Ameresco Inc (AMRC) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2013 Ameresco Inc. earnings conference call. My name is Morris, and I will be your operator for today. (Operator Instructions).

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

Thank you, Morris, and good morning, everyone. Thank you for joining us today for Ameresco's fourth-quarter and full-year 2013 earnings conference call.

I am 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 published this morning. Following the brief highlights from the quarter and the year, management will 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 SEC on March 18, 2013 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-GAAP financial measures during this call. These non-GAAP 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 of 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. George?

Thank you, Suzanne, and good morning, everyone. The results for the fourth quarter were mixed. While revenues were in line with our revised expectations, gross profit and earnings were not. As expected, fourth-quarter revenues include approximately $33 million from the sale of six renewable energy plants which were successfully completed during the quarter; strong year-over-year growth from federal, Canada, and the Northwest region; and approximately 7% growth from all other service revenue.

Fourth-quarter gross profit and earnings were materially affected by the gross margin realized on the sale of the six renewable energy plans, which was below our expectations. We also did not realize the expected benefits from a number of project closeouts during the quarter. And further, we experienced a handful of project cost overruns and a customer warranty issue.

Our fully contracted backlog as of the end of the year was essentially flat at $362 million. We did not see the substantial improvement that we were expecting as we continue to experience delays in converting awarded projects to signed contracts. The weighted average conversion time on an awarded project to a signed contract in the fourth quarter was 12 months. While this is a welcome improvement, it is more indicative, though, of fewer signed contracts than anticipated during the quarter and a lower-than-average project size compared to the historical average.

The weighted average conversion time for the full year of 2013 was 16 months. Market conditions continue to be challenging. While some of our regions and the federal segment appear to have reached bottom, we have not observed a sustained improvement or an indication that would suggest to us that we are approaching a near-term inflection point.

In the meantime, we have continued to diversify our exposure to energy efficiency projects through an increase in revenue streams from annuity-based revenues and other Energy Services offerings, which have helped offset the effect of current market conditions in our core business.

For example, during 2013 we broadened our service offering by adopting renewable energy business more throughout the Company. We expanded our footprint into the United Kingdom with the ESP acquisition, we invested in enhancing our value proposition to announce analytics solutions, and we made progress in diversifying our customer mix.

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

Thank you very much, George, and good morning, everyone. The financial highlights from the quarter and the year are as follows. Revenues for the fourth quarter increased 12%. The primary driver of the revenue increase was the sale of six renewable energy plants.

Gross profit for the fourth quarter decreased from $33 million in 2012 to $28 million in 2013. The primary reasons were an unfavorable mix of lower-margin renewable energy projects and cost overruns.

Fourth-quarter operating income decreased to $3 million in 2013. Lower gross profit more than offset a year-over-year decrease in selling, general, and administrative expenses.

Fourth-quarter adjusted EBITDA and net income decreased for similar reasons. Fourth-quarter 2013 net income per diluted share was $0.03 compared to $0.11 for 2012. For the full year, revenues decreased 9%, a 15% year-over-year decrease in project revenues related to delays caused by market conditions more than offset a 7% increase from our all other service offerings.

Full-year adjusted EBITDA decreased to $30 million in 2013. Adjusted EBITDA excluded depreciation of $13 million related to project assets and $3 million for property and equipment. Full-year net income per diluted share was $0.05 compared to $0.40 a year ago.

The full-year effective tax rate for 2013 was 12.5%. We expect the effective tax rate in 2014 to be around 19%.

Adjusted free cash flow, a non-GAAP financial measure, used $23 million for the year, which includes $40 million in proceeds from US federal ESPC projects. Our net investment in renewable energy project assets was $25 million in 2013.

In light of our recent results, we have amended our senior secured credit facility to waive the minimal EBITDA requirement for 2013 and to modify that minimum amount, as well as financial ratios related to EBITDA during 2014 to accommodate the lagging effect of the 2013 results on those requirements.

We ended the year with a fully contracted backlog of $362 million. During the fourth quarter, we converted approximately $125 million of awards to signed contracts, and revenue generated from backlog was approximately $129 million.

