Q2 2019 Earnings Call
Good morning.
And welcome to the Ormat Technologies' second quarter 2019 earnings Conference call.
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I would now like to turn the conference over to Rob Fink. Please go ahead.
Thank you operator hosting the call today are Isaac Angel, Chief Executive Officer, Dror Sharp Chief Financial Officer.
Our lobby vice president of corporate finance and Investor Relations.
Before beginning we'd like to remind you that the.
Formation provided during this call may contain forward looking statements related to current expectations estimates forecasts and projections about future events that are forward looking applied in the private securities litigation reform that like your spot.
These forward looking statements generally relate to the company's plans objectives and expectations for future operations are based on managements current estimates projections future results or trends.
Actual future results may differ materially from those projected as a result of certain risks.
For a discussion of such risks and uncertainties. Please see risk factors as described in Ormat.
Technologies annual report.
<unk> Form 10-K quarterly reports on 10-Q that are filed with the FCC.
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 GAAP.
They should not be considered in isolation from the financial statements prepared in accordance with GAAP.
With all that said I'd now like to turn the call over to Isaac Angel Isaac the call is yours.
Thank you very much <unk> and good morning, everyone. Thank you for joining us today.
Starting with slide five.
<unk> continues to benefit from the initiatives, we have put in place to drive operational efficiency, it's already existing problem.
These efforts, which include adjusting resources and adding more than equipment are helping to grow our generation and improved margins in our electricity segment.
Well I see <unk> dot Cmos honestly, we're expecting our portfolio.
Generation in the electricity segment increased by 5.7% compared to last year as we begin to benefit from our phase two your mcginness Hills power plant as well as the expansion for Olkaria power plant.
Partially upset by no activity dark pool up all plant. This resulted in a 5.66% increase in electricity segment revenue compared to the second quarter last year.
Excluding the impact of pulling up our gross margin for the segment would have been 41.7%.
This margin is down as to be expected from the first quarter of 2019, but lower than anticipated fuel maintenance expense in the quarter mitigate the expense expected decline.
We continue to make good progress in our efforts to resume operations. It went up and we expect that our plant refurbishment activities will be completed on schedule by the end of 2019, but the operation would review the local permitting and transmission network upgrades being God undertaking by our local utility partner are completed by early 2020 .
You know product segment revenue declines likely.
However, we continue to benefit as the industry's only vertically integrated company.
During the quarter, we booked approximately $26 million in new contracts from the Turkish market.
In our backlog reached two two hundreds and $1 billion.
Demand for our solutions remain solid.
We delivered $94.9 million in adjusted EBITDA for the quarter up 17.4%.
Adjusted EBITDA, excluding the impact of pulling up mainly from the business interruption proceeds is approximately $19.8 million up 11.5% compared to last year.
We are increasing our 2019 adjusted EBITDA guidance and reiterating our revenues guidance provided in the first quarter's earnings.
I'll turn the call over to Doron will review the financial results before I provide an update on our operation they're all please.
Thank you Isaac and good morning, everyone.
Starting with revenues on slide seven.
Total revenues for the quarter were $184.1 million.
Up 3.2% compared to the same quarter last year.
Breaking this down the electricity segment grew 5.6% and product segments revenue decreased 5.3%.
Moving to slide eight revenues, you know, what <expletive> Tracy segments, well $129.1 million for the quarter compared to $122.2 million in the same quarter last year.
The growth, resulting from with simply expanded operations at Mcginness Hills and on Kaleo.
As well as contribution from the acquired use cheap land combined to overcome the loss of revenue, resulting from the temporary shutdown the pool in a ballpark.
Turning to slide nine.
Total segment revenues decreased to $52 million for $54.9 million in the same quarter last year.
The decrease in revenue was due to the timing of silicon older which is routine in defaults policies.
On Slide 10, you can see the oldest there's the other segment contributed $3 million of revenue compared to $1.2 million in the same fourth of 22.
Yes, we have started benefiting from it I've been news at the Plumstead at Stryker battery energy storage bought it well, which came online in the first quarter this year.
[noise] moving to slide 11 for a discussion of <unk> total gross profit end market.
Second quarter consolidated gross margin was 35.4% compared to 32.2% in the same quarter last year.
