Ameresco Inc (AMRC) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by, and welcome to the Ameresco fourth-quarter 2014 earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions will follow at that time. (Operator Instructions)

I would now like to turn the conference to our host, Ms. Suzanne Messere. Ma'am, you may begin.

Thank you, Eric, and good morning, everyone. Thank you for joining us today for Ameresco's fourth-quarter and full-year 2014 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. Also, Ameresco's Chief Accounting Officer, John Granara, will be available during the Q&A portion of the call.

On today's call, management will share brief highlights from the prepared remarks we published this morning. Following the brief highlights from the quarter, 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 17, 2014, 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 obligations 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. We are pleased with the great progress that we made in 2014. We delivered revenues towards the high end of our 2014 guidance, met income within our range, and we achieved year-over-year growth for both metrics for the first time since 2011 indicating signs to recovery and improvement. Revenues increased 3% year over year to $593 million. Excluding the sale of the six total assets in 2013, organic budget revenues increased 8% year over year.

Revenues from other service offerings increased 10% year over year. We also experienced strong revenue growth in our US federal and small-scale infrastructure segments.

Solid financial results benefited from better execution and stronger gross margins. Full-year gross margin increased to 19.7% from 18% last year, which is in line with our expectations. Better profitability -- stability benefited from a favorable mix of higher margin projects and offerings. Full-year 2014 operating income nearly doubled, and adjusted EBITDA increased 29% year over year, despite increased operating expenses from acquisitions and restructuring charges.

Assuming a 35% effective rate for both 2013 and 2014, 2014 net income would have more than doubled year over year.

We also took the opportunity to address operating efficiencies in the first quarter and second quarter, as well as an additional restructuring in the fourth quarter to reduce our fixed cost base even further.

2014 was a great year for cash. We generated over $50 million of adjusted cash from operations. As discussed on previous earnings calls, market conditions in Canada have been challenging since the 2011 federal elections. We have been fine tuning Canada since. The lack of visible progress was disappointing. As a result, we decided to make a leadership change and from that the strategic review designed to align the Canada segment with market opportunities.

During the strategic review, we identified (inaudible) market opportunities -- provinces that continue to support energy efficiency projects, mandates that act as drivers, and expectations that increased activity within the federal programs and ongoing solar programs.

Next, we restructured and realigned our organization during the fourth quarter to focus on market opportunities identified during the strategic review. While we are expecting a revenue decline in Canada in 2015, we believe we have positioned that segment to return to profitability. We remain committed to Canada.

Contracted backlog increased 7% year over year. We signed an additional phase at a Savannah River site for $38 million in the fourth quarter. Expected 2015 revenue from 12-month backlog increased 42% year over year, providing greater confidence in our outlook for 2015.

Year-end awarded backlog was $854 million. Assets in development, which represent small scale renewable energy plants that have been awarded or for which we have secured development rights, was $141 million at year end. During 2014 we determined that owning small-scale renewable energy projects should provide very long-term economics.

When we own renewable energy assets, we recognize recurring long-term revenue over the life of the asset, and the EBITDA margins are expected to be much more attractive. During the year, we removed approximately $85 million of renewable energy projects from the awarded projects we see in the total production backlog and have added those projects to assets in development.

Solar assets are a key component of our strategy to keep more of the renewable energy assets as we develop our own portfolio. At year end, we had a solar asset portfolio of approximately 11 megawatts. We have identified a total development opportunity of 86 megawatts, and of that, there are 13 megawatts of assets in development that are expected to go into operation in 2015 and 18 megawatts of assets in development that are expected to go into operation after 2015.

We believe that favorable industry trends will continue to be a driver of attractive market opportunities for distributed generation.

In 2014 we renewed our focus on developing integrated projects that highlight our unique technical expertise while demonstrating energy savings can be great economic drivers for projects we are combining energy efficiency and renewable energy measures. Two examples are the project for the Minneapolis St. Paul International Airport and the GSA Deep Energy Retrofit project as we discussed last quarter.

We are very pleased with the acquisition we made in the UK. It confirms our thoughts regarding how to successfully approach C&I. The team targets two C&I customer segments -- retail and industrial. They established a sustainability partnership with their customers and then design, develop, and implement projects that help their customers achieve their goals.

