Ameresco Inc (AMRC) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Ameresco Earnings Conference Call. My name is Sailee and I will your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session.

(Operator Instructions).

I would now like to turn the presentation over to Ms. [Susan Stillings] with Ameresco. Please proceed, Ma'am.

Thank you, Sailee, and good morning, everyone. We're pleased that you are joining us today for Ameresco's Second Quarter 2010 Conference Call and its first earnings conference call as a public Company. I'm joined today by George Sakellaris, Ameresco's Chairman, President and CEO; and Andrew Spence, the Company's Chief Financial Officer.

This morning Ameresco issued its earnings release, reporting its second quarter 2010 financial results. The release is available on our website at www.ameresco.com and for your convenience a replay of this call will be available there for one week.

Before I turn the call over to George and Andrew, I would like to make a brief statement regarding forward-looking remarks. Today's call contains forward-looking information regarding future events and the future financial performance of the Company. Ameresco cautions you that such statements are just predictions and actual results may differ materially as a result of risks and uncertainties that pertain to our business.

Ameresco refers you to the Company's IPO prospectus filed with the SEC on July 22, 2010 as well as the Company's press release issued this morning. These documents, as well as the Company's quarterly report on Form 10-Q that will be filed with the SEC in the coming weeks, discuss important factors that could cause actual results to differ materially from those contained in the Company's projections or forward-looking statements. Ameresco assumes no obligation to revise any forward-looking statements made on today's call. I will now turn the call over to George Sakellaris, Ameresco's President and CEO. George?

Thank you, Susan. Welcome, everyone. We are very pleased to be hosting Ameresco's first earnings conference call as a public Company. As you know, we listed Ameresco's stock on the New York Stock Exchange in late July, where we raised net IPO proceeds of $54 million. This was in our plans and is important step in our company's growth. This capital allows us to repay our outstanding corporate debt and also provide us with the necessary capital for executing our growth strategies.

Turning to the second quarter and the first six months of this year, we are very pleased with our strong financial results. Andrew will discuss our financials in more detail, but the highlights of the quarter and the six months are as follows.

First, we saw a 58% increase in our second quarter revenues year-over-year and a 52% increase for the first six months of the year. Second, we saw substantial improvement in our gross profit margins and operating leverage, which allowed us to grow EBITDA by 278% over the second quarter of 2009 and by 216% for the first six months of 2010 over the same period of 2009.

Third, the above resulted in strong earnings per share of $0.21, a four-fold increase from $0.05 last year in the second quarter and to [$0.24] for the first six months for the first six months of 2010 from $0.06 in the first six months of 2009. Again, a four-fold increase.

And fourth, we also achieved positive cash flow of $2.5 million in the second quarter. This is important since we are normally investing in the first two quarters of the year, which results in negative cash flow and return for positive in the last two quarters of the year. Now, Andrew will provide more details on our financial results and I will be back with more closing remarks afterwards. Andrew?

Thank you very much, George, and good morning, everyone. Today, Ameresco announced second quarter 2010 net income of $7.7 million, a 348% increase over the second quarter of 2009 net income of $1.7 million. Earnings per diluted share were $0.21 for the second quarter of 2010 compared to $0.05 per diluted share for the second quarter of 2009.

For the six months ended June 30, 2010, net income was $9 million, or an increase of 320% when compared to the net income for the first six months of 2009 of $2.1 million. Earnings per diluted share for the first six months were $0.24 compared to the $0.06 per diluted share earnings in the same period in 2009.

The principal drivers for the second quarter were stronger revenues, higher gross margins, and better operating leverage. We recorded total revenues for the three months ending June 30, 2010 of $141.4 million, which was 58% higher than the $89.5 million earned in the second quarter of 2009.

Revenue from energy efficiency projects increased by $23.6 million, or 31%, as more projects were actively being installed for our customers. Renewable energy revenue increased by $28.3 million, or 232%, in the second quarter of 2010 compared to 2009 due mainly to an increase in the size and number of renewable facilities being developed by us for our customers. In addition, approximately $5 million of our renewable energy revenue increase was from the operation of facilities owned by us that produce renewable energy and from the delivery of renewable energy products.

