Ameresco Inc (AMRC) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ameresco, Inc. Q1 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, John Granara, Chief Financial Officer. You may begin.

Thank you, Glenda, and good morning, everyone. We appreciate you joining us for Ameresco's First Quarter 2018 Earnings Conference Call. Joining me today is George Sakellaris, Ameresco's Chairman, President and Chief Executive Officer. George will review the operating highlights before I review the financials of the quarter, and then we'll take questions.

Keep in mind that we have a deck with supplemental financial information. You can download that deck from the Investor Relations section of our website.

Before I turn the call over to George, I would like to make a brief statement regarding forward-looking remarks. This call contains forward-looking information regarding future events and the future financial performance of the company. We caution you that such statements are predictions based on management's current expectations or beliefs. Actual results may differ materially as a result of risks and uncertainties that pertain to our business. We refer you to the company's press release issued this morning and to our SEC filings. These documents discuss important factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. We assume no obligation to revise any forward-looking statements made on today's call.

In addition, we 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, prepared remarks and in the appendix of the slides.

And with that, I'll now turn the call over to George. George?

Thank you, John, and good morning, everyone. We had an outstanding first quarter. When we last spoke to you in early March, we noted the solid business momentum we had going into 2018. Our results this quarter reinforced our confidence. Revenue was up 24%. Profitability grew substantially, and total backlog was up 15%. This strong performance was a function of the strategies we continue to pursue, combined with outstanding execution from our world-class team.

One of the key strategies we have focused on over the last couple of years is to improve the visibility of our business. We are succeeding in this pursuit due to our emphasis on recurring revenue, combined with the visibility inherent in our large backlog of projects.

Our recurring revenue streams, which are operational maintenance and energy sales from assets we own, grew 31%. These are very high-margin revenue streams, so we continue to grow earnings faster than revenue. Recurring revenue contributed over 70% of total adjusted EBITDA in the quarter.

We expect robust growth to continue since we are just starting to get the profit contribution from our large renewable natural gas plant in Michigan. As we have mentioned, the Michigan plant is online now and will ramp to normal capacity in the next few months. Our new plant in Arizona is expected to come online in late Q2 and should ramp to capacity during the second half of the year.

Of course, those 2 plants are not the only activity in our energy portfolio. In Massachusetts, we executed agreements to purchase 2 large solar projects for public housing customers. These are currently in construction, and we expect to close the acquisition shortly. Community solar is growing in popularity, and similar deals are entering our pipeline.

In total, we placed 19.3 megawatt equivalent of assets into service, bringing our portfolio of operating assets to over 210 megawatts equivalent. These energy assets alone now give us visibility on an estimated $850 million of energy revenue over the next decade or so. Furthermore, our assets in development grew by 12 megawatts to 90 megawatts equivalent.

We have outstanding visibility now in core project business as well. Total project backlog grew 15% year-over-year and 7% sequentially and is now approaching $2 billion. Awarded backlog now stands at nearly $1.3 billion, and contracted backlog is $596 million. Backlog is growing in large part because of our investment in project development, which is one of our key strategies. We invested 16% more in project development this quarter than last year. We expect to keep ramping this investment since it's delivering results by increasing market penetration.

We have spoken in the past about how larger and more complex projects are driving growth, and that continues to be the case. The average project size in our awarded backlog is $10 million compared to $7 million in the contracted backlog. Our awards backlog reflects current trends in the marketplace. An example of a new large contract is a $60 million project with the Department of Veterans Affairs, our second contract with them since December. This project will be at one of their largest hospitals located in the Bronx. The project is very comprehensive, covering HVAC, controls, lighting and more.

As time goes on, we will be able to provide more details on other large awards. For instance, we recently secured one in higher education, and we have similarly large awards in military housing and convention centers. Of course, not all our awards are this large, but the higher frequency of these large awards sharply illustrates the effectiveness of our focus on large and more complex projects.

Our pipeline is strong, and we are encouraged with what we see ahead that makes us optimistic about this year's results and more importantly, for the years to come.

With that, now I will turn the call over to John for comments on our financial performance. John?

Thank you, George. Our press release and supplemental slides contain all the figures and comparisons you need, so I'm not going to repeat all the numbers. Instead, we are going to focus on the analysis of the factors that influence results.

Keep in mind that we are referring to Q1 figures unless I say otherwise, and all the comparisons are year-over-year.

