Q3 2022 Ormat Technologies Inc Earnings Call
We have reached since the beginning of this year with the addition of 73 megawatts of new capacity supported the continued growth in our electricity segment.
Additionally, newly signed contract within the product segment have improved our margins, while simultaneously strengthening our backlog by 150%.
After the prolonged impact of the COVID-19 pandemic on our product segment. We are pleased to see this positive trend in development and the momentum that it is creating across the business.
In the storage segment, we continued to capture the benefits from high energy prices in all of our markets.
As we advanced our strategy of building, an energy storage portfolio balanced between contractual fees.
<unk> revenue in merchant exposure.
We recently signed a 15 year PPA.
I will elaborate on later in the call.
We expect the positive momentum in our storage segment to continue in 2023, as we benefit from the regulatory tailwind created by the inflation reduction there and the availability of ITC credits for storage projects.
We continue to see strong global paid weeks for renewables, specifically in the U S and Indonesia.
The elevated global pricing environment for fossil fuel and increased focus on energy security.
Our long term plans and we are confident in our ability to continue delivering on our healthy revenue and earnings growth trajectory.
We expect our combined geothermal energy storage and solar generating portfolio to reach approximately one five gigawatt by the end of 2023 and to deliver an annual adjusted EBITDA of approximately $500 million.
On a run rate basis towards the end of 2022.
Yeah.
Now before I provide further updates on our operations and future plans I will turn the call over to Ashley to review the financial results.
Thank you Jerome.
Let me start my review of our financial highlights on slide five.
Total revenue for the third quarter was $175 9 million.
Up 10, 7% year over year.
<unk> strong growth across our electricity product and energy storage segments.
Third quarter 2022, total gross profit was $61 1 billion.
This resulted in a gross margin of 34, 7%.
Up 475 basis points from an adjusted gross margin of 30% in the third quarter of 2021.
When excluding the $15 $5 million insurance settlement proceeds.
Related to the Puna power plant that were recorded as a reduction to cost of goods sold in Q3 2021.
Net income attributed to the company's stockholders was $18 1 million.
Or 32 cents per diluted share in the second quarter in.
In the quarter.
This compares favorably to the results of $14 9 million or 26 cents per diluted share in the same quarter last year.
On an adjusted basis net income attributable to the company's stockholders was $18 $8 million.
<unk> 33 per diluted shares.
Net income attributable to stockholders up five 3% and diluted adjusted EPS up two 5%.
Versus the same period last year.
The increase in net income and adjusted net income was mainly as a result of a strong increase in operating income driven by all three operating segments.
Adjusted EBITDA of 102 million to $2 million increased 6% in the third quarter compared to $101 6 million in the third quarter last year.
This more acreage was largely driven by an eight 9% and operating income given the good performance of our three segments.
As well as the reduction in the G&A expenses.
Caused by lower legal expenses versus last year.
This increase was offset by the absence of insurance settlement proceeds received in the third quarter last year.
Excluding the $15 8 million insurance settlement proceeds.
Adjusted EBITDA was higher by 19, 1%.
Moving to slide six.
Breaking the revenue down at the segment level.
Electricity segment revenue increased seven 1% to.
To $550 million to $80 million.
This increase was driven by higher revenue quarter due to higher generation and electricity rate.
The commercial operation in July 23, two or three before and the contributions from the tungsten enhancement project, which began commercial operation in April of 2022.
Revenues in this segment were partially offset by the ongoing shutdown.
<unk>.
Yes.
In the product segment.
Revenue increased 35, 1% to $14 2 million and represented eight 1% of total consolidated revenue in the third quarter.
The growth in our product segment revenues was primarily due to our project in New Zealand, which we started to record revenues in the third quarter of 2022.
Energy storage segment revenues increased 56, 2% to $8 8 million when compared to the third quarter of 2021.
This meaningful increase was driven primarily by higher energy rates in most of our storage assets.
Due to the higher overall merchant prices, coupled with added capacity and Kaiser from the new five megawatts 20 megawatts hour window facility.
Moving to slide seven.
The gross margin for the electricity segment was 36, 5%.
Excluding the onetime business interruption insurance proceeds of $15 $5 million related to our Pune project that was recorded in the third quarter of 2021.
The third quarter of 2022 electricity gross margin increased by four 5%.