Well liked where gross margin for that segment expanded yoga you to 42.8%.
As I said.
This was down sequentially, which we expected, but that's the lower than anticipated maintenance issue, including a routine pump replacement and will finish.
The decline was less than we expected.
Gross margin in the electricity segment, excluding the impact of four no mainly from the business construction properties with approximately 41%.
You know for the segment gross margin was 20.6% in the second quarter compared to 31.6% for the second quarter last year.
As previously mentioned.
It relates to the investments to lobster is called threat at the lower margins than our usual mode.
We anticipate margins to begin to normalize in the second half of the year and we continue to see that growth merger for this segment in 2019.
Will be between 22 and 27%.
Our other segment reported a negative gross margin as well.
Turning to slide 13.
Selling and marketing expenses for the second quarter of 2019 were $3.3 million compared to $3.7 million for the same quarter last year.
General and administrative expenses for the second quarter of 2019 with $14.2 million compared to $15.9 million for the same quarter last year.
Yes, Steve This decrease was mainly related expenses in Q2 2018.
Associated with the or the indication of the material weakness related to Texas in the fourth quarter of 2017.
As well as doing statement second third and fourth quarter financial statement at all for you.
<unk> 2017 fasted state.
Turning to slide 14 operating income for the second quarter funny, 19, with $46.9 million compared to $36.6 million for the same quarter last year.
The increase was primarily attributable to higher revenues and improved gross margin.
On Slide 15, you can see the breakdown of the operating income by segment.
Turning to slide 16.
Net interest expense for the second quarter of 2019 was $21.5 million compared to $15.8 million last year.
This increase was primarily attributable to the U.S. and Jo Malone and new loans is what is the interest related to say the death benefit as detailed in this light.
Offset by low interest expense as a result of principal payments of long term debt.
Turning to slide 17.
Income tax benefit for the second quarter of 2019 was $3.5 million isn't really quoted in nonrecurring tax benefit of $15.3 million for that strategy plan to Wi Fi that's split them net of changing in accrued withholding taxes, given our decision to no longer reinvest our earnings in four locations.
What's called a bit when its reception.
Income tax expense for the second quarter of 2018 was $29.1 million as we called it the nonrecurring tax expense of $16.9 million for the increased the valuation allowance related to points, that's really in production today.
Our effective tax rate benefit is 11.2%.
[laughter] looting.
The nonrecurring tax benefit occurring this quarter, though well much income tax provision effective tax rate would have been 31.1%.
Turning to slide 18.
Inclusive of these nonrecurring income tax benefit well must reported net income attributable to the company's shareholders of $33.9 million or 66 cents per diluted share compared to net loss attributable to the company shareholders.
Oh, well zero point $3 million or one cents below that show.
Adjusted net income attributable to the company's stockholders. Excluding these nonrecurring tax items was $20.6 million or 40 cents per diluted share compared to $16.6 million or 32 cents per diluted share in the same quarter last year.
Turning to slide 19.
Adjusted EBITDA increased 17.4% to $94.9 million for $8.8 million in Q2 2018.
Adjusted EBITDA includes approximately $4.1 million in a negative zero point $6 million north of adjusted EBITDA related to Puno used 2019 in Q2 2018 prospectus.
Adjusted EBITDA, excluding any impact from corner was $90.8 million in Q2, 2019 and $81.4 million in Q2 2018.
The well known related you'd be doing it looks $6.8 million of insurance proceeds received for business interruption in Q2 2019.
No proceeds were received in Q2 of 2018.
Reconciliation of EBITDA and adjusted EBITDA are provided in the appendix slide.
Turning to slide 20.
Cash and cash equivalents unrestricted cash and cash equivalents as of June 32019.
Was $181.6 million compared to 107 $7.5 billion as of December 31st when 18.
The accompanying slide breaks down the use of cash for the six month.
Our long term debt as of June 32019 was $1.3 billion net of deferred financing cost and its payment schedule is presented on slide 21.
The average cost of debt for the company is 5.1%.
Our net debt as of June 32019 was $1.1 billion.
Turning to slide 22.
Let me speak briefly to our financing activities during the second quarter.
Year to date, we have successfully raised approximately $133 million in the aggregate, including $41.5 billion into second.
