Ameresco Inc (AMRC) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q1 2012 Ameresco Inc Earnings Conference Call. My name is Sonya, and I will be your Operator for today. At this time all participants are in listen only mode. We will conduct a question and answer session towards the end of this conference.

(Operator Instructions)

As a reminder this call is being recorded for replay purposes. I would like to turn the call over to Suzanne Messere, Director Investor Relations. Please proceed.

Thank you Sonya and good morning everyone. Thank you for joining us today for Ameresco's first quarter 2012 earnings conference call. I'm joined today by George Sakellaris, Ameresco's Chairman, President, and Chief Executive Officer, and Andrew Spence the company's Chief Financial Officer.

On today's call management will share brief highlights from the prepared remarks we've published this morning and then take questions from the audience. 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 press release issued this morning and its annual report on Form 10-K, filed with the FCC on March 15, 2012, which discusses 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. In addition, the company will be referring to non-gap financial measures during this call. These non-gap financial measures are not prepared in accordance with generally accepted accounting principles. A GAAP to non-GAAP reconciliation as well as an explanation behind the use on non-GAAP financial measures is available in our press release as well as our prepared remarks.

I will now turn the call over to George Sakellaris Ameresco's President and CEO. George.

Thank you Suzanne and good morning everyone. Ameresco's flat first quarter revenues were in line with our expectations at $146.6 million. We expected a seasonally slow first quarter for 2012 when compared to the unseasonably strong first quarter of 2011. Gross margin increased to 19.9% compared to 19.1% a year ago. The increase was driven by project close outs and an improved mix(inaudible) of higher margin offerings.

The investments that we made in solidifying our market position, as well as expanding our geographic footprint and service offerings during 2011, having increased salaries and benefits expense. In addition, salaries and benefit expenses during the first quarter were slightly higher than expected due to lower than anticipated employee utilization rates. As a result, net income was below our expectations at $1.5 million.

However, these investments continued to strengthen an already solid market position during the first quarter as evidenced by an improvement in pipeline activity. During the first quarter total construction backlog increased 10%, driven by a 51% increase in awarded projects. Further, the amount of new proposals in our pipeline increased 14%.

Revenue for all other offerings increased 54%. Year over year increases within the operation and maintenance integrated PV and small scale infrastructure combined with our investment to expand our service offerings offset the effects of the first quarter seasonal slow-down in installation activity.

Based upon our growth expectations and positive trends within the market place, we are optimistic about our future prospects. We believe that we are well positioned to meet our growth expectations as well as our long term growth targets. Therefore, we are not changing our guidance.

And now I'd like to turn the call over to Andrew, our Chief Financial Officer, who can provide more details about our financial results. Andrew.

Thank you very much, George, and good morning. The financial highlights from the quarter are as follows.

Revenue from energy efficiency increased 6.8%. Strong contributions from installation activity in our other US regions segment and recurring revenue from acquisitions more than offset declines in our US Federal, Central US region, and Canadian segments.

Revenue from renewable energy decreased 17.5%. Strong contributions from integrated PV, small scale infrastructure, and O&M only partially offset a decline in installation activity, driven primarily by the completion of the Savannah River Project during the fourth quarter of 2011.

Gross margin during the first quarter of 2012 was 19.9%, compared to 19.1% in 2011. Strong energy efficiency gross margins, due to project closeouts and an improved mix of higher margin offerings, more than offset downward margin pressure within renewable energy, as well as nearly $1 million in amortization costs related to acquisitions.

Downward margin pressure within renewable energy was primarily impacted by the continued transition to the O&M phase at Savannah River. We expect this trend to wind down and eventually reverse as the year progresses.

Operating expenses in the first quarter increased from $19.7 million in 2011 to $25.8 million in 2012, an increase of 31.1%. In addition to the investments we've made, which George mentioned earlier, operating expenses during the first quarter were slightly above our expectations due to an increase in salaries and benefits expense arising from the lower-than-expected employee utilization rates.

We expect that as a percentage of revenue, operating expenses should decline as revenue increases in line with historical seasonality trends through the remainder of the year. We expect operating expenses, as a percentage of revenue for full-year 2012, to be in line with where it was for full-year 2011.

Both project development costs and general administrative and other expenses, for the quarter, were in line with our expectations.

Moving on to cash flow, we generated $33.2 million in positive operating cash flow during the first quarter, compared to a use of cash totaling $25.6 million in 2011. It is very unusual for operating cash flow to be positive in the first quarter, and we do not expect this outcome to recur in the future.