In the product segment gross margin was 18% in the quarter compared to 12, 8% in the same quarter last year.
The increase in gross margin was driven by new agreements of which we were able to capture stronger margins.
The energy storage segment reported a gross margin of 31, 5% compared to gross margin of 12, 2% in the third quarter last year.
This increase was.
Increased positively impacted by the significantly higher rates and availability at most of our stores yet.
Looking at slide eight the electricity segment generation generated 95% of total consolidated adjusted EBITDA in the third quarter.
The product segment generated 1% and the energy storage segment generated about $4 million.
Of EBITDA, representing almost 4% of the total adjusted EBITDA.
Reconciliation of EBITDA and adjusted EBITDA provided in the appendix.
Looking at slide nine.
Our net debt as of September 30 was $1 8 billion.
Cash cash equivalents and restricted cash and cash equivalents as of.
September 30.
2022 of approximately $263 million compared to $387 million.
At year end 2021.
This slide breaks down the use of cash for the nine months illustrated what's the ability to reinvest in the business.
Service, our debt and return capital to our shareholders in form of cash dividends and share buybacks.
We note that this use of cash have been funded from cash generated by operation and a strong liquidity profile that we keep and maintain.
Our total debt as of September 32022 was approximately $2 billion net of deferred financing costs.
And its payment schedule is presented on slide 30 in the appendix.
Average cost of debt is down to three 9%.
We think it is important to note that as we prepared to deploy capital to fund our multiyear growth.
Nearly all of our debt.
<unk> remained fixed rate in nature.
Which we believe will help continue positional mud competitively in a rising global interest rate environment.
Particularly as we execute upon our strategic plan to.
To deploy capital and progress toward our multi year term.
In addition.
We expect to finance part of our future Capex spend with the support of the ITC and PTC under the new IR inflation reduction Act, which leads me to the next slide.
Let's move to slide 10.
On August 16 of this year and you essentially reduction agent side and.
And we expect to benefit from it in many aspects.
These effects combined with the recently signed PPA for our geothermal and storage assets.
<unk> to improve economics in both segments.
<unk> capital need in the U S. Even further than anticipated.
First.
The higher rate extending the tax credits for geothermal by three years.
Essentially higher rates than before.
Which enable ahmad to get into tax equity transaction and fund higher percentage of our investment.
This should reduce our capital needs and English project economics.
We expect the geothermal projects that will start operation in the next five to six years it should be eligible for production tax credits.
Second for.
For the first time, our investment in our storage segment going forward.
We'll be eligible for between 30 and up to 50% of ITC at commercial operation.
Versus versus no incentive prior to the ACA.
The expected ITC proceeds will reduce significantly our capital needs and should improve the economics of the project.
All projects under construction with <unk> of 2023 and beyond should be eligible to benefit from the installation reduction.
Lastly.
The hiring significantly simplified our ability to sell the tax credit to third party enabled us to capture potential higher value of the tax benefit.
Moving to slide 11.
Year to date in 2022, we have invested nearly $408 million in.
Capex to advance our goals.
$750 million of cash and available line of credit.
Total expected capital for the last quarter of 2022 includes approximately $160 million for capital expenditures.
As detailed in slide 31 in the appendix.
All of that is very well positioned from a capital resource.
With excellent liquidity and ample access to additional capital at attractive rates to fund future growth initiatives.
On November <unk> 2022, our board of directors declared approved and authorized the payment of quarterly dividend of <unk> 12 per share to all holders of the company's issued and outstanding shares of common stock as of November 16, 2022.
Payable on November 32022.
That concludes my financial overview.
Now I would like now to turn the call over to <unk> to discuss some of our recent developments.
Thank you aarti.
Turning to slide 14 for a look at our operating portfolio.
Generation growth was positively supported by the inclusion of tungsten and see before and the generation of the Dixie Valley power lines and the increase in operational.
This was partially offset by the EBIT one file.
You can see on slide 15, we added 73 megawatt this year to the electricity segment portfolio.
One 2% increase in total generating capacity.
As noted on slide 16 in the third quarter, our Pune geothermal power plant operated with an approximate 27 megawatt level.
Currently PPA prices continue to be elevated as the result of higher global energy prices.
We are still in discussions with telco to improved fixed price PPA pricing within our existing quarter.