We see in the retail segment implementations include energy efficiency measures, whereas for industrial customers the focus is on distributed generation. It's a very targeted approach that focuses on building long-term customer relationships that leads to multiple projects and add-on services.

We believe that customer relationship building and the penetration within existing customers is the key to C&I growth in the United States market as well.

For 2015 Ameresco expects to earn total revenues in the range of $610 million to $640 million. The Company also expects adjusted EBITDA to be in the range of $43 million to $48 million and the net income per diluted share to be in the range $0.16 to $0.24.

And now I would like to turn the call over to Andrew to provide more details about our financial results and our guidance assumptions. Andrew?

Thank you very much, George, and good morning, everyone. The financial highlights from the quarter are as follows. Revenue for the fourth quarter increased 3% to $181 million from $176 million a year ago. Revenue increases from the US federal and small-scale infrastructure segments and all other was partially offset by decreases in project revenues from the US region from Canada segments. Excluding the $33 million sale of solar assets in the fourth quarter of last year, project revenues in the US regions would have increased year over year. Revenues from acquisitions in the fourth quarter were $4.8 million.

Full-year revenues also increased 3% to $593 million from $574 million a year ago. Revenue increases from US federal, Canada, and small-scale infrastructure segments and all other was partially offset by decreases in project revenues from the US regions. Revenues from acquisitions for the full year were $9.7 million.

Project revenues were $388 million for the full year, which was flat year over year. As George mentioned, project revenues demonstrated signs of stabilization and recovery in 2014. We expect project revenues to increase in the range of 8% to 11% in 2015.

Full-year revenues from other service offerings increased 10% year over year to $205 million. We expect revenues from other service offerings to be flat to slightly up in 2015. Full-year revenue from small scale infrastructure increased by 29% year over year. The increase was related to the new renewable energy plans placed into operation during the first half of 2014 and to the sale of renewable energy certificates from assets that we own. We expect small-scale infrastructure revenue to increase in the range of 5% to 7% in 2015.

Full-year integrated PV revenue increased 7% year over year. Strong performance in the first and fourth quarters more than offset a slowdown in the second and third quarters related to the availability of supply. We expect integrated PV revenues to increase in the range of 5% to 7% in 2015.

Full-year O&M revenue increased 3% year over year due to new contracts for US federal customers and contract renewals for existing customers. We expect O&M revenue to be flat in 2015.

Gross margin for the fourth quarter was 20.1% compared to 16.1% a year ago. Gross margin for the full year was 19.7% compared to 18% a year ago. The 2014 gross margin was in line with our expectation and benefited from a favorable mix of higher-margin projects and service offerings.

Operating expenses for the fourth quarter were $30 million compared to $25 million a year ago. As indicated on our third-quarter earnings conference call, we were expecting our quarterly run rate to increase by $2 million going forward, which implied that we were expecting approximately $26 million to $27 million in operating expenses for the fourth quarter. Operating expenses were higher than we originally indicated, primarily due to $1 million in restructuring charges in Canada and a $1.7 million reversal of capitalized project development costs.

Fourth-quarter operating income increased to $7 million from $3 million a year ago. The improvement in operating income was driven by increases in both revenues and gross margins. Full-year operating expenses were $104 million compared to $97 million last year. Full-year operating expenses were higher than anticipated due to the reasons discussed for the fourth quarter. Full-year 2014 operating expenses included a total of approximately $2 million in restructuring charges for the first, second, and fourth quarters. The restructuring charges resulted in more than $2 million in permanent savings, which we have reinvested in future growth opportunities.

Full-year operating income increased to $13 million from $7 million in 2013. The full-year improvement in operating income was driven by increases in both revenue and gross margins. Fourth-quarter adjusted EBITDA increased to $13 million from $9 million last year. The full-year adjusted EBITDA increased to $39 million from $30 million a year ago. The increases in adjusted EBITDA were primarily related to improvements in operating income.

Fourth-quarter net income was $9 million compared to $2 million last year. The year-over-year improvement in net income was due to the reasons stated previously, as well as an income taxed benefit related to investment tax credits for the new renewable energy assets placed into service during 2014.

Fourth-quarter net income per diluted share was $0.18 compared to $0.03 last year. Full-year income before tax increased to $6 million from $3 million a year ago. Increases in the US regions, US federal, and small-scale infrastructure segments and all other was up partially offset by a $4.8 million decline in the Canada segment. As George discussed, Canada's performance has been a challenge. However, we believe we have positioned it to return to profitability in 2015.

