Ameresco Inc (AMRC) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2018 Ameresco, Inc. Earnings Conference Call. (Operator Instructions) Also as a reminder, this conference call is being recorded. At this time, I'd like to turn the call to our host, Gary Dvorchak. Sir, please go ahead.

Thank you, [Dulham], and good morning, everyone. We appreciate you joining us for Ameresco's Second Quarter 2018 Earnings Conference Call. Joining me today is George Sakellaris, Ameresco's Chairman, President and Chief Executive Officer; and John Granara, Chief Financial Officer. First, George will review the operating highlights, and John will review the financials of the quarter, and finally 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'd 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'll be referring to non-GAAP financial measures during the call. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. A GAAP to non-GAAP consideration 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. I'll now turn the call over to George. George?

Thank you, Gary, and good morning, everyone. Our performance this quarter was outstanding, demonstrating great execution by our team and the momentum and visibility we have in our business. All key financial metrics grew substantially. Revenue was up 18%, gross profit up 20%, earnings per share grew over 40% and adjusted EBITDA up 39%. Our visibility was improved by the 20% growth in our total project backlog as well as a growing portfolio of both operation and maintenance contracts and energy assets. Because of this, we are raising our guidance for the year as well.

I want to first review the results of our energy asset business, as it reflects the evolution of our business model over time. Sales of renewable gas and electricity from our portfolio are recurring, high-margin and locked in for many years through purchase power agreements and other contractual arrangements. Furthermore, energy assets will have a meaningful impact on our profit growth this year due to the addition of 2 renewable gas plants that go into operation this year. Energy asset revenue was only 11% of total revenue, but the portfolio, contributed nearly half of adjusted EBITDA.

Revenue is up 25% from last year. We now have 212 megawatts equivalent in operation, 2/3 of which is renewable gas and the rest being solar. Importantly, our asset portfolio of pipeline is diversified geographically, with good penetration in most major renewable energy markets. Our extensive geographic coverage will benefit us as more renewable energy markets develop across the country.

Now, I would like to discuss renewable gas in more detail. The WOODLAND MEADOWS plant in Michigan reached full operations late in Q2, making a contribution in the quarter. We buy landfill gas from the owner of the landfill and then our facility converts it to green gas and we sell it into the interstate pipeline system for use in CNG fueling stations around the country. Our revenue consists of both a sales price of the gas and the D3 RINs [award].

Previously, the landfill gas was consumed on-site for electricity generation, piped out into lower value applications or simply flared off. This facility represents both in economic and environmental win for all parties. We expect our renewable gas facility in Phoenix, Arizona, to start operating in the third quarter. This facility, which is connected to a wastewater treatment plant converts the biogas into refine renewable gas.

The RNG is then injected into the natural gas distribution system for use as transportation fuel. Like WOODLAND MEADOW, this plant will create revenue both from gas sales and D3 RINs. The plant is mechanically complete, and we are awaiting final permits to start operating. We anticipate operations to commence in August.

RNG is particularly important for us, and we continue to develop a robust pipeline. We are now upgrading the plant in Texas from lower quality landfill gas to high BTU green gas. We expect the commissioning of this plant in late 2019, or early 2020. This plant, alone, was 12-megawatt equivalent of this quarter's 26-megawatt equivalent, addition to assets under development. Furthermore, we are in the early stages with 2 additional RNG facilities. Those 2 are not yet in our 114-megawatt of assets under development. Beyond those 2, we have even more RNG opportunities that we intend to eventually develop.

Renewable gas drives the energy asset portfolio today, but Solar is also delivering great results. Of the 114 megawatts we have in development, over 2/3 are solar power. Our solar power projects encompass a variety of categories. I will describe a couple to give you a sense of the opportunities out there. One category with a lot of activity now is community solar. We have been active in this, you might recall, the BlueWave deal we announced a year ago. In the second quarter, we signed definite agreements to acquire 4 community solar sites located in Massachusetts with the capacity of over 5 megawatts.

When this acquisition is closed, we will have 10-megawatt solar sites, totaling 15 megawatts in our portfolio. Another category is solar power associated with our efficiency projects. The Island Palm Community project, which I will discuss in a moment, includes 6 megawatts of rooftop solar as we are developing and will own.

In general, our core project work drives many opportunities to own renewable power assets, especially in the federal and health care sectors. Beyond the care and contribution, our energy asset portfolio provides outstanding visibility for future profits. Looking out 20 years, we have an estimated $850 million of revenue coming from assets in service now. Clearly, the energy asset business is one worthy of significant investment on our part. This year alone, we expect to invest over $100 million in the development and acquisition of energy assets.

Now, let's turn our attention to our core project business, which also delivered outstanding results this quarter. These projects offer good margins and great visibility. They also generate cash that we can invest into growing our energy asset portfolio. We often mention that projects are getting larger and more complex, and are included emerging technologies, such as, battery storage, advanced controls, microgrids and distributed generation. This complexity plays to our competitive advantage.

These projects are driving faster growth and more value add.

In Q

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we signed a

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contract for a project that is representative of this type of large deal. The project is the modernization of Island Palm Communities, a privatized military housing complex in Hawaii.