Turning to slide 17.
Yes.
<unk> power plant in Kenya, We're currently starting our drilling campaign, which should allow us to increase plant production during 2023.
Second with respect to EBIT. One we are currently optimizing the complex through Repowering work, which is expected to be fully completed in the second quarter of 2023.
Finally, the Dixie Valley power plant is back in service and is performing at a higher capacity than before.
Turning to slide 18 for an update on our backlog, we saw a 150% input.
Third last quarter, we were able to sign contracts totaling approximately 100 million.
During the quarter in Indonesia, and New Zealand and expect improved margin on this call.
Moving to slide 19.
Energy storage segment delivered another strong quarter.
Posted by the high energy prices, it's most of our energy storage assets and higher capacity in California.
Despite short term delays for some of our energy storage assets, we see improvement in the profitability.
Sort of the higher merchant model.
As I mentioned earlier, we signed with the California utility our first ever battery storage BPA also called the tolling agreement.
This 15 year agreement secured 100% of revenue of the 80 megawatt 320 megawatt hour bottleneck facility.
The agreement is subject to CPUC approval.
The bottleneck project is our largest project currently under construction and we expect revenues and EBITDA from this project to align with our growth plan outlined in our March Investor Day.
We also expect this project to benefit from the ITC from the inflation reduction.
The fixed nature of the bottleneck DTA supports our long term growth objective of building a balanced energy storage portfolio, which will mitigate our risk exposure to merchant prices and would shift the portfolio multiple contracted fixed revenue arrangement.
Moving to slide 21 and 'twenty.
As we have communicated all year.
'twenty two is a significant build up here for.
The foundation related this year will support our robust growth plan, which are expected to increase our total electricity generation to approximately one two gigawatt by the end of 'twenty 'twenty three.
Growth across all segment has been impacted by supply chain delays availability of raw material, including battery and lower availability of local contract among other items.
These have caused some delays and projected commercial operation date, and we may need to shift some of our goals and targets further in the year to account for those impact.
Even with these challenges we are still on track to reach 273 megawatt.
640 megawatt hour.
Our storage portfolio by the end of 2023 and expect continued positive growth.
Slide 23, and 24 displayed seek geothermal five hybrid solar PV project currently underway.
On track with Sidoti of North Valley, and able to both of which we expect to bring online by the first quarter of 2023.
EBIT is expected to be completed in Q2 2023.
In Guadeloupe, who received the required permits to start construction.
Each in Indonesia, we have made meaningful progress and have already started the design of the partner.
And then our solar PV portfolio, we completed the tungsten solar project and released the steamboat solar unit focused structure.
Moving to slide 25 in 2000.
The third leg of our growth plan come from the energy storage.
Slide 25 demonstrates the energy storage facility with the start of construction.
Upturn is close to completion with several other projects planned for completion in Q1 of 2023.
As you can see the slight delays in commercial operation date, but we are on track with our year end 2023 growth partners.
Please turn to slide 27 for a discussion for 2022 guidance.
And the first nine months of 2022 months and delivered meaningful year over year growth across our revenue operating income and adjusted EBITDA.
Heading into the close of the year, we are updating and narrowing our guidance ranges to reflect our performance through three quarters and expectations for the fourth quarter.
We now expect fully revenue to range between $720 million and $735 million.
Increasing our midpoint of the range.
We are slightly narrowing adjusted EBITDA guidance within the previously articulated range anticipating results to be between $430 million.
$442 million.
We remain confident in our ability to manage our business and assets to deliver on our guidance and to drive future growth in 2023 and beyond as we exit.
Our integrated business model.
I will end our prepared remarks on slide 28.
This was a solid quarter as demonstrated by continued financial and operating momentum.
With strong progress against our long term growth.
While the global market are experiencing challenges related to the supply chain disruption and raw material shortages, including batteries and solar panels.
We continue to benefit from the acceleration in demand for renewable energy in the U S and globally.
And from our own improvement in operations.
The broader migration towards renewable electricity sources supported by the recently approved inflation reduction that should enable us to capture additional tax benefits in the U S.
Which will further boost the economics and validate our decision to allocate the majority of our capital to be invested in the U S. In both our electricity and stores.