Gross profits of the second quarter of 2010 grew at a greater rate than revenue as we were able to realize stronger margins as budgeted project margins have improved. Total gross profits of the three months ended June 30, 2010 was $26.2 million, an increase of 70% over the $13.5 million reported in the same period for 2009. Our overall gross margin improved to 18.5% in the second quarter of 2010 from 17.2% in the second quarter of last year.

Operating expenses increased 4% to $14.1 million from the second quarter last year. Salary and benefit expenses decreased as the growth in overall business activity improved staff utilization, which resulted in more employee costs being allocated to direct expenses. Project development costs also declined, reflecting the higher volume of new contracts executed. As contact volume increases, pre-construction costs are treated as a direct expense against revenue rather than as an operating expense.

Offsetting those declines was an increase in general, administrative and other expenses. That increase was due to a charge we took related to an unexpected prepayment of a long-term receivable. This asset was acquired in 2003 and was subsequently monetized with a residual amount recorded by us based on an expectation of the contract running the full term.

In the second quarter of 2010, we received the notice that the customer intends to prepay the contract at the end of this year, resulting in a $2.1 million non-cash charge. Overall, operating expenses as a percent of revenue improved in the second quarter of 2010 to 10%, from 15.2% in the last year's second quarter.

Operating income totaled $12 million for the second quarter of 2010 compared to just under $1.8 million last year, more than a six-fold increase. EBITDA, which is operating income plus depreciation and non-cash stock-based compensation, totaled $14.6 million for the second quarter of 2010, a 278% increase over the $3.9 million reported last year. EBITDA as a percentage of revenue was 10.3% for the recent quarter compared to 4.3% in 2009. We refer you to this morning's press release for a discussion of EBITDA, which is a non-GAAP financial measure, and for a reconciliation of EBITDA to operating income, the most comparable GAAP measure.

Other income and expense decreased by $1.8 million from the second quarter of 2009 to a net expense of $1.2 million in the second quarter of 2010. The second quarter of 2009 benefited from a $1.6 million of unrealized gains on interest rate swaps. Those swaps were designated as a hedge in the second quarter of 2010, no longer requiring a periodic mark-to-market.

The net expense in 2010 represents interest charges and amortization of deferred financing fees. The net result of this activity is an $8.4 million increase in net income before taxes of $10.8 million in the second quarter of 2010, which compares to $2.4 million in the same period last year.

Our income tax provision increased from $662,000 to $3.1 million, or an effective tax rate of approximately 28.6% in the second quarter of 2010. The tax provision in the recent quarter brings our year-to-date effective tax rate to 28.1%, which is the estimated full year rate for 2010.

The principal difference between the statutory rate and the effective rate were the deductions permitted under Section 179d of the tax code, which relates to the installation of certain energy efficiency equipment in federal, state and local government-owned buildings as well as production tax credits to which we are entitled from the sale of electricity by certain plants that we own.

Now, turning to cash flows. Cash provided from operating activities during the three months ending June 30, 2010 was $2.5 million. This compares favorably to the $6.5 million that was used during the same period in 2009 and to the $17.9 million used in the first quarter of this year.

As revenue has increased ahead of our current year plan, it has resulted in stronger operating cash flows. Our plan for 2010 had projected that operating activities would continue to use cash for the first two quarters before becoming a source of cash in the second half of the year. Our operating cash flows improve as overall business activity increases, and you can see that it has done so ahead of schedule.

Cash used in investing activities in the recent quarter totaled $6.5 million and consisted solely of capital expenditures, primarily for the development of renewable energy facilities that use landfill gas and photovoltaic systems. For the first six months of this year, we have invested approximately $12.4 million in such facilities and are on track to invest just under $30 million in 2010.

Cash provided from financing activities was approximately $1.4 million in the second quarter. We made draws on our revolving line of credit totaling $6.4 million, which were offset primarily by scheduled repayments of subsidiary level, non-recourse project debt. It should be noted that a portion of the net proceeds from our IPO were used to pay off the subordinated note and the outstanding balance on our revolver. This was done the last week of July.

Finally, as was noted in the press release this morning, our total backlog of projects that are contracted and those that are rewarded but not yet contracted remain strong at $1.1 billion. Of that, fully contracted backlog was $668 million at June 30, 2010 compared with $457 million on the same date in 2009. Our second quarter number is also ahead of the total at March 31, 2010 of $635 million. Awarded but not contracted backlog at June 30th was $465 million compared with $711 million on June 30, 2009. I will now turn this discussion back to Ameresco's President and CEO, George Sakellaris.