The first quarter operating cash flow benefited from receipt of remaining retainage or hold-back related to the Savannah River Project in the amount of $20 million. In addition, certain receivables of acquired companies that normally would have been collected in the fourth quarter of the previous year were received in the first quarter of 2012. These delays were temporary and are not expected to recur in the future.

In the first quarter we invested $10 million in project assets, and we received $3.8 million in section 1603 and other rebates. We continue to strengthen our balance sheet. Cash used in financing activities totaled $13.7 million. For example, we paid down $6.4 million of our senior credit facility and $800,000 of our non-recourse-subsidiary loan debt, related to project assets.

Total corporate debt on our balance sheet, not related to projects, was $35.7 million, as of March 31, 2012, for the term loan. The $60 million revolver had a zero balance outstanding at the end of the first quarter. And with that I will turn the discussion back to George.

Thank you, Andrew. Our pipeline increased by 12.6% year over year to $2.4 billion at the end of the first quarter. An increase in activity in all regions contributed to the year over year improvements. In addition, our US Federal segment contributed to new awards and experienced an 82% year over year increase in active proposals.

Our total construction backlog, as of March 31 increased 10% year over year to $1.28 billion, driven by a 51% increase in awarded projects. The book-to-bill ratio for the first quarter of 2012 was 1.6. Activity thus far, in 2012 is in line with seasonality, and we expect to see a more meaningful improvement in fully-contracted backlog during the second half of 2012.

Revenue from our other offerings, such as, small-scale infrastructure integrated PV and O&M and other increased 54% year over year to $43 million.

Moving on to our guidance as I mentioned we are not changing our guidance for the fiscal year ending Dec 31 2012, we continue to expect the following, total revenue in the range of $800 million to $825 million, and net income in the range of $39.5 million to $42.5 million. Our guidance assumes continued improvement in the environment for converting awarded projects to signed contracts for the balance of the year.

And, as Andrew mentioned, we expect to see seasonality similar to what we have seen historically for the remainder of 2012. More specifically, the first quarter tends to be approximately 17% of total revenue for the year. The first half tends to be in the range of 38% to 40%, and the second half of the year tends to be in the range of 60% to 62% of total revenue for the year. We believe that the first half of 2012 will be at the bottom end of the typical range and that the second half of the year will be at the higher end of the typical range.

For the balance of the year, we anticipate operating expenses, as a percentage of revenue, to be lower as we approach the seasonally strong, second half of the year; a gradual decline in the second quarter and a noticeable decline in the second half of 2012, with the overall level for the full year in line with 2011, as a percentage of revenue.

In closing, we are very pleased that the favorable trends within our pipeline continued into the first quarter. We are optimistic about the future as well. The keys to driving future growth are executing effectively and a sharp focus on addressing custumer needs, for comprehensive energy efficiency and budget-neutral solutions. Based upon our growth expectations and assuming that the positives trends within the market place continue, we believe that we are well positioned to meet our growth expectations, as well as our long-term-growth targets.

Now, we do like to answer your questions, and I will turn the call back to our call coordinator, Sonya.

Thank you. (Operator Instructions) First question comes from the line of Amir Rozwadowski, please proceed. Your line is open.

Thank you very much and good morning folks.

Good morning.

George, I was wondering, it seems as though costs have come in a bit higher than you'd originally anticipated during the first quarter. We've had a couple of quarters where that seems to be the case, but you folks seem to be pretty comfortable with being able to ratchet back that cost through the course of the year. I was wondering if you could --

Are you still there?

I do apologize. The line has just disconnected. If you could just bear with me and I will open the line for you.

Thank you.

Apologies for that. Your line is now open again, Amir.

Go ahead, Amir. Are you done with the question?

If you would like to do star 1 again, and you'll come back into the cue. Your line is now open, Amir. Please proceed.

Thank you very much. George, I don't know where I got cut off there, but the primary question was the costs seems to have come in ahead of expectations here for the first quarter, but you folks seem to be comfortable with being able to ratchet them back through the course of the year. I was wondering, what really give you the comfort that you can execute on that front?

Yes, that's a very good question. As the volume picks up, Amir, then the SG&A and everything else, they come in line. Because what happens, for example, you have 17% of the revenues of the first quarter, but basically you have 25% of the annual expenses. And that's what messes up your metrics, so as the volume picks up then the ratio of the labor costs comes down, as a percent of revenue.

And we constantly fine-tune the organization based on the amount of work that we have. I mean, it would have been very easy for us. Take $3 million of our SG&A, but we would pay the price, most likely not this year, but next year because you would not have seen the activity in the pipeline pick up the way it did. That's why we feel very comfortable that once we see that 51% improvement in the awarded projects. That's why I say our investments are paying off.

