting the bottom line. So, on the electricity side, there is nothing unusual that happened this quarter that will give me the -- any clue that it 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.) A follow up from Dan Mannes, Avondale Partners.

Thanks for indulging me. On the power price side, I was wondering if there has 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 particularly given the volatility we've seen in both oil and gas prices lately?

We, Dan, 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 a net basis we are maintaining our overall numbers, although accounting wise they are not defined as accounting hedges so they appear in a different line item than the revenue.

So, the volatility has some impact of ups and downs. But on the total numbers, since we are hedging specific PPAs, it shouldn't impact us. I would say that the relatively higher gas prices today compared to previous -- to the beginning of the year and the previous years, 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 Mesa in 2017. But anything you can do, for instance, to renegotiate, for instance with ECO on Puna, just to maybe take some of the volatility out going forward on a long term basis?

Dan, you will appreciate that we will not start negotiations with ECO on the conference call. But on the other hand, as you recall, we were challenged in Puna since the tropical storm two years ago.

And I am very optimistic today that we are beyond those challenges. And the power plant is performing more than well and increasing output almost to its maximum, which so far indicates that we did well in the past year and a half to modify, change, and so on.

Now the challenge remains with North Brawley that we are dealing for the last few years. And I am also optimistic that over there also we will be able 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 am optimistic and I am looking forward to the upcoming quarters and years. And we believe that we are -- all the employees of Ormat are behind us, and we are 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.