Withdrawing pipeline and numerous projects under development, we remain confident in our long term plan to increase our combined geothermal energy storage and solar generating portfolio.
<unk> one five gigawatt by the end of 2023 and to deliver an annual adjusted EBITDA of approximately 500 million.
Run rate.
This concludes our prepared remarks, now I would like to open the call for questions.
Operator please.
Yeah.
We will now begin the Q&A session. If you would like to ask a question. Please press star followed by one or you touched on key pad.
If for any reason you would like to remove that question. Please press star followed by Kim again to ask a question. Please press star.
One <unk>.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset.
Asking your question.
We will pause briefly to allow questions to generate thank you.
The first question is from the line of Noah Kaye with Oppenheimer. Please proceed.
Good morning, and thanks for taking the questions.
Could we.
Start with just some clarification around the statement slide 10.
The new geothermal project, receiving up to 33.75 cents per kilowatt hour based on.
The new law can you help folks walk through that a little bit.
What requirements have to be met and how many of your projects under development do you think would actually qualify for for that level of subsidy.
Yeah.
And our first good morning, and thank you for the question. This is Nancy.
When we look at the new PTC regulation.
It looks like a remark on.
Oliver it's broad projects will be eligible for.
For $27 $5 per megawatt.
Over 10 years of production production for PTC.
That's basically five times the minimum rate that was established by the regulator.
And the reason why we are able to get the five times minimum royalties because we do plan and we will use contractors that meets all the regulation, including the rates that we will have to pay them and the amount of <unk>.
Basically observers that we have it's part of our operation and the time that we built the culture.
The $27 <unk> is already a higher number of events, where we are today.
There are two other ways to get to a higher rate one can take you to around $30 per megawatts and one can get to a run at 33 megawatt now per megawatt we assume that most of our projects will not be eligible for <unk> 33.
In order to get to $30 per megawatt.
What we will have to do is to Utah.
Utilize the local contractor.
Had local content.
As part of our construction and we all know that we are using.
Equipment that comes from overseas, but there are some exceptions that if you did not produce the.
Equipment locally you may be able to get a higher amounts. So this is one option to get higher.
The second option is to operate in an area.
In the past impacted by it.
The energy community that is actually in most cases. This is energy communities that used to have cole in them or natural gas that didn't have any operation going forward and then you can get a higher rate I will say that in our plan and as we see it now most likely that we will get 27.
<unk> thousand 50 <unk>.
For all.
That will start in the next few years and we will finish probably in the next five to six years.
I will just tell you that if you take the 10 years.
PTC is.
On a nominal basis, they are equal equivalent to more than 50% of the cost to build a power plant.
That's incredibly helpful. So yeah, <unk> 33 per megawatt that actually I think sounds like three three cents per kilowatt hour for im dividing it correctly, but but that just may be a typo, there, but that certainly I understand the higher the higher benefit potential capture.
They're in and the impact.
If we talk a little bit about.
Project timing.
I think the deep solar panel.
Battery storage those supply chain delays that are industry wide or are well known can you talk to us a little bit about the geothermal side and what youre seeing in terms of.
Timing for projects that it looks like.
Maybe a little bit of shift on a few projects here and there.
At this point of view do you see any significant.
Either supply chain or permitting hurdles.
To meeting your year end 'twenty three goals.
Should we be watching for.
Thanks for the question is it's the wrong.
We don't see.
Supply chain on materials supply chain issues on the geothermal power.
This is obviously something that we are leading and well aware with the different.
Suppliers and making sure that we have the right.
Inventory as needed.
Permitting is always a challenge.
The connection is always a challenge in the U S. So we do see some small delays.
Maybe it's early but.
In general on what we have on the.
These are things that we are.
It's been that we will maintain.
It should not be impacted by supply chain issues.
Okay.
Okay. That's very helpful and then last.
Congratulations on the $100 million.
In products.
Can you talk to is all about a kind of.
The timeline for converting that backlog into into revenues that really more of a 23 story in terms of the inflection. It seems like that maybe and then just the potential depth of demand behind that what the pipeline looks like and products for additional contracts.
So in general and I would say for EPC projects.
That we sign and Thats, what the projects in the New Zealand's our EPC project, usually between 18 to 24 months.
We ended the bulk eating through the first 12 months.
They've been 12 months.
