Ormat Technologies Inc (ORA) 2017 Q1 法說會逐字稿

Good day, and welcome to the Ormat Technologies Q1 2017 Earnings Conference Call and Webcast. (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, Francesca. 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 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 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 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 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 would now like to turn the call over to Mr. Angel. The call is yours.

Thank you very, 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 continue 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 advanced our ability to achieve our stated goal of evolving into a recognized leader in renewable energy.

Our electricity segment has a strong quarter. -- had a strong quarter, delivering 7.3% growth reflecting a generation coming online and the return of (inaudible) 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 products backlog.

Near the end of the first quarter, Ormat closed the acquisition of the business and asset for Viridity Energy, Inc., a company engaged in demand response, energy management and storage of energy. As most of you know, demand response and energy storage are 2 of the fastest growing segments of the energy industry and this acquisition accelerates our entry into this space. Integration is already underway, and we are promoting several storage opportunities in the East and the West coasts.

Turning to Slide 5. Last week, we announced that ORIX Corporation, one of the world's leading diversified companies with operations in 36 countries, will acquire an approximately 22% ownership position in Ormat by purchasing approximately 11 million shares of Ormat's common stock. From FIMI, we're making 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 for renewable energy investments around the world.

ORIX is a clear supporter of clean, reliable, [baseload] power, and they see geothermal as an increasingly important component of the world's overall energy mix. With ORIX's significant presence around the world, access to capital and strong positioning throughout Asia, we believe Ormat can enhance and accelerate 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 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 corporation agreement between the couple (inaudible), 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, in Japan, Ormat will have certain rights to serve as a technical partner and co-invest in ORIX geothermal energy projects. Also, ORIX will assist Ormat in obtaining project financing for its 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.

Under related agreement, ORIX will have the right to designate 3 persons to our board, which will be expanded to increase -- to include 9 members. ORIX will propose a fourth person that will be mutually agreed by Ormat and ORIX to serve as an independent director on our board.

In addition, for so long as ORIX entitled to board their presentation, ORIX will be subject to certain customary standstill restrictions, including an effective 25% cap on its voting 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 in 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 of 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 our Bouillante power plant 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 due to successful improvement of the resource performance.

Moving to Slide 9. First quarter 2017 revenue for our product segment was $74.1 million compared to $43.7 million for the same period last year, representing an increase of 69.5%. This increase was primarily due to the start of revenue recognition from 2 new geothermal projects 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 segment revenue was partially offset by a decrease in revenue from our geothermal project in Chile, which is close to completion and due to timing of revenue recognition in a 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 on 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 2016 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 power plants.

In our product segment, gross margin decreased to 33.3% in the first quarter of 2017, mainly due to different product mix and different margins in various sales contracts we entered into for this segment during this period, as well as additional costs 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, a 17.7% increase year-over-year. The increase in operating income was primarily attributable to the increase in our gross profit in both our electricity and product segments, primarily due to the increase in revenue.

Operating income attributable to our electricity segment for the first quarter of 2017 was $40.9 million, an increase of 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 of 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 equivalents as of March 31, 2017, were $174.1 million compared to $230.2 million as of December 31, 2016. The accompanying slide 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 its payment 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 a quarterly dividend of $0.08 per share in the next 2 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 higher 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 in 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 commence operation in March 2017. Our [March] share in the first unit is 14 megawatts, and we started to generate income from of our 12.75% equity investment in the Sarulla Consortium, which is recorded in the P&L under equity and income of investees.

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 '18, 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 estimates, 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 to the national utility of Honduras. We expect the project to generate annual revenues of approximately $33 million under the 15 years BOT agreement.

We also initiated construction of Tungsten Mountain project in Nevada. We expect Tungsten to generate 24 megawatts once 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 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 a 10 megawatt [repowering] that will increase Olkaria III complex to 150 megawatts during 2018. In Guadaloupe, we are planning to increase our -- of Bouillante -- we 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 a 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 a 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 goals to add between 200 and 210 megawatts by the end of 219 (sic) [2019]. Additionally, our M&A team continues to monitor the market and proactively search for acquisition opportunities that will be accretive 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 solution, 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, proprietary software and solution 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 for construction of new projects and enhancements for 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 facility. 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 expect the lion's 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'd like to open the call for questions. Operator, if you please?

(Operator Instructions) The first question comes from Noah Kaye of Oppenheimer.

First, Isaac, you mentioned that the plant-rated capacity of McGinness Hills went up a bit, and 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? Is the resource actually better? Or did you just develop better engineering solutions to tap it?

Noah, thank you very much. And I understand you were asking about McGinness III, yes?