In 2013 we started the year with $367 million in fully contracted backlog. Of that, $205 million was converted to revenue during the year. In addition, $183 million from pipeline converted to contracted backlog and contributed to revenue. The remaining $186 million in revenue came from all other service offerings. Revenues from those all other service offerings increased 7% year over year. We expect those revenues to increase 6% in 2014.

Revenue from small-scale infrastructure increased by 6% year over year. Of the four renewable energy plants that were delayed, two of the plants have already been placed into operation. The other two are expected to go into operation before the end of the second quarter. As a result, revenue from small-scale infrastructure is expected to increase more than 20% in 2014.

Revenue from integrated PV increased by 8% year over year. We established two distribution centers and added new salespeople to expand our presence on the East Coast. We expect integrated PV revenues to increase approximately 10% in 2014.

O&M revenue increased more than 10% year over year. The increase is primarily due to scheduled maintenance that occurs every few years. We are expecting 2014 O&M revenues to be consistent with 2013.

And with that, I will turn the discussion back to George.

Thank you, Andrew. Ameresco expects to earn total revenue in the range of $560 million to $600 million in 2014. The Company also expects net income to be in the range of $7 million to $12 million. Our assumptions for 2014 guidance are as follows: project revenues from contracted backlog of approximately $210 million, project revenue from awarded projects and proposals in the range of $160 million to $185 million, and the remainder of revenues from all other service revenues.

As Andrew pointed out earlier, gross margin in the range of 18% to 20% and an effective income tax rate of 19%.

We expect the challenging market conditions to continue in 2014. Using the same backlog analysis for 2013, 2014 revenues are expected to be consistent with those of 2013.

Operating efficiency measures that we have taken should improve profitability. We expect typical seasonality in 2014, which means that our results should be heavily weighted towards the third and fourth quarters.

In closing, we remain confident about the long-term industry fundamentals. We believe that the market still has tremendous potential, and we are determined to unlock that potential while gaining market share.

In addition to delivering 2014 results, we will continue to focus on broadening our service offering, refining our value proposition, and diversifying our customer mix. We also plan to be more disciplined in execution, which means concentrating our resources on awarded projects as they are most likely to convert in a timely manner; also tighter controls in engineering and specifications and better risk management and increased oversight.

We expect all of these actions to enhance our market position and improve the delivery and quality of our offerings.

The rising industry trend that has been gaining momentum is on-site generation. We believe that we're well-positioned to take advantage of this trend based upon recent developments. We demonstrated that selling renewable assets is a scalable model. We received a contract award for an 18.6 megawatt solar installation at Fort Detrick. Also, we were selected as one of the three qualified firms that can participate in the U.S. Army $21 billion made up IDIQ renewable energy program specifically for solar, wind, and biomass.

For the long term, we believe that over the course of 2014 we will make great progress towards positioning ourselves as the trusted sustainability partner for our customers. We can transform an industry that still has tremendous potential and further our efforts to generate great value for all our stakeholders, and that is, of course, customers, employees, and shareholders.

Now we would like to answer your questions, and I will turn the floor back to our coordinator, Morris.

(Operator Instructions). Craig Irwin, Wedbush Securities.

George, when I look at your guidance, your revenue guidance in particular for this year, your construction backlog is pretty much flat year over year. You are guiding for some of your non-construction revenue to be growing modestly. But then versus where we were a year ago, you are giving materially more conservative revenue guidance. Can you clarify for us if this is really a reflection of the slowness that you have seen as far as project completions and final project releases, or is this a change in the character of the backlog or potentially a change in duration of the construction backlog that you are looking at for 2014?

That is a very good question. We tried to be as realistic as possible based on what we know in the marketplace. And I think it is representative to the fact that the conversion time -- it is more of the slowness, but converging awarded projects to executed contracts which we can build out. And since the market conditions overall we feel they are the same as they were in 2013, they haven't improved that much, and we anticipate the same at least over the next few quarters, that is why we try to be realistic and say, well, we have similar backlog execution in backlog as we had last year. The overall revenues are slightly up but from the other offerings, but everything else is relatively the same.