Thank you, Andrew. Our market opportunities have continued to grow across all of our groups and our diverse geographic regions where we operate. During the quarter, we signed our largest solar project in Canada to date with the Grand Erie District School Board in Ontario under the Ontario Power Authority Program.

And in energy efficiency, we signed long-term energy savings performance contracts with the City of Lowell in Massachusetts, with NASA Space Flight Center in Maryland, and with the San Francisco Housing Authority in California. These are just some of our new projects we signed for the quarter.

As further evidence of the need for energy efficiency and renewable solutions and the demand that we are seeing in the market is the fact that the number of proposals that we have in the market today is 80% ahead of last year's numbers. Of course, we want to convert a good part of these proposals into executed contracts and we are working very hard to make that happen. As Andrew discussed, our aggregate backlog of contracted and awarded projects remains strong at over $1.1 billion. Out of these, our fully contracted backlog of $668 million represents a 46% increase over the same quarter of 2009.

I know that many of you met with us on our roadshow. And as we indicated then, our growth strategy continues to be based on the following principles. First, pursuing organic growth in our existing markets by increasing project sites and market penetration through opening additional offices and making new hires. We have 54 offices in 29 states and we are in four Canadian provinces. Currently, we plan to expand by two to three offices per year and possibly more.

Second, expanding the scope of our cost-effective, environmentally-friendly products and services and, most importantly, on increasing our recurring and higher margin revenues coming from additional operations and maintenance contracts and renewable assets that we own. Based on our record for this quarter and six months to date, we believe we are making a very good progress towards that effort.

Third, growing through opportunistic acquisitions. As you know, we have made a number of acquisitions in the last ten years, each of which has allowed us to either expand geographically or to offer additional services in existing markets. We continue to look for opportunities to expand, but only if the acquisition is accretive and expands services or brings us into geographies where we do not have a presence.

And fourth and finally, the price, what I call, advantage. We have an unrelenting focus on customer satisfaction. Our solutions help them lower costs and improve their green footprints, an area of increasing importance to all of their stakeholders. More and more, we help raise what I call the customer awareness that energy efficiency projects are primarily driven by great economics and this ultimately motivates them to act.

That leads me to an important point about our strategy and the value proposition of Ameresco, and one, I believe helps fuel demand even in a tough economy, and that is the fact that along with our energy-efficient solutions that help customers lower their energy costs we arrange capital from third-party sources to finance the cost of our customers' energy projects.

This is good for our value proposition but, more importantly, good for the clients, including, of course, our governmental clients. While they are working to lower their energy costs, they are also able to lower their capital needs because they do not have to use their own capital to implement the energy saving solutions.

Now, a little bit about our outlook. I will say a few words about that. We believe that our strong second quarter and six months to date results are indicative of the demand that we have seen in marketplace. We believe that this trend looks good for the rest of the year and the foreseeable future.

As a result, we continue to expect -- one, that our total revenues for the year will be between $575 million and $585 million; second, that our EBITDA will be in the range of $52 million to $54 million; third, that our net income will be in the range between $26.5 million and $27.2 million; and finally, that our earnings per diluted share will be between $0.62 to $0.65 per share. I would like to thank you again for joining us in today's call. And now, we would like to answer your questions and so I will turn the call back to our coordinator, Sailee.

Thank you, ladies and gentlemen.

(Operator Instructions)

Your first question comes from the line of Steve Milunovich from Bank of America. Please proceed.

Great. Thank you very much. Andrew, could you just remind us about the seasonality in the business? I know you don't predict quarters, but are you still expecting to see a kind of large third quarter relative to the fourth quarter? Anything different this year?

No, that's correct. Typically, the strongest quarter of the year tends to be the third followed by the fourth quarter, with the first and second quarters being weaker than the last two of the year. Our first quarter is typically the weakest and then you see a progression through the second quarter. So, that's what we've experienced in the past and that's what we'd expect to continue to see.

And how do financing conditions look? The economy may be getting a little bit softer. Does that have an impact on you?