Supply contracts are usually one year, but the big projects, we had in New Zealand.
C suite.
Spread over 18 up to 24 months.
Yeah.
In the pipeline, we have a few potential project that we are.
Nothing with.
Customers.
In the largest.
The most.
Interesting places New Zealand.
Sort of.
The potential we have.
A very big player there.
Build actually quite a few partners.
These are more local.
<unk> is there.
The next.
Large players that we see a lot of potential in Indonesia.
And we see quite a lot of.
Drilling and development done by various developers.
Including ourselves, but we're talking about the product side.
And we see it we expect to see quite a few tenders coming out over there in the next few few months and quarters.
These are the tool.
And obviously also other places, but I think these are the two large.
Okay.
It's good to see that turning from really kind of a revenue headwind for several years into into a tailwind that looks like over the next couple of years and we'll look for more thanks for taking the questions.
Thank you.
Thank you.
The next question comes from the line of Mark Strouse with Jpmorgan. Please proceed.
Yes. Thank you very much for taking our questions just a couple on energy storage if I can.
So it looks like some of the deals that you are projecting for <unk> are now in.
In early 2023.
Not surprising as Noah said, just given the industry headwinds, but be curious about that.
The year end 'twenty three targets now seems to be at the lower end of the range that you were previously expecting is that really just because of the kind of the slower start to 'twenty, three or you're kind of signaling that you're expecting.
The supply constraint.
Thanks to last year.
Yeah.
Well I think the lower range is mainly because of what you are not selling always see submissions with the supply.
Supply chain so we.
The project that should come online and we also discussed bottlenecks that we have secured rule.
Contract and all the batteries so it should be online by the end.
'twenty two.
'twenty three.
Apart from that we're continuing with our plan.
Is it a demand issue.
Supply.
Batteries.
But also permitting is a major barrier in the U S that we are building across our segments.
Okay, and then more of a modeling question for my follow up.
Just going back to your comments around the profitability of your storage business storage business benefiting from the higher merchant pricing is there any commentary you can you can provide.
The coming quarters, how we should think about margins for that business.
Yeah.
Yeah.
So as Terry good morning, Kathy I will say that the third quarter really enjoy.
Higher prices due to natural gas prices increasingly east coast.
PJM market towards our leading markets then month by month, we see it.
When you look year over year.
Our revenue is up over 50% with almost no English as it.
We only entered the five megawatts Athena Bueno.
Q4.
We are already gave you guidance of $30 million for the year. So as you can see it's not going to be as good as the Q3 because prices are not as high.
At least the first month of the of the fourth quarter.
And so I would say we are expecting slightly lower margins in Q4.
We've said that when we look forward as a company we should see.
Increased.
As we increase our capacity in our.
Gross profit and EBITDA margin.
And you can look for example.
Bottleneck project, which we just signed with.
We gave an example in our Investor day off an 80 megawatt 320 megawatt hour project.
And the one in the analyst day is roughly $60 million of revenue.
And almost $13 million.
EBIT.
So when we look forward I will tell you that the EBITDA margins for this segment should continue and hi.
Hi every year as we move forward, but Q4 I don't expect it to be as good as Q3.
But things can change you know commodities are moving really fast, but at least October we've seen better market than last year, but not as good as Q3.
Makes sense. Thank you very much.
Thank you.
The next question comes from the line of Ryan Levine with Citi. Please proceed.
Good morning.
Thanks for taking my question in terms of the delays and that storage and solar segment. What are the implications in terms of your contractors and partners with the timing delays is there any.
Recovery of paneling, and its associated with any of these timing shifts.
And how does that impact your financing plan and other.
Other capital plans.
Hi, Ryan Thank you for joining us.
<unk>.
What we see at least today.
<unk>.
Yeah.
Relatively small delays of.
A few weeks or maybe a month or two on the construction.
And.
However, we are able to manage it.
Well not.
We listened today projects before we know that we have secured the batteries.
Which is the main component for the obviously for the energy storage.
And on the contracting side.
Is.
It's many times the challenge and today, when we have the ICC and you're required to pay.
The right wages I hope it will make it a bit more easier.
To find the contractors' because.
People will be more willing to.
To work.
Regarding LDS.
This is something that.
It is not.
Immaterial impact.
It's.
Sometimes we have some lps with with our suppliers.