Full-year net income was $10.4 million compared to $2.4 million a year ago. Full-year net income per basic and diluted share was $0.22 compared to $0.05 last year.

We had an income tax benefit of $3.6 million for the fourth quarter and $4.1 million for the full year. This was in line with our expectations due to investment tax credits mentioned previously. And as George mentioned, our focus on cash delivered results in 2014. Adjusted cash from operations was $51.4 million compared to the $20.6 million of adjusted cash used in operations a year ago.

We invested $10 million in renewable energy projects in the fourth quarter and $27 million for the full year that we plan to own and operate. We expect to invest $75 million to $90 million related to assets in development in 2015, the majority of which we expect to finance using tax equity financing. We are close to executing a sale leaseback facility with a commercial bank. We are also in discussions with several other lenders, which we expect will provide additional tax equity financing.

We invested $13.9 million in acquisitions during 2014. At the end of 2014, we had $5 million outstanding on the revolver portion of our senior credit facility.

We started 2014 with $362 million in fully contracted backlog. Of that, $217 million was converted to revenue during 2014. In addition, $171 million from pipeline converted to contracted backlog and contributed to revenue during the year.

We ended the fourth quarter with a fully contracted backlog of $386 million, which was an increase of 7% year over year. During the fourth quarter, we converted $114 million of awards to signed contracts, and project revenues from backlog was approximately $130 million. The weighted average conversion time of an awarded project to a signed contract in the fourth quarter was 15 months compared to 12 months a year ago. The average size for projects signed in the fourth quarter was approximately $5 million compared to $4 million in the third quarter.

The weighted average conversion time for the full year was 16 months compared to 14 month a year ago. We expected the weighted average conversion times to remain in the 12- to 18-month range.

Awarded backlog in the fourth quarter was $854 million. Newly awarded projects for the fourth quarter were $113 million and awarded projects that converted to signed contracts were $114 million.

In addition, we removed approximately $68 million of projects that were previously included in total construction backlog under awarded projects for the fourth quarter and an additional $17 million that were previously removed earlier in 2014. Both amounts are now included in our new metric, assets in development. Assets in development at year end were $141 million.

We also removed $115 million of projects we determined were not likely to move forward, which also led to the reversal of capitalized project development costs already discussed. Over $40 million was related to two Housing Authority projects, which typically have a much longer conversion time than other projects. These two projects had been in our awarded backlog for nearly five years. Excluding these Housing Authority projects, the remaining $75 million removed from our awarded backlog was less than 10% of our backlog as of the year end. We believe our conversion rate will remain at or above our 90% historical conversion rates.

George provided our 2015 guidance already. Our assumptions are as follows -- project revenues from contracted backlog of approximately $310 million, project revenues from awarded projects and proposals in the range of $100 million to $120 million.

The remainder of revenues is expected to come from all other service offerings. Gross margin in the range of 19% to 20%, operating expenses as a percent of revenue of 16% to 17%, an effective tax rate of 25% using the midpoint of our guidance range, and weighted average common shares outstanding of $47 million.

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

Thank you, Andrew. We are pleased with 2014. It was a year of recovery and improvement. We improved financial results and made great progress on the strategic point of view. We decided to keep more of the solar assets we developed for our own portfolio, which is expected to provide much better economics over the long-term. We renewed our focus on developing integrated projects that highlight our unique technical experience. And finally, we expanded our value-add service capabilities in the UK for local and multinational commercial and industrial customers.

We have remained confident about long-term industry fundamentals throughout. Due to 2014 progress and 2015 expectations, we have also gained confidence regarding near-term industry fundamentals. We anticipate that our additional US Energy Services segment will experience broad-based revenue growth in 2015 and are on a path to achieve growth rates that are within current industry expectations.

We are pleased that we have a policy positive outlook for 2015 and that our guidance reflects modest revenue growth and potential for strong improvement in EBITDA.

Now we would like to answer your questions, and I will turn the call back over to our coordinator, Eric.

(Operator Instructions). Noah Kaye, Northland Securities.