Like George said, performance this quarter was outstanding. Our momentum is strong, and growth is accelerating as the transformation of our business model continues to gain traction. We delivered double-digit revenue expansion, higher gross margin and greater profits, including a 164% increase in adjusted EBITDA. We also increased visibility with record backlog and growing recurring revenue.

I should note that we recorded another tax benefit in Q1 resulting from the Budget Act passed in February. The benefit was approximately $3.8 million or $0.08 per diluted share. Excluding the impact of the onetime tax benefit and the effects of noncontrolling interest, earnings per share were $0.08, an excellent result, especially for the first quarter.

Top line growth was our best in some time and showed strength across the board. The major lines of business were all up. All the gains were double-digit except O&M, which grew modestly. By its nature, O&M is an exceptionally stable revenue stream. We have over $60 million in our O&M backlog that we will begin to recognize once the projects in construction have been completed. Also, we are still expecting to contract an incremental $100 million of O&M work this year.

Energy sales increased across both electricity and renewable gas due to the larger portfolio of assets. Project revenue growth was robust, especially in our U.S. Regions segment. We are happy to see the U.S. Regions build on the rebound that started in the second half of 2017. I should also mention that project revenue got an additional boost from $10 million of Chicago street lighting revenue that we earned earlier than expected.

Gross margin ticked up as we had somewhat lower costs in operating at renewable gas plants. Project gross margin was stable. Operating expenses grew slightly well below the rate of growth of both revenue and gross profit, demonstrating the operating leverage inherent in our business. All of the increase in operating expense came from project development, an investment we are happy to make.

Adjusted EBITDA more than doubled with a margin of 9%. The margin is approaching our annual target of 10%. Adjusted EBITDA growth was especially high this quarter due to the slow start U.S. Regions had in early 2017.

Turning to the balance sheet. Cash is good, and receivables were down due to a significant decrease in unbilled revenue. Payables were down, while debt increased due to additional fundings and draws on the line of credit to complete projects. As George mentioned, our total project backlog is up 15% versus where we were a year ago. We continue to maintain a healthy balance across the business with the same proportion coming from both U.S. Federal and U.S. Regions.

Turning to guidance. We are raising our 2018 EPS range to $0.60 to $0.70, up from $0.55 to $0.65 previously. We are reiterating the range for revenue and adjusted EBITDA. While this may seem conservative, it is still early in the year, and as is always the case at this point in the year, we're still dependent on converting some of our awarded backlog into contracts. Also, we did have the accelerated revenue from Chicago, a reminder that our quarterly results can be lumpy.

In general, we are happy to report strong quarterly results and are quite comfortable that we are on track for the updated guidance.

Now we would like to open the line for your questions. I'll turn the call back over to our coordinator, Glenda, to run the Q&A session. Glenda?

(Operator Instructions) And our first question comes from the line of Craig Irwin from Roth Capital Partners.

So congratulations on a really strong start to 2018. This is an impressive result. So the first thing I wanted to ask about is a bigger-picture question, right? People that have been following closely can see that you've been doing exactly what you said you would do and maybe accomplishing the bigger goals a little bit faster than what some of us external watchers, observers of the company have been looking for. But as we look over the next number of years, can you maybe frame out for us the potential for growth on the project side, what you see there? And then on the asset side, do you see similar growth potential to what you've delivered over the last year, 18 months, as far as new projects being brought online? And particularly in the green grass or landfill gas arena, if you could talk about whether or not you credibly see an opportunity for a couple of plants a year for the next few years.

Okay. And first, I will try to tackle the project business and then the green gas. On the project business, we are particularly happy, and I think John mentioned it, to see that the U.S. Regions, they started growing. The second half of last year, they started picking up. And of course, they picked up this quarter, and we're forecasting them to see double-digit growth for the balance of the year. And that's why I made the statement on our pipeline, we are optimistic about the long term. The pipeline looks pretty good unless something drastic happens in the marketplace that nobody knows about it at this point in time. But the activity level that we see across the United States, especially as the project offering has evolved, it's incorporating solar, it's incorporating various storage, microgrids and so on, and that's why the projects are getting larger. So we see pretty good project activity across the U.S. And then to some extent, in Canada. Even though they struggled this last quarter, the activity level going forward, it looks pretty good. In the federal sector, again, I think you saw a flattish quarter for the federal market for this particular quarter compared to last year. But if you recall, last year, that segment grew over 30%. So -- but still, by the end of the year, we anticipate that unit to have low double-digit growth as well. But the backlog foregoing on in 2019 looks better than where it was for this year. So we're, again, optimistic about the project business across the board. Now as far as the green gas, we do, like we said, right now, we are in construction on the Phoenix plant. And we have in the development 3 other assets, and we could potentially have more. However, we are very careful how we're developing that particular business because literal -- or I would say, some uncertainty into the marketplace. And I think, last time, I said I will not bet the farm on it. But on the other hand, though, we will take advantage of the opportunities that present themselves but in a measured way. But the potential is there. And what I feel good about our company, we do have a very good track record in that particular part of the market segment, and we win our fair share of projects. I don't know if John wants to add any more.