So we don't have anything that will tell us we should forecast differently. So we say that's why I said, we will be consistent. 2014 will be more likely consistent with 2013.

Okay.

This a lot of -- and the biggest driver we get to put more and more focus until we see something else developing down the road. Because the metrics that we used to use before if it was an awarded project, X amount we will convert for that particular year, and we will be able to execute -- that just drastically changed from the past.

So we try to focus much, much more on what is executed backlog. And that is why I said we're trying to make every effort that we can to increase the annuity-based revenues and the other offerings and diversify the mix of our business so we are not as dependent, what I will call the MUSH market in the long term.

Thank you. My next question is about the results in the quarter. So you mentioned the $33 million in renewable projects weighing on the quarter a little bit, along with some cost overruns. Couldn't you break out for us the relative contribution from each of these items to the margin weakness and their relative shortfall in the quarter on the profit line?

And then maybe could you explain for us a little bit more about the $33 million in projects if these were projects that you built on your own balance sheet and then sold? And if that was the case, why sell them given that there is potential we could see MLP eligibility to these things at some point over the next handful of quarters.

Yes, that is very good. The projects, there was six projects basically, and all of them we were in Massachusetts. And we were planning -- and even though we hold some and we have in the past and we will continue to do that, remember on the calls I would say that periodically we will be expanding the business model where we built those projects for others. And these projects were intended to be sold all along.

And what happened, though, I think we lost the business to be more specific, a little bit over 3 points in the margin that we anticipated to get from those particular projects. And some of them we did probably less than half on the top of volume size, we built them around balance sheet, and the rest of them actually we had the buyer as soon as we actually can get the contract to build that particular project out, which was the largest one.

And you will see us. And if you will recall, when we acquired APS out of Phoenix, Arizona, over 50% of that business was coming from basically building solar projects for others. We wanted to expand that particular business model to the rest of the Company, and that is one of the things that attracted us to that particular acquisition. And what is going on in the marketplace actually, we see a great opportunity to accelerate our growth, take advantage of that business line, and we hope it will be very successful.

Just to clarify, Craig, these assets, these renewable assets that we sold in Q4 we did construct them before we sold them, but these were assets that we developed for the purpose of selling to a third party. They were never part of our asset portfolio.

Understood. Thank you.

And then the other ones, the cost overruns that he does in the warranty issue, between all of them, I would say it is well over $3 million. And it has to do with a couple of them I would say that weak engineering. And sometimes we should stick with our gut feeling, and when one of them came to an acquisition and when they told me what they were doing, I said to myself, I hope we know what we are doing because we had done it before, and I did not bring it back to the headquarters to do some more due diligence. And I kicked myself, and I take the blame for that.

But that is -- and as the Company grows, you might see that.

And then on the other ones, it is what I would call scope really on the particular projects. And, otherwise, the contract must not be tight enough for that particular customer, and then there will be some scope changes. And that sometimes we see the fixed-price contract where it ends up being on our side.

And then the other thing that has happened, and this is probably the fact that if you are not just busy, some of your construction managers don't close out the projects as fast as they would. So the costs associated with those particular projects end up being more than what they would otherwise have been. Otherwise if they were busy, they would go to some other projects, and then they would close them out. So we did not see the pickups, and we were anticipating between $2 million to $3 million of pickups, and that didn't happen. And that affected the bottom line.

Thank you. My last question, George, as a large shareholder yourself, obviously I am sure you are disappointed with the recent results and the short-term outlook. But you have clearly chosen to preserve the capacity to execute on your larger backlog. Can you explain to us really what keeps you optimistic about the opportunity to execute on your pipeline and what you would look for as indicators that this is starting to break -- that the dam is broken and that maybe we will start seeing the revenue inflection upwards that we have been waiting for the past couple of years.

Moving the contracts -- we have over $900 million of awarded contracts. I would like to see about half of that move, let's say, within a year. And then if that can happen, before -- like right now, like the smaller contracts in some of the regions, they are beginning to turn between six and 12 months. If I start seeing that on the larger contracts, the ones between $10 million and $30 million, and for the volume of the business that we are in, we need those to turn. Then I would say that the inflection point has happened.