Financing remains available. We've not had any projects that we've run into difficulty and we continue to see multiple sources of financing for all of our projects at the state and local government level as well as the federal government.

Okay, then, just a quick last one. Share counts, 38.4 million diluted. We were thinking something higher than that. What's the share count likely to be next quarter?

We're going to see the share count rise on average. I'm looking at a full year average of between 42 million and 43 million shares on average.

Thank you.

Your next question comes from the line of Steve Sanders with Stephens Incorporated. Please proceed.

Hey. Good morning, everyone.

Good morning.

Just first, George, you made a comment about the increase in proposal activity and so I'm curious. There was a data point in your filings that showed in '09 you had $1.7 billion of proposals and you were awarded about $800 million. Are you referring to that number or is there a different metric that you're talking about when you say the proposal activity is up 80%?

I don't know which number you are referring to, but there is a number that we track inside the Company. The metric that I use -- all our total outstanding proposals in any given point in time. And for the first six months of this year, that number is 80% of where it was last year.

Okay. And on the --.

And then the awarded number for last year, it was higher than it is this year because back in '09 -- '09 first was an unusual year and because we had two issues. One, we had a lot projects in the queue in order to complete the financing because we had the slowdown in the financing late '08 and early '09.

And then, the other issue that we did mention on the roadshow was the fact that we had run -- the industry as a whole -- on the DOE contract ceiling issue, and that wasn't lifted until February of 2009 and then it took a couple of months later on for the projects to begin to move ahead. So this year is more representative of other years, with the exception of late '08 and '09. And the metric that we use in the outstanding proposals is a key metric for us because that indicates the market activity.

Okay. Thanks very much. And then, a couple on the renewable side. Obviously, the revenues there were up substantially for the quarter and the first half. Can you talk a little bit about the product installations versus the recurring piece of that? And then, can you also comment on the opportunities you are seeing to put your own capital to work on some of these landfill gas and other projects? Are you seeing more opportunities to meet your hurdle rate? Less? Just at least a qualitative comment on that?

I will start with the last one first. We continue to get a pretty good backlog associated with the opportunities where we could invest in landfill to energy projects and giving us the return that we want to. And like I said in the roadshow, unless we feel we get a pretty good return and a quick payback on our equity, we will not invest in them.

In addition to that, we see quite a few solar plans like the one that I mentioned up in Ontario, whereby it's right now 3.2 megawatts for the various school systems. That asset, we will own it at the end of the day and we will have a 20-year contract of selling the output to the Ontario Power Authority under a very good contract.

And regarding the overall revenues associated with the renewables, you see a substantial increase. And some of that comes from the annuity base, from the investment that we have made, but the better part of that comes from projects where we built them for the customers.

And, of course, one that's impacting the numbers a lot this year is the Savannah River Project. And even though we built that, of course, for the Department of Energy, the Federal government, and even though it's an energy efficiency performance contract project, it's counted as renewables because we're converting an old coal-fired power plant basically, shutting it down and built a brand new wood-burning facility -- a power plant using biomass, so it's counted on the revenue side as renewable.

Okay. All right. Thank you very much.

And you will see that line because I don't know how to (inaudible). For a while I thought maybe I called it hybrid -- energy efficiency and renewables -- because the fact that the customer started requiring more and more of the renewable source of energy, but we built in it for the customers through the energy efficiency project.

Okay. All right. That's helpful. Thank you.

Your next question comes from the line of Dale Pfau with Cantor Fitzgerald. Please proceed.

Good morning, gentlemen.

Yes, good morning.

Congratulations on that cash flow kicking up there in the first half; that's nice. I'm going to go back to this issue of the number of outstanding quotations, and that's an impressive number that it's up so much and it's a pretty good positive for you. Have you seen a change in, number one, your close rate and the time to close on those contracts? Can you talk a little bit about the trends out there?

We see a pick-up in market activity. I think that's all you can say about that particular number. But as far as our success rate, like I said on the roadshow, better than one or a three and the trend has been up as Ameresco gets better and better traction in the marketplace. So we have seen an improvement in that.