As we move those projects from the awarded category to the executed contract, then the metrics come back in line. This by the way, this first quarter it's not atypical to what we saw in 2008, 2009, and a little bit 2010. But 2011, last year it was a very unusual year because we had couple huge contracts that we were executing during the winter months. And one of them is, of course, Savannah River, and the other one is McGuire Airforce.

Great thank you for the incremental color. If I may, if we look at your total backlog, both awarded and fully contracted, on a year over year basis we continue to see a pick up in total growth. How should we think about the progression of that going in to the back half of this year? It sounds like federal activity has picked up pretty noticeably. What type of trends do you expect to see as we progress through the course of this year?

We are very, very, very pleased that the federal market, you know that was totally shut down last year and almost the year before. The activity there is very, very high. We are having a hard time keeping up with responding to the proposals from the federal government right now.

So the awarded, I think, category will continue to pick up, but we are going to put a good amount of emphasis to convert a good amount of the awarded category to executed contracts, so we can build them out. As we roll out, you will see, for example, the awarded projects, I would say, the increase that we have probably half of that we've been working with those projects last year and so on. So you will see those contracts coming in the second half of the year being executed then starting to build them out.

Great, thanks very much, George.

Thank you. The next question comes from the line of Zach Larkin. Please proceed. Your line is open.

Good morning everyone. Thanks for taking my question.

Good morning, Zach.

Hey George. I wondered if, first off, could you talk about with the increase in the federal projects also as the ESPC model is getting more visibility and understanding, are you seeing any changes in the size, scope, or complexity of the projects that are coming in for potential awards?

Once in a while there will be one big elephant here and there, like we have the Savannah River. You like you to take advantage of that, but the average size of the project, and we were looking at them yesterday, it's about $5 million to $6 million. So it's -- That's why I said earlier, answering Amir's question, that we are having a hard time responding to many government RFPs.

The government has published a list too because many of the agencies they've identified, like for example, the agriculture or the commerce department and so on, defense, homeland security. You will see that their projects they are anywhere from $5 million to $50 million. There are some a little bit higher than that, but the overall -- Well, I will say the bread the butter type of a business, and we like those types of projects. Even though the other ones, so once you get them they make you look good, but you pay the price eventually.

Now thanks for that. And also wondered, you talked a little bit in your prepared remarks originally. But can you talk about where you're seeing the most activity and what your expectations are regionally, across the country as we move through the year?

We are very, very happy the Midwest, the one that if you recall, last year it was one of the slowest -- it slowed down considerably. This year it has picked up tremendously. The southeast has picked up very good. Canadians, they are still a little bit slower than the other regions. The northwest is picking up, so we -- The southwest we have been getting some very good traction. So generally we see a very good pick up across the United States, and then, of course, the northeast, like last year, was one of the best performing regions. This year again it seems like it's going to have a good year.

Thank you very much.

Thank you. The next question comes from the line of Dale Pfau. Please proceed. Your line is open.

Good morning, George.

Good morning, Dale.

Suzanne. A question here on your margin profile, we talked a little bit about it last quarter. Are you continuing to see the margin profile in your backlog improve? Would you talk a little about that and some of the trends you're seeing?

Especially with some of the regions like the Midwest, we see it improving. And then the overall business though, I wouldn't expect that we're going to see much difference, other than, though, the mix of the business change. That's why I said a higher margin offering. For example, the AEG group that we acquired last year, their margins are 50% to 60%.

Some of the other software business that we acquired, like the EPS group again, they have substantially higher margins, so as you see the mixture of the assets, where we own all the renewable assets, they have a considerably higher margin. So as the mix of the O&M, the mix of the business changed a little bit, you will see the overall gross profit margin of the company picking up a little bit. That's why on our road show, we said that the long term, our weighted gross profits margin may approach around 20%.

And then, you talked about the federal picking up. Any other segments that you see that are particularly strong or weak right now?

Like I said, the Midwest, northeast, southwest, and the southeast regions, they are pretty good. The other thing that we are beginning to see some traction, and I think we have talked about this before, and especially with your position on the EPS group, little bit of the commercial and industrial. Of course the potential there is tremendous.

And --

And some of the other projects, I don't want to talk too much about that, but like the Philadelphia Wastewater Sewer Treatment Plant that we signed last year, we see more opportunities in that segment.

And on the renewables, how is the overall outlook on renewables?