Although in most cases, we have long term relationship with our suppliers in it.
If your dialogue.
But we have so this is not.
A major part.
And on the financing part that you asked we havent get financed.
Sandals.
Only once we have final standalone storage project so.
We don't see that as an issue.
Yes.
Okay.
And then in terms of the product backlog I think you highlighted 150% increase over last quarter, we delineate as to why.
What region, you're seeing the growth in or what types of customers you're seeing the biggest increase in your backlog.
Okay.
I think the main two areas, we see the growth with the New Zealand.
And in Indonesia. These are the two places that are pushing forward.
Geothermal project.
I think in the short term at Thermo New Zealand in the longer term or the medium term it would be Indonesia.
Yeah.
So these are the two large one and total debt to $9 billion.
Funding to some issues in Taiwan and Japan.
And in Honduras, and El Salvador.
Salvador, Mexico so.
But these are mini product.
In Maine.
<unk>.
Yes.
The London, Indonesia.
And we hope the <unk> economy.
Come back with fit in that.
Mark.
Hi potential football.
Is the growth of these England in Indonesia, predicated on uncertain macro development or what's really driving that expansion.
The New Zealand, it's a question of negotiating contracts and winning tenders and the same in Indonesia, it's not.
They have the the resource.
The willingness to develop and define that maybe just a question of.
Either negotiating a one on one contract the whole answer.
The funding to tender.
Different projects.
Well.
Ready will during the course waited and waited for it to go away.
And now they're back into the market.
Okay, Great and then last question in terms of the IRA and impact to your core business you highlighted more on the development side, but are there any expansions or repowering that may qualify for ITE.
ITC or PTC.
For geothermal.
In the geothermal power if the if it's.
Basically expanding an existing power plant like be Huawei.
The one progress significantly.
Significantly. The addition.
The expansion should be eligible for the PTC and ITC.
Okay. Appreciate the color. Thank you.
Thank you.
Yeah.
Operator, do we have more questions.
Okay.
Hello, operator.
Okay.
Yeah.
Thank you.
Our next question operator.
Yes.
Okay great.
Sure.
Is from the line of Jeff.
Your line with Cowen <unk> Company. Please go ahead.
Okay, great and good afternoon.
A couple of questions on my end I was wondering if you could just go over the current portfolio of storage is that 100% merchant.
Could you give us a sense of the mix.
Sure. So when you look at the Cowen <unk> portfolio, we do have only in California.
We call our <unk> contract usually covenant.
Up to 40% of the revenues go away.
On the current portfolio the Pomona one handset.
The contract when it's Tito is an hour a contract <unk> has announced a contract all of the remaining a format.
Contract, Colorado, basically on a merchant basis.
So when you look at the current operation format.
Majority of the revenue is coming from a merchant revenue with that being said.
When you look at what we expect to bring online between now and the end of 2023.
We actually shifting to a more contractual revenue.
And the leading part of it is the bottleneck contract.
As an 80 megawatt 320 megawatt hour project so.
Besides per megawatt is bigger than anything that we operate including everything that we're going to build next year.
And that's why we will have a full tolling, which means it's a fixed revenue for us for 15 years, and which will benefit and allow us to balance between merchant and fixed revenue.
That's great to hear a CMA the footnotes to the bottleneck slide which is helpful.
It requires CPUC approval do you have a sense of when you would anticipate that just given you are hoping to have it up and running by the end of next year.
We have started you know with the construction.
The CPUC approval, there would be a 60 to 90 day that their deaths. What they were told we know that they've asked for an expedited approval.
So.
With what will get it.
2% to 90 days.
Excellent and my last question is just not as part of your 'twenty three outlook, but more for your mid decade.
M&A was a part of that I was just curious if you could opine on.
Where M&A valuations are on both geothermal and storage my sense is that George had been a bit inflated a year or so ago I didn't note that's cooled off at all.
On geothermal.
We don't see today any assets in the market, but we are constantly discussing with the Ono.
Whether or not they would like to sell or to go into some kind of an M&A transaction.
On the storage you're right you know.
Over the last year and before you know pricing where were inflated.
I think the increased interest rates.
We'll bring them to reality it didn't happen yet.
But we do expect it to happen and once they come to reality, we are there in the market and we are constantly looking to acquire.