During the second quarter, we completed a drawdown of $22.5 million under a non recourse loan agreement with U.S. financial institution for the financing of gloves that if its right to 220 megawatt battery storage.
Project located in New Jersey.
In addition, we raised approximately $18 million for all of you on the project.
Overall, well money's would position with access to additional capital to fund future initiative.
On August six.
2019, the company's board of directors declared approved an authorized payment of a quarterly dividend.
11 cents per share this went to the Companys dividend policy.
The dividend will be paid on August 27, 2019 to shareholders. The freightquote as of the close of business on August 20 2019.
That concludes my financial overview I would now like to turn the call to Isaac for an operational and business update Isaac.
Thank you very much the wrong.
Starting with slide 24.
Update on operations.
Year to date, we added approximately 82000 megawatt hours.
And increased our generation by 5.7% to one point 52 million megawatt hours right, adding our mcginness Hills phase three and Olkaria three expansion as well as from the consolidation of Neal Hot Springs, Sunny meet you and rough three republiklans in late April 2018.
Specifically in the second quarter of this year, the seven megawatt solar portion of our expansion in Dutch tungsten he'll come all night.
The expansion commenced commercial operation in early July .
Do you do the expansion in generation was partially offset by deploying a shut down.
Turning to slide 25, and 26, let me spend a few moments providing an update on the situation that pool.
[noise], we continued to make good progress in our efforts to resume operations that pool.
We expect that our <unk> power plant refurbishment activities, including the work on the substation will be completed on schedule by the end of the year.
But Glenn will resume operations as soon as local permitting and transmission network upgrades being undertaken by our local utility partner are completed by early 2020 .
On the field side during work to remove the blocks from our geothermal will be funded to the production wells were damaged and we will have to repair or read through them. In addition, we continue to work on the other wells. We believe that once we will see more operation capacity will gradually increase as we continue to compete and to see whether with Verizon.
It's a vertically integrated company, we have a unique advantage of controlling the entire value chain of George will be better.
This will help us to bring put online.
Moving to slide 27 as of June 32019, <unk> claim to $6.8 million of business interruption and is at the end of the second quarter. You have received totally approximately $20 million in proceeds received 6.8 million of such proceeds during the second quarter of 2019.
[noise] discussions with the new few insurers didn't not being the business interruption is ongoing and she is quite possible that you will have to turn to legal procedures.
The business interruption coverage compensates for the company for the loss of profit that resulted from the inability of the on surface property to generate electricity.
Once the pipeline is on duration, it's any capacity levels, we anticipate that we will not be eligible to business interruption proceeds.
Moving to slide 28.
We recently announced the operation of our first ever Joe Terminal and although he Britain project, Yeah did seven megawatt AC solar extension to the tungsten mountain power plant in Nevada bring bringing our total generation capacity to 917 megawatts.
We remain on track with our near term growth plan to add between 120 and 135 megawatts by the end of 2020 one.
This is Doug it is supported by supported by the list of potential project presented on the slide.
In Hebrew reporting permitting engineering and procurement are going.
Our ongoing and in steamboat huge enhancement engineering and procurement are also ongoing.
We are also optimistic about the mid and long term future opportunities for a month.
Expanding our Joe tournament portfolio around the world.
We recently strengthened our position in Indonesia, where we acquired from a medical power subsidiary 99, 49% of the Aegion project for approximately $3 million.
We are committed to additional funding for the project exploration and development.
Subject to <unk> to specific conditions.
Aegion project, which is fine which gets funded capacity will be determined after exploration include a gentleman concession and the turn to your P.D.A. were up 210 megawatt capacity that currently is being extended.
The project is ready for exploration and development some slim holes already through.
Turning to slide 29 for an update on our backlog.
As of August seven 2019, our product segment backlog stands at $201 million in the product segment, we see opportunities in New Zealand definitive being Turkey, and Latin America.
We anticipate that our backlog contract mix together with the lower margin grow the <unk> contracts in Turkey carloads being the backlog will drive product segment gross margin to be in the range of 20% to 27%.
Long term, we believe opportunities in the other regions as I had mentioned will help us to diversify our product backlog.
Moreover.