Like the activity level in the federal group, the federal government, this is very, very high, and it is not beginning to move to the executed contracts. And I would say that market, it can't come back.

But in the long term, you say I am the largest -- I still believe in the business, and I think I firmly believe that the business fundamentals are still there. And it is only a matter of time. And like I kept saying before, it's only a matter of time before this will return, and we will -- the value will be realized that is associated with this particular business.

Thanks again for taking my questions.

Jim Giannakouros, Oppenheimer & Co.

The assumption implies in your guidance, that that $160 million to $185 million in your assumption in revenues for 2014, can you share with us any kind of granularity on how you envision that playing out? How much of it is already converted given that we are 10, 11 weeks into the year, how much is short cycle or smaller projects, and how much is early project revenue recognition on things that are going to convert mid-year? Any color would be appreciated.

We see some traction in some contracts that are beginning to turn, otherwise move from the awarded category to the executed category over the last couple of months. So we are, how can I said it, confident that the $160 million to $185 million will be realistic.

But on the other hand, I would say that the first quarter, though, is going to be very challenging of where we are. And that is why I said in my remarks that it will be heavily weighted in the third and fourth quarters of our revenues.

And generally, we do not provide any guidance, but I think because we are where we are right now, if I were to give some kind of number out there for the first quarter, it looks like we would be in the range of $90 million to $95 million with some kind of a loss.

That is appreciated. Thank you, George.

And you mentioned that federal is stalling a little bit. Can you get a little granular as far as where you are seeing the opportunity, where you are seeing the growth? Is it that you are maybe gaining a little share? Is it that just overall the agencies are moving forward with awards or even contracting awarded backlog, and I guess marrying that with what you are seeing in MUSH markets, pockets of strength and/or weakness?

I think we are seeing some activity in the federal space. There was a large project that converted in the fourth quarter of 2013. We are seeing some activity in the early part of 2014. So there seems to be more activity in terms of getting the projects that have been in our pipeline for a number of quarters, getting them converted into contracts.

And then more broadly, we are starting to see more activity with respect to the federal space. So we are seeing some early positive signs, but we are, again, being cautious as we look ahead.

And you saw the big award, the $21 billion that we got the IDIQ. So the federal group is moving, and we have seen some recent successes where we have moved contracts from the awarded to the executed.

The other one, the central region is doing very well, especially on the smallest project.

Understood. And one last follow-up or maybe it is the same question that Craig asked earlier on just trying to get a sense and trying to tap into your experience with the industry, George. What has to happen to get to a normalized backdrop for the ESPC market to get to a place where we can have visibility to a sustained revenue ramp for Ameresco and the industry? If you can give us a historical perspective of what in the past has prompted that and driven a cycle up that may happen again or why this time it is so different?

This time it is so different because of what -- at the end of the day, if you -- the way we offer our products, it is that that grows on the customer's balance sheet one way or another.

And since we had the debt ceiling issues in the markets that we are working in, especially with the federal government, it became a concern to just about every customer that we talked to. They said, yes, I understand it gets paid out of the savings and so on and so forth. However -- and I might need this to get this energy infrastructure upgrade, but it still goes on my balance sheet.

So until that perception or that reluctance or what can I say is people don't feel comfortable taking on additional debt -- until that goes away, I think you will see some delay in the marketplace. And that is why I said before we have to learn to or design the Company to be able to sustain something like that. Because before we had less than 12 months turnover on the projects, and now we're talking 16-plus months. And that is a long time. So if that is the way it is going to become, the diversification of the customer mix I think it's going to be important for us going forward.

I mean, I would love to see the C&I business be 20% of our mix, and that is something that we're driving for and hoping to accomplish over the next few years.

Understood. Thank you.

And the other thing that we did and that is why I said the measures we have taken to improve efficiency in the Corporations over the last few months, we had made some tough decisions, and we took some of the expenses down. And you will see that we will take in this quarter probably a $1 million charge of some of the reductions that we have to make.

$5 million.

So going back to Craig, he says, I present the capacity. I did, but not all of it, to grow.

(Operator Instructions). John Quealy, Canaccord Genuity.