Energy storage assets.
Excellent that's all I had thank you so much.
Thank you. Thank you.
Thank you.
The next question comes from the line of Justin Clare with Roth Capital Partners. Please proceed.
Yeah, Hi, thanks for taking our questions here.
So first off in Q3, we saw the gross.
Gross margin for the product segment rebound meaningfully here.
Wondering if you could share a little bit more detail on what drove the improvement was largely pricing related or did you also see improvement on the on the cost side and then just looking forward was wondering how we should think about the product segment margins you have a much larger backlog here.
Could we see further improvement on the margin side.
And thank you for the question.
2021 we have signed the.
Contracting days.
Product segment that when we bought the raw material, including transportation we encourage.
Additional costs.
People related to supply issues and also I would say in general commodity commodity market uplift.
And as a result, we saw the margin all year trying to this quarter at a lower level.
The third quarter.
We're already seeing that these projects from 'twenty to 'twenty, one are basically almost at the end of the of their cycle down basically almost over and the new contract that we signed that will oversee and mostly 2023 those are at a higher margin.
I know that historically, we would.
Suggest that we think we can get anywhere from 24 to 27 28 margins at the product segment I will say that the.
I think that we're not there yet maybe.
Maybe in the low twenties of these bonds.
We are seeing now is phenomenon.
The slight decrease in.
In raw material costs. So there are pieces, we signed new contracts.
When we go and buy the raw material, we actually get a benefit.
Similar to the fact that how we lost money on when the margin when the cost of the raw material went up so I think we will be in the low twenties, but no darrin, where we need to be but we're making progress.
Okay colors really really helpful. There.
And then just wanted to understand your expectations for the level of the ITC you think you might be able to capture in the storage segment given theres this range of 30% to 50%.
I think part of that is the result of if you meet domestic content requirements.
So can you can you meet those requirements do you think in either of the 2023 or 2024.
Timeframe, so any any context, there would be helpful.
No.
I think as you said you know the going up from 32 to <unk>.
<unk> is a bit more challenging and requires some additional.
Yeah.
Definitions.
Detailed guidelines by the.
IRA has not been you know all of the <unk> the question of domestic content.
Question, how it is going to be defined.
As we all know most of the battery cells are manufactured outside of the U S.
But in other areas and in other costs in other countries.
The Phoenician how you.
You defined something as the manufactured locally and not just the acquired differently so deaths.
The one thing that we still are still open and we don't know.
And the other the other 10% is location specific.
We have some locations that might quantify we're not sure. We're looking at other locations that we know are not eligible for the additional 10%.
So it's really a project by project the analysis.
But you know and the inflation reduction that took us immediately from zero to 30% IPC. So it's a big <unk>.
Upside.
Okay, Great and then just one last one you reiterated the plan here for <unk>.
Reaching a run rate for adjusted EBITDA $500 million toward the end of this year.
Was just wondering kind of what is factored into that.
Are you, including the potential upside from.
The tax credits for the PTC in that number.
And then also is there any.
Have you factored in the ITC for storage into that number or could those be upside as we look into 2023.
As we outlined in the Investor discussion that we had in March Amato.
Motto is anticipated PTC to be part of.
Our life and most of the projects that are going to end in 2022, and 2023 of those will be eligible for PTC, regardless of the new regulation.
Start of construction was a few years ago. So the BTC was already included.
The ITC steel.
There are four big four way.
Accounting companies in each one of them have different thoughts of how we need to account for the ITC, especially when we are able to sell them in a transfer of mod versus the versus the ability to sell that as part of an ITC tax equity transaction and we.
Not sure yet if it's going to go through the EBITDA line or potentially through the tax line item.
And therefore, we did not include any significant dollars related to ITC and a 500 million.
Okay I appreciate it thank you.
Thank you.
The next question comes from the line of Julien Dumoulin Smith with Bank of America. Please go ahead.
Hi, Good morning team. Thank you I appreciate it so if I can go back to that.
I don't mean to rehash too much but I wanted to ask it more directly here you have the $650 million EBITDA target by 2026, right and you outlined that at the analyst day prior to Iraq.
You've articulated numerous upside on both development as well as seemingly upside on projects that are already in flight and contracted.
How do you think about upside to the 650 or said differently additional balance sheet latitude.