But as far as the timing, it takes the six months to a year that we have indicated before by the time from the initial proposals to closing the project. And the projects are getting larger and larger and always bigger, and the bigger and the more complex that the projects get, the more time it takes to close them. (inaudible)

That's very helpful. And clearly, the announcement up in Ontario is a positive because of their subsidies up there. Do you expect you're going to see more business up in Ontario because of that and could you give us any indications of any states in particular where you see a lot more activity?

Ontario, they have a very, very good program. And that's why when I said Ameresco was well positioned, we have many accounts, which basically the school systems, that we did energy efficiency projects. And then when this project came to pass, otherwise the Ontario Power Authority, they came out with a program where they paid $0.713 per kWh for the next 20 years.

We've taken advantage of that particular problem, going back to our clients and asking them to install basically small scale solar plants or panels on their roofs, and it seems like we're going to be very successful with that program. We just signed that particular customer and we have several others that they are in the queue right now and we expect to see some pick-up up in Canada.

And are there any other -- any particular states that you're focusing on in the US because of the same sort of --?

State of Massachusetts, state of New Jersey, state of Colorado -- they have some very good programs out there regarding the renewables. And the same with the RPS, the various states that they have renewable performance standards. That's on our landfill assets or any other renewable asset; where we own it, we target in states where we can get very good long-term rates. Because remember, we do not build those assets without having a long-term contract for the sale of the output.

Great. Thank you very much. Keep up the good work.

You're welcome.

Thank you.

Your next question comes from the line of Eric Prouty with Canaccord. Please proceed.

Great, thank you. Just a question on some of the end markets. It sounds like there's been a little concern out there in the kind of K through 12 education market that with the state and local budgetary constraints that some of those projects might be in jeopardy going forward. Are you seeing any change in that market yet?

No. That has come up before, you know. The more trouble that the local government and the schools they get as far as the budgetary constraints that they have, the more help we can be to them because we bring to the table the capital to implement the energy efficiency projects, which, like I said, it reduces their overall energy costs as well as the operation and maintenance costs because they get new boilers, new chillers, and so on, and we're a solution.

So, the more trouble they get, the better our product becomes to them. But sometimes what happens, it's the perception or you might say that they lack the focus because they are in tremendous constraints or you might say issues that they don't focus on it, and it takes our sales people to go out there and motivate them and educate them about the benefits of this proposition and then they would take advantage of it. That's what we are finding out.

Great. And then, another question on the renewables. And you might have explained this a bit earlier, but the margin on the renewable part of the business, is that dictated -- a very nice improvement there year-over-year. Is that being driven by a project mix within the portfolio or is that being driven by just greater efficiency, greater number of projects occurring?

I'll let Andrew --

It's a little bit of both, Eric. We're seeing an increase in revenues from plant assets, which carry higher gross margins, but also some of the larger renewable energy projects that we're installing; George mentioned Savannah River. Those projects also carry a little bit better margins as well.

Okay. So should we then expect, given those are somewhat longer-term phenomena, that this margin improvement should be able to stick as we enter into the back half of the year and into next?

That's what we would expect, yes.

Great. And then finally, there's been especially in once instance a large change of ownership in the competitive landscape with the ESCOs. Are you seeing any change out there in the competitive landscape, either with the existing ESCOs or any of the more contractor-type companies attempting to muscle into the business?

We have seen some people trying to get into our business. But as far as the competitive landscape and as far as our ability to execute or win contracts, it hasn't affected us at this point at all. And like I said earlier, actually, our success rate is going up, so trend is better than what it was last year. And this business -- a lot of people they want to get into it, but they don't have the track record or the execution in order to be able to do it.

Great. And then kind of Noresco/Carrier, has there been any changes in your competitiveness versus them or are they kind of as strong as ever out there in the market?

I just keep telling the customers, because Noresco used to be one of my companies, so if they want the real thing they should use Ameresco.

It's a good sales pitch. Guys, thanks a lot. Good quarter out of the gate here. Thanks.

Your next question comes from the line of Tim O'Brien with Crow Point Partners. Please proceed.

Yes, good morning. Congratulations on the IPO and good quarter. Could you help me think a little bit about -- because we're still getting to know you as a public Company -- the normal relationship between backlog and revenues? And could you give us some color on what appears to be a slight reduction in backlog versus the end of the first quarter and year-over-year, and help us to reconcile that with the outlook on revenue growth?