Three main questions. First, just on the numbers so we can harmonize these models, can you give us Q4 revenue under the old reporting regime of energy efficiency and renewable energy, just so we can see what was what?

Okay. Andrew can address that.

Yes, for the quarter -- hang on a second, John. Okay. There we go. Energy efficiency is $105,567,000, and renewable energy was $70,567,000.

Okay. And then just in terms of timing, why do this now in Q4? Why not just do it in Q1 with the new segments in methodology? What was the thought process there?

It really a -- the way the segments are derived and the way we presented it really evolves out of the way we actually manage the business. And so we felt that for the year reporting that was the right time to make this change and put everything on the same -- try to get everything -- kicking off next year with the way we have been currently managing the business.

Okay. So number two, on the small-scale infrastructure, with this new segment, is this all the concession assets that Ameresco has is in this bucket or not?

Yes. It should be all of the assets --

All the assets we have.

-- that we own and operate, yes.

Okay. Can you talk about just in terms of an EBITDA profile for that line in particular? It should be a fairly steady contributor to cash flow as well as any related debt to that? Just so we can look at what that entity is within the Company.

Yes, it should be a fairly steady contributor. We will see some growth in 2014 as I mentioned because we've got a number of new projects coming online. But that is one of the businesses where we focused on being an annuity-based revenue provider, not subject to the seasonality that we see with other business units.

We should also see, because of the high depreciation, we should see some fairly strong operating margins, EBITDA margins compared to some of the other business units.

Again, just trying to frame this. So if it is a $40 million-plus business per year in revenues, is it reasonable to say that this is around a 50% EBITDA-type business?

I would say that that is little bit high. A little bit high maybe --

Am I way off or am I close?

No, about 40%.

Okay. That is fine. And then related debt, Andrew, for that, what would be the enterprise value if you were to spin that off?

That I am not prepared to comment on. We've got about $80 million connected with those projects right now.

Okay. That's fine, and I appreciate the color you are giving us.

My point is, I know there has been talk and we have talked on the call before about looking at Ameresco in a different structure, whether that is a REIT or a yieldco. George, can you give us an update on what you and the board are feeling?

Clearly the current model it has gone nowhere for a couple of years, and it looks like it is stuck in 2014. But what about unlocking value for the enterprise? Can you just give us an update about what you and the board have discussed in the past couple of months?

We discussed and we talked about the yieldco and maybe even if we had another opportunity to redeploy the amount of money that we would raise because with the acquisition that we replace the EBITDA and hopefully grow it faster, we would do that. Or if we found an opportunity then selling one or two or three assets as long as we have something to replace it with.

As far as the yield curve, we're not big enough yet. And I have talked to a couple of the financial institutions, and they said -- and they gave us a certain size that we have to be in order to be able to do that. And we talked about maybe we take a partner in there. We put this asset with a particular partner, but nothing concrete yet.

That's okay.

I look at it this way -- it's an asset -- I know we are not getting paid on the street on the price of the stock. But as long as we create value, someday we will find a way to extract it.

Okay. And then lastly, George, for M&A, you guys have been very nimble, very cost-centric in purchasing assets. The stock market is very inflated. I imagine some potential M&A multiples are inflated. Can you just talk about what you are seeing for potential M&A and what your characterization of multiple and opportunity is? Thanks.

Yes. I will tell you, we lose many more than we ever buy because of that. We are very, very disciplined on the price that we would pay for an acquisition. It has to be -- I wouldn't say it's strategic -- it has to fit either geographic footprint expansion or in our product offering like some of these software acquisitions that we made that I think they can give us some traction on some C&I customers, and we feel very good about that. And we tried to expand that particular strategy as we go forward.

But then at the end of the day, those acquisitions they have good price and be accretive. And I agree with you, that the market is a little bit inflated out there. But because of knowing the players in the industry, sometimes we do get some pretty good deals because people, they want to team up with us and grow. But we're going to continue being extremely -- we're not going to get carried away and pay too much money for anything.

All right. Thanks, guys.

Thank you. I would now like to turn the call over to George Sakellaris for closing remarks.

And with that, I would like to thank you all for joining us on today's call, and we will talk to you next time. Thank you.

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