Good morning. Congratulations on a strong quarter and improving outlook. Just wanted to discuss expectations further for 2015. Can you give us roughly what you are thinking in terms of adjusted free cash flow and perhaps on a related but how much cash you expect to have available for equity and projects, apart from the 20 megawatts of solar you are discussing?

I would say that our cash flow should be in line with EBITDA, even though the actual operating or net free cash flow will vary from year to year based on particular timing of projects, but our expectation is that it should be somewhere around the adjusted EBITDA number.

With respect to investing in the projects, one of the benefits of using the tax equity that we are sourcing is that it is very close to 100% financing, so we are going to be relying on that to fund much of our capital investment during 2015.

We feel very comfortable that the business plan that we have, we will have the cash -- whether it's self generated or using the sale leaseback or some of the other options that Andrew pointed out that we have sufficient cash to execute on our plan.

Well, given that then there should be additional cash available for non-solar buildout, how are you thinking about the buildout of landfill gas and other non-solar project assets this year? What will that ramp look like, do you think, and what are the opportunities that you are targeting?

The same way that we always thought. We look at the particular project, and if we feel that we will get return on equity of 18% or better after-tax, we will invest in those projects. But what has happened on the LSG projects the last couple of years because the gas prices are so low -- natural gas prices -- that the buyback of the output associated with those particular projects is not as good. That's why you don't see as much landfill gas to energy projects. However, though -- and I think we did mention it on the last call -- that the range market -- it's a considerable tariff, and right now we do have in development stage four projects. But in our projects in development, we only reported two of them because we feel much more comfortable that the two are more likely to move forward than all four of them. So we plan to expand in what I will call other renewable assets we will call ourselves, but we look at the return on equity invested in that particular project that we will invest, and I am very comfortable that we will have the cash.

The other good thing -- that's why we adapted the strategy to focus more in investing in renewable assets we hold for our own balance sheet. In the past, the strategy was that we would take about half of the cash flow generated and then for renewable assets that we will hold for our balance sheet, and the other half we would do for acquisitions. That's how we grew the Company. But with the availability of funds right now in the marketplace, we feel in a much more comfortable position to accelerate the growth of that business. That's why we made a major initiative early last year where we achieved considerable traction, and that's why you see more of it in that area.

Okay. And maybe just turning to the project revenue business, what do you see, George, as the factors that you are really looking for this year that can make backlog growth start to accelerate and maybe where you are sort of aspiring for the total backlog to grow to by year end?

It would be nice to see growth of the backlog by the year end, but I will say the industry is growing at least 7% to 8%. I don't know if you have seen the (inaudible) that the industry will grow 7% to 8%, and I think we would like to see at least that much.

And I always challenge my team, tell them that you guys are a little bit better than the industry, we should deliver better. I will never be content until I get the 10% level, so you know how I am thinking.

But, look, last year and where we were a couple of years before, seeing the 7% increase in the contracted backlog, we felt good about it. We would like to have a little bit more, but that's where it ended up being. And because -- the other thing that has happened, the time that it takes for a project to get converted, what we call the conversion times, it is still 16 to 18 months, which is very long.

But what I am trying to get the organization to learn to live within that constraint until -- that's why people ask me, when would you see an inflection point? Until I see that timeline shrink considerably because then in the metrics we will change for our company a lot because the operating customer is likely to go down because you move projects much faster through the organization.

But the trends in the industry, especially in the United States, are pretty good. We still have a drag up in Canada, but at least we will -- even though the earnings will go down for the year, we will turn it to profitability, so we feel very good about that.

Okay. Yes. Clearly you are seeing an improving outlook, and that is, I think, based on your guidance. Maybe I know -- this is my last question -- from a seasonal standpoint first quarter, first half tends to always be lower. Maybe this year you can give us a little bit of additional granularity on kind of the cadence of revenue?

I have already asked that question because if it didn't come up, we will bring it up ourselves. We expect the first quarter always for the year is very, very challenging for us, and especially this year with all of the storms, I am expecting it will be even more challenging. But we expect top line and bottom line to be very consistent with what we had last year.

For the first quarter?

No. This is John. So that last year we were in the $100 million range in revenue and about an $8 million loss, so we expect that to be consistent.