Yes. The most important metric thing that I would look is the execute of contract, that $668 million, because that's the one that it converts to revenues over the next six to 18 months. So, that's the one that I always watch very, very carefully.

And like I said earlier, even though you see that what we have defined as backlog last year to this year were the awarded contracts, they were such a large portion from the [top of] backlog, it was because it was an unusual year. Because we had almost $400 million in the queue of projects that we were waiting for the financing to happen or for the Federal government contract ceiling to be removed, so it wasn't a normal year. The other metric that I look and I watch very carefully is the outstanding proposals, and those you should expect that a good part of them over the next six months or so to be turning into executed contracts.

Thank you. And as a follow-up --.

(inaudible - multiple speakers) I will give you the guidelines, the internal plan that we had for this year. Across all metrics we are ahead of plan, and that includes all the way from top line to bottom line revenues to net income as well as contracts we were anticipating in executing for the first six months.

Great. Thank you.

You're welcome.

Your next question is a follow-up from Steve Milunovich with Bank of America. Please proceed.

Thank you. Could you talk about the renewable projects that you might be bidding on? My understanding is that there may be some rather large ones. And if you, in fact, get some of those, when would we see them executed?

A couple at New York that you might see them probably next year or so. And then there's a couple with the Federal government that they are in -- we have made the proposals, but they are in the queue right now. I wouldn't expect to see the Federal government projects until probably late next year, implementing them.

Okay, got it. For someone looking at the backlog and saying it's been fairly flat in total over the last year or two, but I think you believe that the Company's going to grow at 20% plus, what would you say to that view? Look at the proposals, in particular, kind of give you confidence that awarded backlog will kind of regenerate and eventually you'll see high revenue growth?

Well, when we designed our business plan for this year as well as for next year and we estimated where we wanted to be on the executed contracts, let's say, by this time this year, which the contracts we execute were up to date, the better part of most of them, they will implemented next year. That's why when I was answering Tim's question I said that in all metrics we are ahead of plan. So, as far as I'm concerned for our visibility for this year and the better part of next year, we are right ahead of plan.

Okay. And can you talk about the possibility of having a financing mechanism for the commercial and industrial market, and maybe explain the difference between the government and the commercial markets in terms of why are businesses so heavily government-focused?

Because the financing product - otherwise many banks and other financial institutions like that, they will finance the governmental agencies whether it's state, local, schools, colleges, universities, and so on, where for the commercial and industrial sector there is not a product out there in the marketplace yet that will finance those projects for a long period of time.

And that's why President Obama has called some of us about three weeks ago to the White House in order to discuss how -- Mr. Moynihan from Bank of America was there -- to come up with a product that will finance energy efficiency projects for the commercial and industrial sector. So that effort is continuing and I wouldn't be surprised that over the next year or so that we will see that product be developed and you will see us doing more and more business in those market segments.

And if the Treasury cash grant is not extended, does that impact your business much, because I think you talk about using that to get a quick return of your equity on renewable projects?

No, it would not, because we still look for the -- like I said on the roadshow, for a three-year payback of our investments. But on the other hand, it did help last year, it will help this year, and will help next year for the projects that we started this year, and we have six projects we are starting this year to take advantage of that particular program.

Great. Thank you.

You're welcome.

Your next question comes from the line of Asit Sen with Madison Williams. Please proceed.

Thank you. Good morning.

Good morning.

I have a quick question on the Ontario solar project, just digging a little deeper. The information you've provided is 3.2 MW. And I think, George, you mentioned a 20-year contract at $0.713. The question I have is you're going to own these assets at the end of the day, how big are the capital needs now? How does the financing, et cetera., work? And how big do you think it gets?

We already have three insurance companies that are willing to finance the debt associated with that particular project and I think the equity that we'll contemplate on that project is about 20% of the total project cost, and right now that's estimated at around $16 million , if I'm correct, plus or

Okay. And this potentially have the potential to grow much bigger, because the program, I believe, has significant support? Is that correct? How big potentially can this program become?

I wouldn't be surprised to see that we will sign 10 to 20 megawatts of those projects over the next six months or so, if the project continues to stay open.