Once you hit the 650 created as a function of that.
You can clarify for those projects that are already contracted here, specifically or more likely biased towards the geothermal side to what extent is that.
Additional value from my array.
Hell bond by you guys at this point.
Hi, Julien I'll start with Dan regarding the IRA and who actually get to the end of the day you know the full value.
Obviously.
Lyle develop there you know.
Utility that everybody is aware of the upside.
As you.
You might expect it would be somehow split along the.
All the parties in the.
In the transaction.
This shows you know between projects that are already in development that are going to be in construction and obviously all contracts and the Capex has been signed already so diary will move more towards the develop vertical pilipino future project.
We believe the market over time, and I will get to a new.
To stabilize on a different.
Number.
Merchant pricing topic pricing in development.
And regarding the target that we've set you know.
In the.
In the analyst day.
Fearful today, it's not something that we constantly and look it up today, obviously in March when we did the analyst day, nobody knew about inflation reduction that.
Everybody was expecting the PTC for geothermal to continue.
And this is something obviously that.
It was all the time part of our modeling so.
PTC is obviously in the geothermal pump what ICC for so it'd be something new that came after that so that was not.
Included.
Can you clarify just in terms of the Big City. There I mean, how do you think about when you come back and provide a more comprehensive update again I get that you don't have full line of sight that exist with the current projects necessarily to get out of there but.
How do you think about just the accelerating nature of opportunity.
Even more to the point forget the 650, how do you think about the timeline for coming back and providing a medium term update on opportunities arising from the I get that a lot of the storage of merchant in nature, and therefore is driven by you from a timing perspective, but a lot of the geothermal is driven by the pace of Rfps and procurement shouldnt, we be seeing.
And accelerating effort on that front, both because California, and the west are broadly short.
And need resources on a timely basis as well as these elevated IRA opportunities for the time being.
So Julien we are we have.
Being you know even before once the.
<unk> targets were set we have been pushing exploration and pushing development of geothermal project.
And we are continuously doing it we see.
Extensive demand in California for geothermal asset.
So whatever we can develop and move forward then we've invested this year more in exploration and then we've done.
We have done in previous years and next year, we'll probably invest even more in exploration and development in this year than previous years.
So we are pushing it.
The storage the main barriers to develop storage project in the U S is the interconnection.
Q.
And you know cluster 14 in California came up with being the Q had 90 gigawatt books.
A potential project there I think the entire.
Usage in California is 50, but the Q4 new product was 90.
Gigawatts so.
This is something that is becoming the biggest barrier even modest supply chain issues.
But we have put on the table the IRA didn't change it all out our plan to develop as many energy storage as we can.
And if during next year or any other time in the future now I would like to update specifically, even though we will do a detailed analysis and give some.
Julien This is rusty I think there are two parts of the plan that we're looking at as we speak first.
It looks like the capital need.
We had in minus $2 billion.
To put all of this work will be reduced.
Cause the ITC will provide on the storage anywhere from 30% to 50% in the tax benefits to us so the cost to rebuild.
The five year plan that we put together will be lower and that will enable us to have a lower interest costs lower leverage which in our mind is very beneficial for the plan.
Second as I mentioned earlier in the prior question.
If we will have a significant ITC it will impact the EBITDA, we will have to look into it. We're not sure. We ended the ITC will flow to the EBITDA level. It may go directly to the bottom line earnings per share.
We're not guiding at this point, so one say everybody agree on how to better account for the ITC will be able to look into our 650, but as I said bottom line, we will see the additional part of the funding to grow.
That will be covered by ITC benefit.
In India Analyst day, we expected to spend roughly half a billion dollars on storage segment.
Over the next four years from now.
That will be the case in 30% to 40% of it.
Will be financed by the IRI it.
Basically we will reduce our cost of debt and our debt significantly.
Okay.
Yes, I hear you on all point. Thank you. Good luck, we'll speak to you soon.
Thank you. Thank you.
Again to ask a question please press star one.
There are no additional questions at this time I will pass it back to management for closing remarks.
Thank you. Thank you all for joining US this was another good quarter for months.
We are now focusing on the developing and pushing forward as we ended the call on.
Our growth and exploration targets.
Thank you all.
That concludes today's conference call. Thank you you may now disconnect your lines.