We get pretty good -- On the renewables and where we own the assets, again, so far it's a very good market for us, but I think the long-term is, especially if for the PV business, the federal subsidies expire, I think that you will see that part of the business slow down.

And one final question. You mentioned the water business. What percentage of your total backlog of your business right now is water, and do you think that's going to be a growing piece of your business?

I think that's less than 10% right now. There are two elements there. One is that -- I want to make sure that we clarify it. The plans that we have built for Philadelphia were in sewer department, basically it's a cogeneration. It's a green facility.

We do a substantial amount of work on water conservation. And people don't realize that many of the apartments and the housing, it's tremendous, and the federal facilities, tremendous amount of water conservation business that we do. On the wastewater sewer treatment plants there's substantial opportunity across the United States that we can pick up.

Great, thank you very much.

Thank you.

Thank you, the next question comes from the line of John Quealy. Please proceed. Your line is open.

Hey, thanks. Good morning it's Chip Moore for John. I was wondering if you could talk a little bit about the integration of the recent acquisitions you guys have made? And then your current M&A pipeline and thought process there.

We always continue to fine-tune the organization and integrate some of the units. We did combine, where we saw one of the biggest opportunities so far. Combine whatever offices and assets we had, what I would call it, the southwest region with the company that we acquired from APS, Arizona Public Service Company. So we integrated that group into one unit, managed out of Phoenix with Bob Georgeoff, the person that was heading the APS acquisition. So that's working out very, very well.

And, of course, as I mentioned on the AEG group of competitive reasons, we are keeping that group separate, other than integrating their financials with the rest of the company. But we are always looking for, constantly fine-tuning the organization and make sure that the expenses do not get out of line with the overall operations.

And then, as far as, where we are with other acquisitions -- We don't like to comment on it, but I think it's reasonable to assume that we will always be working on two to three potential acquisitions, and this time is not different than others.

Yes, that's helpful. And just given your comments on, having a hard time keeping up with some of the demands on the federal side. Does that accelerate the time line, or what's the thought process?

The thing with the federal government, you know that activity is very high, but that you wouldn't see them have an impact until next year because it does take time to -- By the time they select the person from the RFP or the company, and then we have to do the detail audits and so on. So it takes anywhere from 6 months to 18 months to execute the contract with the federal government, but on the other hand though the trend is good. So we'll see a substantial pick up of what's likely next year, coming out of that group.

Great, thanks.

The next question comes from the line of Christopher Crumb. Please proceed. Your line is open.

Yes. I was wondering if you guys could break out the organic revenue verses acquisitions? And also do the same for backlog. Thank you.

I think Andrew --

I think for the, with respect to total revenue in the first quarter, we had $18 million of revenue coming from the acquisition. I think with respect to backlog --

The backlog growth, I would say more than -- essentially all of them, it's from the organic growth.

Okay, any break out on the revenue between renewable energy and energy efficiency?

Yes, energy efficiency is about $17 million and a little over $1 million for the renewable energy.

Great. Thanks so much.

You're welcome.

You're welcome.

There are no further questions on the queue at this stage.

Since there aren't any questions. I want to make a little clarification, as for where we are here, and where we are going for the rest of the year. We took a hard look at the various consensus for the second quarter. And based on where we are right now and the numbers that I gave you, we know that we are expecting for the next quarter to be below consensus and that we will expect our revenues to be around 19% to 21% of the total year revenue. Thereby, we'll be below where the consensus are, but then the operating expenditures will be approximately 150 to 200 basis points below where it was the first quarter.

As I mentioned earlier, the revenues for the second half of the year, they will be in the range of 60% to 62%, and then that will take us back into our guidance.

(Operator Instructions). We do have further questions. The next question comes from the line of Jim Giannakouros. Please proceed. Your line is open.

Hi. Good morning everyone.

Hi, Jim.

Quick question on just your awarded backlog. Could you talk about what end markets were particularly strong or added an outsized portion of that sequential backlog and awarded? And then also, what end markets trailed off your fully contracted?

The biggest awards has been on schools, colleges, universities that we had. Like I mentioned a couple on the federal government, nothing outside of the ordinary unless --

Local, yes, you said local.

Yes local colleges, but some of the bigger ones, they were couple large cities, and a school systems, and then a couple big universities. That added quite a bit to our backlog.

And as far as anything incremental from federal given -- I guess everybody's expectation that should come on. Is your expectation that there could be some contract awards this year, and then we should see some revenue benefit in 2013? Or were you thinking awarded contracts in 2013 and beyond?