There's always this segment continues to grow the impact of the volatility of the product segment, and especially margin volatility we have relatively less of an impact on our overall financial results.
Turning to slide 13 for an update on our storage activity.
You know storage side of our business, we continue to leverage on <unk> core capabilities important direct origination development engineering procurement construction financing and operations together with the unique IP network Operation Center in telling Thats worked personal obtained through the video did the acquisition to expand our footprint and build a robust project.
Pipeline.
We successfully created one of the most diverse storage portfolios in the market spanning multiple regions in the U.S. with.
Plumstead than Stryker do 20 megawatt hour operation project sitting services to be Jurgen.
Relative to 12.5 Mega Mega about our project in Texas that is under construction and Theres a services through airport.
Five megabyte, though paint project under commissioning and were more connected to ISO new England market and 40 megawatts are below seasonal development project that we've said services. So.
This project at multiple applications, both in front of the meter as well as behind the meter combination of contracted revenues and merchandise revenues.
We are using technology won't.
Multiple tier one vendors in the battery side than investors and other equally important components.
Oh referencing the battery storage activity are directed at both towards Greenfield development.
Well it towards M&A in joint development opportunity.
Turning to slide 31.
Our estimated capital needs for the last two quarters of 2019 include approximately $105 million for construction of new project and enhancement of our existing power plants. In addition, we estimate $25 million of capital expenditures for maintenance of our operating power plants.
For our exploration and development activity, we plan to invest approximately $10 million and an additional $10 million is planned for our storage activity.
For our production facilities, we plan to invest approximately $6 million.
Also well repair and new drilling in a pull up our plan to receive operation its original 38.
Mig of a generation capacity, we expect between 30 million to $50 million.
That we expect insurance proceeds to recover part of this isn't bit indigo aggregate, we estimate total capital expenditure for the last two quarters of 2019.
Approximately between 186 and $206 million.
In addition, we expect $41.5 million for long term debt repayment and thus the port in in the last two quarters of 2019, and an additional $38.1 million for repayment of short term revolving lines of credit, which we assume will be renewed.
Please turn to slide 32.
For a discussion of our 2019 guide it.
We are increasing the adjusted EBITDA guidance be provided in the first quarter earnings call and reiterate the revenue guidance. The increase in adjusted EBITDA is the outcome of the minimal wellfield issues and lower pump replacements, we experienced in the second quarter.
In summary.
I'm encouraged with our progress and believe the company's operating efficiently.
By the end of 2019.
We expect to have put up our plans ready for operation and we continue to work closely with telco and the local agencies to expedite the work to enable us resuming the operational.
Or must continues its efforts to put these challenges behind us and he is very well positioned in the growing geothermal and storage market.
And this concludes our prepared remarks.
Now I would like to open the call for questions. Operator, you may please.
Thank you we will now begin with the question answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before passing the keys.
To withdraw your question. Please press Star then Tim at this time, we will pause momentarily to assemble our roster.
Okay.
<unk> first question comes from Noah Kaye with Oppenheimer. Please go ahead.
Thank you good morning, good afternoon, depending on where you maybe.
Maybe start with the energy storage on the financing side, you got LIBOR and 3.5% seven year tenor it looks like youve put a bit more than half.
Kind of the capital requirement on with non recourse debt here.
How should we think about your ability to do that for future projects given that this was merchant.
And how do we think about kind of your levered.
Equity yeah ours in cases, where you're able to do something like this because I you know I certainly think this is a positive development.
I know, it's a dual and this is a you know one of the saying that it was important to us. When we started you know we've been energy storage is the ability to loan recalls the emotion project.
And this was the first time, we've done it and the LIBOR plus three and a half and.
It was a you know for the first project, we expect to continue.
And they leverage our storage project as we build them.
The roughly I would say the deliver which is about 60, 65% of the total invested capital.
Mhm.
And going forward you know we might take kids. This approach one specific project Alternatively.
In order to be more efficient and only might combine a few projects then they leverage them together so it will be a.
On one hand, the larger facility.
And the fact that we will bundle a few of the projects together.
Yeah, we would obviously would use some of the risk and the we expect that that will enable us.
To get a better at lower margins than but the financing.
<unk>.
Mhm makes sense.