And Andrew, you mentioned about the margins, you've finally cracked the 10% on the EBITDA margin front. And my question to you is there's seasonality in the business, but are margins expected to bump up a little bit when revenue ramp up? Is there any correlation between margins and revenues?

Oh, yes. We should see EBITDA margins --. Well, firstly, we're going to see the gross margins improve to around the 20% level. And then, as revenues increase, we've made the necessary investments in our corporate infrastructure and our operating expenses are not going to grow anywhere near the rate of revenue. So we're going to get -- we expect to get very good operating leverage as revenues continue to increase.

Excellent. Thank you.

Thank you.

Your next question comes from the line of Neil Gagnon with Gagnon Securities. Please proceed.

Gentlemen, good morning.

Good morning, Neil.

Good morning.

A couple of questions. On the outstanding quotes, is there a normal level that you expect to convert or does that change with the type of projects you're working on?

Again, the guideline that we use, about 30%; however, that trend has been better than that now.

Has been better?

Yes.

Okay.

In some regions (inaudible) they do substantially better because they drive the process more themselves.

Okay. George, for you, what are the factors that would limit your growth over the next few years?

That is a very good question. I think the most important factor is probably human resources. However, in order for us -- and that's why you've seen some operating leverage that we're beginning to get by going to larger projects and using the employees that we have.

So, in order to be successful in this business is what I call in developing the up-front projects via developers. And that's why engineering firms or mechanical contractors, they cannot get into this business and be effective because they do not have the developers that go out there, identify the opportunity, screen the opportunity without spending an excessive amount of money, determine whether it's an opportunity that we can make money or not.

And that's why we have 110 account executives, again, with tremendous, tremendous debt. In addition to that, over 150 of what we call development engineers, and that's a great, great differentiation in the marketplace. And the people that are hardest to find are those development engineers with account executives, and that's a bottleneck. So, the strategy is to leverage talent by focusing on larger projects and then hire -- is the way we're doing it. We're hiring younger people and pairing them up with senior development engineers.

Thank you very much.

You're quite welcome.

Your final question comes from the line of Stuart Bush with RBC Capital Markets. Please proceed.

Hi, George. Hi, Andrew.

Hi, Stuart. How are you?

Good morning, Stuart.

I'm good. I know you've talked about opening organically three to four new offices per year. As you look into 2011, where do you see geographically the most opportunity?

If you look at our map, and I said we had won some large contracts down in Florida and we were qualified to do business down there, I think the last year or so. We won a large contract with the City of Orlando and you're going to see us opening an office there. We're going to start increasing the penetration otherwise in the Southeast substantially.

In the West, we are very weak the way we are right now, so you're going to see us increase our presence there. Arizona, you're going to see us increase our penetration there. Colorado is another state that we are focusing at. So you're going to see us winning contracts, and right behind those contracts, increase our resources in that region.

Okay, great. And I was hoping you could talk a little bit about the dynamics or the impact of the ARRA stimulus funding on the industry, if that caused any delays in some projects and if that has been resolved more recently.

It causes substantial amount of delay on some of the projects. And I don't know if many people realize, but all that talk, it's only two projects that benefited from the stimulus money -- Boston Housing Authority project and the one in San Francisco. But I think the realizations have come to pass now, and the customers, they have begun in the last six months to move ahead regardless of the stimulus money.

Okay

So at the end of the day that's fine, but they cannot wait anymore, any longer, they move forward. But then on the other side, some of the stimulus money is beginning to flow. And what we have done, we buy down projects like Boston Housing where we did, even though it's a $64 million. I think $10 million came from the stimulus money and we financed the other $54 million through a third party. So we increased the size of the project, and that's how we used the stimulus money.

Okay. And then one last question, Andrew. If you can just remind me, what should we be thinking as a standard conversion rate between the awarded backlog and executed backlog? And what timeframe should we be modeling for that?

I think you're safe using 90%. I think the reality is a little better than that. The timing tends to vary, but somewhere on average maybe six months.

Okay. Thanks a lot. Good quarter, guys.

Thank you.

Thank you, Stuart.

The concludes the question-and-answer portion of the call. I will now hand the call back to George Sakellaris.

Thank you very much, everyone, for our first conference call and we are looking forward to our next one. And again, thank you very much.

Thank you for participating in today's conference. This concludes the presentation. You may now disconnect and have a great day.