In terms of the cadence for the year and the quarterly -- how that shapes up on the quarters, we would expect that to be consistent as well. Typically 40% of the revenue in the first half, 60%, and I wouldn't give you anything beyond that in terms of how the second half of the year is going to look. But I think typically we have seen in years past where that typically you would see a decrease in the fourth quarter. But I would point out the last two years we've had the increase in revenue last year. So I'm not really going to shape the second half for you today, so I would just assume even.

Okay. That's great detail. Congratulations, again, and thanks so much.

(Operator Instructions). Jim Giannakouros, Oppenheimer.

Just on the notion that energy savings value proposition, it's there. You mentioned that you are seeing an impact in LSD. I understand it's a longer-term consideration, but have you seen an impact on awards or in your conversations or in the math for your core ESP target markets, just given the lower energy costs over the last six months or so?

You know, we have not seen it. The lower energy prices -- it has not impacted what I call the bread-and-butter, the energy savings business. And the reason behind it is because, even though natural gas prices are down -- first of all, the oil savings and energy savings -- I think is less than 10% and Suzanne has indicated 5% from our total savings that we have in our mix.

And then natural gas prices, as you know, even though at NYMEX it's less than a few dollars, that's not translated to what that consumer sees. Most of our savings are electric savings, so electric savings are about 60%, 30% gas savings and a little bit oil, and the rest of it is other. So we have not seen the major impact. But, on the other hand, the psychological level of the customer's perception might be there, and that might have some impact. But so far, it has not been.

That makes sense. Savannah River, you mentioned that -- was that signed or was that awarded prior -- or contracted backlogs this quarter, and when does construction begin?

So that converted from the awarded backlog in Q3 to now contracted in Q4, and the total amount of that contract was $38 million. That is the construction portion. There is also going to be a healthy O&M portion for 20 years that we will get on the backend of that construction project.

And I mentioned it in my call, I think it's very important with what else I said trying to develop with relationships with the particular customer and deliver top-quality product, and that particular customer is very, very happy with the work that we have done. And especially if you recall last year, we had one-time charges associated with the deep-freeze that we had in that particular facility, and we did a good job. We got basically a new contract out of it.

Right. And on that O&M, you are expecting it to be flat in 2015. Is that just a reflection? Why is that? If you are growing new construction activity off of a low from a couple of years ago and/or are there any opportunities with customers that maybe you didn't construct but maybe looking to outsource O&M when they come to you, or should we be thinking about that revenue stream as really anything that you have constructed and then you tack on on O&M?

Jim, this is John. So related to the O&M, we actually had a contract that we amended in Q4 that is actually reducing the O&M revenue prospectively for one particular site. So we are actually planning to make that up, so that's going to be a decrease of about 5%. We are actually planning to make that up to get back to even, so we are planning to have new O&M business this year. It's just to offset the decline related to that one particular project.

And then some of the projects that we are in implementation, those O&M contracts do not kick in until next year. And the strategic initiative is one of the major areas that we are focusing as well to increase the O&M business.

That's good to know that there is a -- I was surprised it's even flat, so that makes sense. Thank you for that color.

And last one, if I may, OpEx as a percentage of sales, do you have a normalized target? I've seen benefits from restructuring and other cost-containment actions that you have taken recently, but you did run at a much lower OpEx as a percent of sales level prior to 2013?

I think prior to 2013, I would just point out that the makeup of the business was a little bit different back then. I think that what we saw this past year is that we did increase our OpEx, but most of it came from the acquisitions, which ended up providing accretive. From an adjusted EBITDA standpoint, they were accretive. So on a GAAP basis, it was a breakeven or slightly above budget. It didn't impact EPS materially.

So although the OpEx had been increasing as a percentage of revenue, we are getting adjusted EBITDA expansion. So we are really looking at -- we should be able to get leverage on the corporate G&A and the overhead, which is the fixed component of the operating expenses. And then we are investing and we are developing projects, and a portion of those expenses do hit operating expenses. So at least for this particular year, we feel good with that 16% to 17% as we grow, and as revenue grows, we would expect to get operating leverage.

Got it. Thank you very much.

And there are no further questions at this time. I would like to turn it back to George Sakellaris for closing remarks.

If there are no more questions, then I do like to thank you for joining us today for today's call and looking forward to the next one. Thank you and have a good day.

Ladies and gentlemen, this does conclude today's conference. Thank you for your attendance. You may now disconnect. Everyone, have a great day.