Yeah, turning products briefly a it looks like with.
The new contracts you know the Turkey exposure increased a bit sequentially, maybe can you update us on the pipeline for products generally and in another geography.
Hi, I know this is Isaac and.
And contrary to previous quarters any year.
Actually the Turkish exposure is much much less than before even though the last two projects that were signed were from Turkey.
But in a normal winter ish.
Profitability not as are we just happened to us in the <unk>.
Last year.
In general or the number in Turkey, which used to be around 80, 85% of the total backlog days less than 45%.
So you can see a dramatic change in our diversification around the world.
We have ER or.
We have today at the new markets that join.
Our.
And New Zealand or China.
Filippe.
And are there.
And so I think in general I'm very optimistic that are we.
After the crisis in Turkey.
Which is somehow.
The clearing.
Yeah, we tried to diversify the process, we can and we were very successful on that.
Okay, Great and then just to clarify on the guidance and the EBITDA revision you does the higher EBITDA guidance include.
The Puno proceeds a insurance proceeds that you got this quarter or does it not.
Include no. They are not they are not included.
Okay, but you did receive almost 7 million. So you didnt exclude that from EBITDA on the quarter correct. So.
Oh of course that the actually the actual numbers. They include the proceeds but the number I gave you which is a losing when doesn't also include the the proceeds received from insurance.
Okay. So it's just 5 million from better operating performance and then you know what the true kind of number right now implied is that plus you know what you are going to receive any insurance proceeds.
Okay. That's very helpful. Thank you.
Thank you know.
As a reminder, if you have a question. Please press Star then one.
Our next question comes from Paul Costner.
With JP Morgan. Please go ahead.
Yeah. Thanks for taking my questions I got a couple on the first one is on the hybrid initiative can you explain to us what the value proposition is true.
I'm Gonna how is it how is that contributing to the bottom line.
Okay. So Paul as you probably aware of the fact that in most of our plan.
We have a parasitic.
Hello.
Which is a result of pumps and other extraordinary equipment that we are operating.
Within the power plant in some cases.
This can be between 10% to 25% hopes to total production of the power.
In D.A.D.A. and that we will be powering.
Those absolutely or does that Siguiri project power through solar facility that we are already into the power plant.
And ER and by debt, our net net outputs off the power plant from the geothermal fluid.
It will be a higher and then today.
That's the main idea [laughter].
And just then second part is as you also know that we have there and output power fluctuation.
Which are dependent on ambient temperature.
And their solar power and geothermal power ambient temperature. They are are they actually they fit together, which means when.
During good noon time, when the actual power from the journal pulp and because it is a bit slow because of the temperature. We obviously have more southern power, which is complimentary.
It makes great sense. Thank you so much.
The second question is I'm sure you're aware of the it's probably been she's each yes initiative it just sounds.
Incredible and I'm wondering are you involved is a game changer huh.
And if it is what kind of timeline do you think before you start realizing the implied growth.
Two geothermal power from that initiative.
Hey, what's the initiative that you worry fairing to pool.
Well. This is the enhanced geothermal system owners to yes. We are we were involved in enhanced journal system initiative to four or five years ago.
And but not anymore and.
We're not a involved can be enhanced and also the fracking.
And initiatives that are going in place in the world.
Okay.
Thank you.
Thank you.
Our next question comes from Jeff Osborne with.
Cowen and company. Please go ahead.
Hi, Good morning, a couple of questions on my end I was hoping you could just help us trying to make a a scorecard on the insurance side for both the property damage.
And the business interruption can you just talk about cumulatively for both items, how much you've received thus far and how much outstanding claims.
There are I know you have the possibility of taking people to court <unk> I just want to get to put it in perspective once received so far over the past few quarters relative to what the total opportunities overtime.
Yeah, Hey, Jeff I am.
I don't have the exact figures in front of me, but the you know it seems as if you look at it.
Lastly, we got in the $20 million for the full to be I am.
We have a claim will say a bit more than $3 million a month.
So she will fool me.
In June the old old from Juno say 18, so it's about 12 months old 13 months, including July so that should be about there.
Yeah, 30, 60 something million daus.
And out of death, we got the <unk>.
20 on the property.