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

Okay. As I explained numerous times before, we are developing all of our projects around the world on stages. We prefer to go on smaller stages, even though we knew that in McGinness Hills we have a larger resource just from the beginning. We developed Phase 1 about 3 years ago, then the second phase about 1.5 years ago. End 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.

Wow, okay, that's good color. Second, obviously, with the backlog seeing some roll offs at Sarulla, maybe you could talk about your view on and your visibility to replacing and growing the product's backlog now with the opportunity set 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?

Okay, Noah, first of all, as you recall, our strategy calls for a higher increase in our electricity segment than our product segment. This thing was determined before the ORIX [bends] 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 it's 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 and not change anything on our expectations as of now and just to remind you that the deal is not even closed yet.

And 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 Sarulla?

Not as we speak now, I am very optimistic about our replacement for the upcoming remainder 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 '18, '19 and '20, there might be additional countries that will come into the loop as we are [working].

Great. And if I could sneak one more in, and it's on Viridity. We were at the Energy Storage Association 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 it 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 to [fixed] grid energy storage? And how long do you think it will be before there's something significant to announce in terms of the number of new storage projects?

First of all, you'll recall that our main reason to acquire Viridity businesses was for energy storage. To our positive surprise, also the DR market is making some positive steps, specifically in the East Coast, which are -- 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 states, but not only in the states. And we are -- as we speak in numerous projects, 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 with this investment.

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

It's Brad Meikle. So with the ORIX investment, how much potential do you think is there for, realistically, geothermal development in Japan? It looks like there's only 500 megawatts that's been developed out of the [300] gigawatt peak load. So it seems to be a drop in the bucket and obviously geothermal pairs quite well with all the solar being deployed with the higher capacity factors. So do you think you'll actually be able to bring any projects to market in Japan?

Okay, Brad. First of all, Japan is one of the leading countries on the geothermal potential. The problem until recently was that most of this potential is in those national parks, which they were -- it was impossible to drill in until recently. We know that the local regulations and laws in Japan are changing. And due to that fact, I believe the agreement with ORIX eventually today represents a higher potential than it would have represented a few years back. So it's very difficult to determine the exact megawatts, but obviously the numbers that you mentioned are negligible to the actual potential that Japan will present in the upcoming years. And soon enough after this deal closed, we will sit down with ORIX's people and try to see what the actual potential residing in Japan. But you realize that, as ORIX being a large conglomerate, 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 cooperation will strengthen our position in Indonesia, which is already doing huge steps towards geothermal energy. And today, Indonesia is one of the growing countries in green energy and specifically in geothermal.

Great. And also in Japan, I mean, obviously, Toshiba's having a lot of problems related to Westinghouse, the bankruptcy and the nuclear problems. Does that help 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 significance at this stage if we look at it from ORIX [perspective].

All right. And the last question is, obviously, you've done business with [J Bank] and other -- in Japan from a lender standpoint for your international projects in the past. But is the ORIX relationship going to significantly change your access to cheap debt, maybe high leverage at a project level internationally, which would require you to put up less equity, perhaps? Or have this cheaper debt giving you a competitive advantage developing international projects?

Brad, no doubt we worked with [J Bank] before, but we worked with J Bank 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's calls, we will see if something changed or not. But no doubt that, here in management, we have high hopes on this regard.

(Operator Instructions) The next question comes from Jeff Osborne of Cowen and Co.

Just a couple of questions for me. I was wondering if you could just touch on the electricity segment in particular. You've made a big focus over the past couple of quarters in optimizing the power plants. Again, can you 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 3 and something years on all our power plants. I should say that we went through 1/2 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 as we didn't deal with yet will bring the same efficiencies as we got on the first 3 years, which were quite significant, because don't forget, and I said that in my previous calls, we picked up the low-hanging fruit just at the beginning. So even though as we have a long way to go, it doesn't necessarily mean that the efficiencies that will come in the future will be another 30% growth on profitability. I expect it to be lower than that, and still as I said, about 40% to go 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 2 years that we expected profitability on the product segment should be between 30% to 35%, and we are still reiterating this number. Q1, in this particular year, was a bit lower, and I expect to be on the high side of our expectation for the whole 2017.

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

An update on Guatemala and ...?

And Ethiopia.

Okay, we have -- as you know, we have 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 5 -- one of the sites out of the 4 that we are signing contract for. And after, we will operate the first power plant and we'll invoice and we would see that everything's okay, we will continue up the road to develop the 4 -- the full 450 megawatts. This is for Ethiopia. On Guatemala, we have 2 operating power plants and we are participating in a tender for the -- for a certain megawatt, which will be finalized within the 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 Zunil power plant from its current situation with a larger power plant.

(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 a giant step towards the future. And as I said numerous times before, I'm very optimistic of the future and thank you for your support.

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