I mean, on the Q1 we had a couple of good awards coming from the federal government. Last year, the whole year, for example, we have only $2 million. On awards this year, we are already over $20 million, for the first quarter, from the federal government.

Got it. Okay and a question on gross margin, particularly high. Should we expect it to come down sequentially as the installation activity picks up? How should we be thinking about your timing, getting to your 20% gross margin goal?

I think we might see a little bit of -- You'll see some improvement with renewable energy. Energy efficiency, as we said, benefitted from some closeouts. We're still looking at 20% as a goal that we are going to continue to trend towards. And the big driver there is going to be the improvement in the overall mix of our business, as we bring on more operations and maintenance, as well as some of the revenues from the consulting and other recurring revenues that we brought on with the acquisitions last year.

Okay. Great, thanks very much.

Okay the next question comes from the line of Michael Lew. Please proceed. Your line is open.

Thanks and good morning.

Good morning.

George, you prior, just made a comment on M&A of activity. As I understand it you're looking at two to three potential targets this year. How far along are you on this? Is this like a third inning or more like seventh inning?

I want to make the comment that we always look at two to three -- We get so many -- We have a group of consisting of, at least two people that they are looking at companies all the time. So I said it's not unusual for us to have a couple, two to three companies that we are looking at but not that far along in any one of them.

Okay. Also with regards to the increased quotation activity or pipeline activity. Can you also characterize the level of rescoping? Is it fair to say that with this type of improvement and activity that's also the level of rescoping is declining?

I'm sorry. The level of what?

Rescoping. Rescoping of contracts.

I don't know.

Renegotiations of contracts. Potential down sizing.

No, no, no. It's basically that people are beginning to -- because they have a goal in the federal government, if you recall that they execute about $2 billion of energy savings performance contracts by 2013. I was in an order by the White House and that White House, what they call Better Buildings Initiative. And all the agencies now they are trying to send out RFPs in order to be able to achieve that goal.

Okay

As far as the mix of the projects, other than a couple of things that I mentioned earlier, the business continues to be the same. And the competitors -- On the federal government now we have more than all of the companies that they are qualified, which are 16. But in the rest of the market, still, the players that we've been competing in the last 10 years we have been one of predominant players. It hasn't changed much otherwise, the bottom line.

Okay. You'd highlighted some improvement in C&I activity. How much has that pipeline grown?

For us, as you can see 100%, but it's small, like I said, we're just beginning to address that market, and we are getting some pretty good traction. But it's not significant; it's not going to make any significant impact on the numbers this year.

Got it. Thank you.

If I might add there, but why we want to be there because, like I said before, it's a huge opportunity, and we want to be able to play at it. So we will get some small contracts, get moving, get the experience, and then be ready when the market fully opens up.

Okay. I understand thanks.

Thank you.

The next question comes from the line of David Giesecke. Please proceed. Your line is open.

Good morning, George.

Good morning. How are you?

I'm good thanks. Craig and I are working through some technical difficulties. He's sorry he can't be on the call at the moment. I have a couple of questions though. Following up on that last exchange, could you go into a bit further detail on what you see in the federal market? Are you seeing awards momentum pick up consistent with the resent statements from the DOD, and how do you expect that to play out over the next few quarters?

The federal market, like I said, we won $20 million of new awards in the federal market. And I think, if my numbers are correct, it's probably over 100 that they were awarded. So, the market is picking up in the federal government.

Do you expect that to accelerate over the next year?

If we are successful with our efforts, I think, yes.

Okay, thank you. And then could you tell us what your typical timeline is that you expect for a new office? That you would stand up until when it delivers revenue.

Yah, that's a very good question. It takes about a couple of years. And that's why I said many times, when I said we have 62 offices across the United States and Canada; we have a tremendous, tremendous franchise that we have established because it takes a long time to turn a profit in a particular office.

Last year we opened 6 offices, so you can do the arithmetic and why our numbers look out of sync. So we have no significant revenues coming out of those 6 offices, and that's why sometimes when I say -- Well, you acquire a company when we find a small company with 10 to 20 individuals in a particular location it accelerates our potential growth. And that's what has helped us a lot in the past, and that's why we're always looking for, what I call, small tuck-ins to help us bring the staff on, and they know the local culture; the business, they have the connections, and it helps us.

There are quite a few opportunities still out there that we can take advantage of that.

Great. Thank you very much for taking my questions.

You're quite welcome. Thank you.

Thank you. There are no further questions. I would now like to turn the call over to George Sakellaris for closing remarks.

And with that, thank you everyone for joining us this morning. And I'm looking forward to the next call. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.