So then the next question I wanted to ask is about the EBITDA coming from stable businesses. So this has increased quite significantly over the last couple of quarters. Now you're exceeding 70% in the first quarter. I know this number will bounce around a little bit, but is it fair to assume that we'll be somewhere in this range of 70%, plus or minus, given that we don't yet have the contribution from Arizona in the first quarter? Will you exit 2018 somewhere in the 70%, 75% range?

Yes, I will let John give more color to this. But my feeling is that no, it will not be at the 70% rate. It will be somewhat lower as far as stability, but not that much lower than that. Go ahead, John.

Yes. And I think, Craig, a couple of things you're seeing is that Q1 is our lowest revenue-generating quarter for projects. So as the project business revenue scales throughout the year, I would expect that number to bounce around. We did say that we would expect it to approach 70% over time. And so that is still an achievable target as you did see today. But as the project revenues increase, I would expect the earnings from those to come down just a little bit. And we really need to see the Phoenix plant get to scale as well. So -- but it's not unreasonable to see us exiting the year at a run rate that is at or close to that amount.

Great. That's good to hear. And last question, if I may, before I jump back in the queue. In your prepared remarks, you talked about an average project size now about $10 million in awarded backlog versus $7 million sort of what you've been executing in contracted backlog. Can you describe whether or not you expect to get some leverage on this as you execute these projects? And do you see some SG&A efficiencies? Does it take similar man-hours to capture a larger project versus a smaller project? Are there other efficiencies that might help profitability executing on these larger projects?

Yes, John has got some great analysis, so I would let him...

I would -- great question. So just overall as a company, larger projects we do get operating leverage, and we're seeing that in our P&L. If you look at our OpEx, year-over-year increase was only 3%, and we have the top line increase of 24%. So I think our model is demonstrating that we do have operating leverage there as well. The thing I will say is that the larger projects do take a larger effort, a larger amount of resources, and it does take a little bit longer time to develop those. So on average, the weighted average conversion time is about 19 months right now, but that's across the entire project portfolio. The larger projects are taking upwards of 24 months and can even take a little bit longer to convert. So that's the downside. But this quarter, we did convert $135 million of new contracts, which in particular for Q1 was quite strong. And we do have, as George alluded to, a couple of large projects in the pipeline that we're hoping to convert this year as well, which we should be able to get some leverage from as well. So that's -- we are able to get leverage from the larger projects.

(Operator Instructions) And our next question comes from of the line of Noah Kaye from Oppenheimer.

Maybe we can start with -- if we could start with a cash flow line item. It looks like you spent about $21 million on acquisitions in the quarter. What were those for?

Yes. George had made reference, we actually did acquire solar assets, 2 of them in particular during the quarter from a developer. And so those are in construction and expecting those to go online late this year or early next year.

Great. So that's actually separate from the CapEx. And can you give us a sense of the magnitude of those?

Sure. So the -- it's about 16-megawatt equivalents. It was part of the 31-megawatt equivalents that we added during the quarter. So it was part of that. I think we did say at the beginning or at the -- during the last call, we expected to place about 30 megawatts in service this year. With the acquisition, we're now expecting closer to 40 to 50, so probably in that 45 range.

Terrific. And then if we look at the total amount of funding needed to bring kind of the 90 megawatts in development into operations, how do we think about kind of the remaining funding and the mix of debt to equity? Because it looks like equity has certainly funded a larger portion of the assets in construction thus far.

We have, and that's a good observation. So we would expect to have about another $100 million of financing to get the projects completed. But we have used equity. The $21 million is all equity thus far, so we haven't yet financed those assets. So we are expecting to bring on about another $100 million worth of debt for those -- for the projects in construction.

Great, and that leads into the next question. So understanding that the project that is almost all nonrecourse, which I appreciate you calling out, and everyone should understand that, where do you think consolidated leverage is going to shake out once you get these assets at the full run rate and have fully financed them?