We got a few millions, but the properties basically its a very there's no argument on the property. So it's just a question of foster said doing the procedure with insurance companies you know gathering data with this swing it to them and getting the money. So.
The properties quite straightforward.
So just so I understand the property side better do you have to complete the restoration of the project and that's more of a maybe mid 2020 event as your.
Up and running you can then go to the insurance companies and say here is how much. It cost is it is a mechanism.
Oh and for the for the property, we can issue claim as we move along so far we've got $4 million for the property and $7 million for the rig.
And.
But it's safe to question, if let's say you know it shouldnt be liquids still so we're not waiting for an exciting day something that is an ongoing issue.
Yeah, Hey.
Okay.
That's helpful.
Okay, and one more thing I think it's important they can account you know the business interruption and you know and the proper <unk> goes with the properties. So this is one policy.
The other policy you know this we are activating and also started to get the money on is the control of public policy because of the damage to was the was found in the quarter.
Well worth you know to Redrill them to want love them and this is a different policy that covers the work on the woods.
Got it.
Okay.
Two other questions or lines of questioning you had some some tax movement. This quarter can can you give us any insight as to you know either including or excluding the benefit this quarter, what how should we think about the tax rate for the full year.
We as we said is we expect the effective tax rate. Excluding this a one time to be around 31, the point something percent.
And the net impact of the L. did that change it seems the tax it's a strategy that we did was about $16.3 million and positive.
Right.
Okay I I saw the 31 for the quarter I wasn't sure if that's a good good run rate for the year.
The last question I had is you know as you look out to the second half and in particular in the third quarter, where it's been a very hot is there any you know ambient temperature issues or ongoing maintenance that rolled over from Q2 into Q3, just as we think about the margin profile for the electricity business is is there anything to flag.
For the quarter that we're in currently.
Jeff. This is Isaac you know Q2 was exceptionally good from the well field old or pump issues. So we expect some spillover statistically that will happen during the second half.
Yeah. That's why we are so we are very cautious on our expectation.
But on the other hand, some of the things are working well and most of them would gauge shouldn't that be billed AR are working.
As we expected.
So and obviously and there will be some spill over on the ambient temperature side.
As you can imagine the Dod budgets and expectations take into account or you expected them to be in temperature. We are operating for more than 50 years, but you know.
On unpleasant the things can happen so we have to be ready for it.
Makes sense I appreciate the the detailed responses. Thank you.
Thank you Jay.
Our next question comes from Gary Sweeney with Roth Capital. Please go ahead.
Hi, Good morning, Thanks for taking my call just one or two more additional questions on if I may.
Now that you're in the process of.
Preparing the facility any opportunity to upgrade the facility, maybe increase production or increase efficiency, while you're in there doing the work right now.
Gary our first priority is to back to to bring the Pope and back.
As it was working.
Even though the rush.
And that's what we're trying to do and if you recall.
And before the incident actually very close to the incident, we had a plan.
To enhance.
The power plant to a much higher output and we were we were in their discussion. We telco you notice to also extend to be a poor or further than it was 2020.
This this negotiations or it's been picked up where they stopped before the your option and we are in the clinic in negotiations with them on that and based on those negotiations we will decide artico neat continue would be enhancement.
Oh, the power plant in the future.
Got it and then back to the insurance side.
Any material changes in terms of cost of ensuring that facility on a go forward basis.
Oh after everything we've been through and then you know, but is there an opportunity to potentially even self insure the facility maybe perhaps some savings.
Oh, yeah, they sent us.
Uh huh.
Then the other one code into luxury and you know that when they feel that the premium for the insurance was up.
Yeah, which is obviously something that you can expect.
And but that that's it for me it's in general do you know.
Well he knew that policy.
The middle of the year, but she was last year, so that actually that caused the premium coffee is already.
Got it. Thank you appreciate it.
Thank you Gary.
This concludes our question and answer session I would like to turn the conference back over to Isaac for any closing remarks.
Thank you very much operator, and there. Thank you very much everybody on the call for and not on the call for your ongoing support.
We went through a challenging year two in 2018.
And there are 19, it looks much more much more promising to for for the company.
And then we will be doing good or bad it within the company to make it happen this year and also in the future. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Oh.