Yes. So I mean, we're going to be in that $300 million to $400 million range depending on the timing when you look at it holistically. And so I think that -- if you look at where we're at now and just add the $100 million, I mean, it's really going to be dependent upon the variability is going to be dependent upon our corporate line and how much we've drawn on the line. And so right now, we're at about 40 or 50, but I would expect, when we do the financing, that number will actually drop down. So you're going to see an increase in nonrecourse project debt offset by -- all else being equal, offset by a decrease in our corporate facility, absent any other investments we make in other potential areas as well.

Great. And so is there -- that's helpful. And if I could ask the question another way, is there a right kind of leverage target to think about on a consolidated basis? What would you be comfortable with once all of your assets are -- that you're financing are fully operating?

Yes. So we're typically -- we're running -- we have some assets that are fully paid. And so -- paid off. So we have 100% equity in some projects. And then for the new projects, on average, let's just say, we're doing 80%. So the total amount of debt, I would expect, on a consolidated basis, is in that 50% to 60% range.

Okay, great. And then the other energy assets bucket, does that include grid energy storage at all? And if so, can you comment on the types of projects you're developing there?

Yes. So specifically, the project that we've spoken about in the past is the energy storage, the battery storage system that we're doing for the IESO in Toronto. And so that's a project that we're planning to place in service sometime this year.

Okay. And then you touched on it before, but I mean, obviously, the clear improvement in U.S. Regions on both revenue and profitability, I think, this color in project size and the leverage there is helpful to understand. But as we see kind of interest rates rising, I mean, typically we've thought about that as maybe a little bit of a challenge to project size. It doesn't seem like you're seeing it certainly none in the current projects, maybe not in the backlog as well. Is that a fair assessment? And if so, why not?

We see it, but it has a very small impact. A couple of projects that we executed after the rise in the interest rates, maybe the scope was reduced slightly but not significantly.

Yes. And I'd say, if you look at it from an economic standpoint, the larger the project, the more measures you implement, the more savings you have. And as a result of having more savings, you then can do more improvements to the facility. So it works actually in both ways from that standpoint. But as we've often said, we wouldn't exist if we didn't save our customers' money, and projects fund themselves. So I think that, that still speaks true in any interest rate environment.

And our next question comes from the line of Craig Irwin from Roth Capital Partners.

Just one quick follow-up here. So the Chicago street light revenue, the $10 million that you said was recognized maybe on the early side, can you describe sort of the factors that contributed to the early recognition there? And does this come directly out of the second quarter? Or is this something more that maybe it's spread out through the second, third and fourth quarters of '18?

Sure. So specifically, I think we were able to install more lights than we originally had planned, and the weather was more mild than we expected, although the City of Chicago, I'm sure people would complain that they had a bad winter. But it didn't prevent us from installing as many lights as we did. So the weather certainly played into a factor. I would say the point we wanted to make is that the $10 million is -- or is not something we would expect an incremental $10 million on a quarterly basis. And so it was largely pulled in from Q2. But they're -- assuming that they stay on schedule, we could get it -- could get to the end of the year and be 0 to $10 million higher, that we originally planned at the beginning of the year. But the important point I wanted to make is we're not expecting $10 million in each of the 4 quarters. So we're not expecting the City of Chicago project to be $40 million higher than we originally planned. So I think it's going to be more spread out, to answer your question directly.

Okay, great. And just so I understand perfectly, this is not a negative delta on 2Q. This is something really where execution is just ahead of schedule, and you could actually be ahead of schedule at the end of the year.

That's correct. Yes, that's correct. I mean, what -- the point I would make is that we saw a very strong Q1 year-over-year, 24%. I don't expect, as we progress through the rest of the year, to be able to sustain that growth rate on a year-over-year basis. We're still holding to the 10% increase in revenues on the top line, and we're still holding to the increase in the EBITDA to be at a faster rate than that. But -- so some of it is a pull-in, but overall, it's just indicative of the lumpiness of the project business as a whole.

And that concludes our question-and-answer session for today. I'd like to turn the call back over to George Sakellaris for closing remarks.

Thank you, Glenda. To conclude, we are happy to get 2018 off to a strong start and are confident in our outlook for the year. Our solid performance demonstrates that our strategies are effective and that we can execute. Our visibility is great with a substantial amount of profit coming from recurring revenue and with a large and growing backlog in the project business. We have good momentum now and believe our business can continue to accelerate. Thank you for your attention this morning. I will now turn the call to the operator. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.