This $150 million deal will encompass a multitude of energy and more efficiency upgrades for 5,800 housing units. It includes 6-megawatt of solar power supplied by Ameresco, as I mentioned earlier. Our upgrades will touch HVAC, housing envelope, lighting both in homes and streetlights, and will take 3 years to complete. The project includes operational and maintenance work which adds a total of $130 million to our operation and maintenance backlog.

Now I believe this project is a first developed by our joint venture with Lend Lease. We expect productive [huger] collaboration with Lend Lease, especially in this key market of privatized military housing. In general, we are bullish in our outlook for the project business. I mentioned the backlog growth of 20%, which was driven by 28% growth in awards. This puts our total backlog at $2 billion, its highest level ever. We continue to see and pursue a number of large and advanced technological deals. We see this trend across multiple markets, including federal, higher education and health care.

I should note that the federal market got some additional support with the signing of a new executive order in May. That executive order directs federal agencies to prioritize auctions that reduce waste, cut costs and enhance the resiliency of federal infrastructure and operations. The executive order also directs agencies to use energy savings performance contracts for funding. Agencies were already doing all this, of course, but the executive order deepens the imperative and thus, supports our sales efforts.

Finally, before I turn the call to John, let me highlight the encouraging progress we are making in Canada. You can recall that we had challenges there a couple of years ago, which we fixed through a variety of actions on our part. Canada is now regaining its momentum. We signed $42 million of contracts there in Q2 alone. This includes some innovative work such as a battery storage project for a large utility and LED streetlight upgrades. We are cautiously optimistic about renewed growth in Canada.

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

Thank you, George, and good morning, everyone. Our press release and supplemental slides contain all the figures and comparisons that you need, so I'm not going to just repeat it all. Instead, we are going to focus on the analysis of the factors that influence results. Keep in mind that we are referring to Q2 figures, unless I say otherwise, and all the comparisons are year-over-year.

As George mentioned, we had a great quarter. Let's go through the income statement first. Revenue growth was balanced, driven by greater than 20% growth in both core projects and energy asset revenue. Notably, the 27% growth in energy asset revenue is driven by the Michigan renewable gas plant as well as the solar assets that we placed into service in the second half of 2017, which are now fully contributing. With both WOODLAND MEADOWS and soon Phoenix contributing in the second half, energy asset revenue growth should accelerate.

In contrast, O&M revenue was flat. We had expected some growth from new contracts that were not finalized, but we do anticipate starting that work in the near future. Gross margin was higher due to a favorable mix of project revenues. As you would expect in a growing business, operating expenses were up, but grew at less than half the pace of gross profit. This was exactly on plan and reflects our disciplined spending culture.

We continue to invest in project development cost which is the main driver of backlog growth.

Halfway through the year, adjusted EBITDA is tracking to the higher annual guidance, I'll discuss shortly. Drilling down on visibility, the project backlog increased meaningfully, especially in awarded backlog which grew by 28%. This growth capped off $890 million of new awards for the last 12 months, which represents our best 12-month period ever. Importantly, backlog growth was balanced across the regions with notable strength in state and local, and federal representing half of our backlog reinforces that this market will also remain a key driver over the next few quarters. On top of that, George mentioned the $850 million in estimated energy revenue over the next 20 years. That revenue does not include future contract renewals or revenue from assets in development. Assets in development were up 41% on a dollar basis. Assets in development still include the Phoenix RNG plant, and furthermore, during the quarter, we added the green gas plant in Texas. As George mentioned, there are additional RNG plants in the early stages that we expect to add later to the assets in development metric.

Looking at the O&M backlog, Island Palm, alone, added $130 million, so we now have nearly $900 million of O&M revenue contracted as well. $700 million of that backlog is attributable to active contracts where the construction work is complete. $200 million of contracts are not yet active. Because of this, we anticipate solid growth in O&M revenue as those additional contracts become active. Looking at all these revenue streams, we believe that there are very few companies with long-term visibility as good as ours.

Now let's quickly review the balance sheet and cash flow, which remains strong. Adjusted cash from operations, which includes the proceeds from Federal ESPC projects was solid at $13 million. Of the $400 million of energy assets on the balance sheet, $76 million are still under construction. Looking ahead, we will require an incremental $200 million to bring the unfinished assets into operation. $70 million is scheduled to be spent in the second half of this year, of which, $50 million should come from project financing.

Finally, turning to the outlook, we are raising guidance. We now expect full year every to be in the range of $780 million to $820 million, EPS is anticipated to be in the range of $0.65 to $0.75, and adjusted EBITDA should come in the range of $77 million to $87 million. We do want to remind you that making the annual guidance requires us to sign some large deals that are now in awarded backlog.

Also, I want to note that while we do not offer quarterly guidance, due to the likely timing of these large deals, we expect year-over-year growth to be skewed to the fourth quarter. Now, we would like to open the line for your questions, I'll turn the call back over to our coordinator, [Dulham], to run the Q&A session.

(Operator Instructions) Our first question comes from Craig Irvin from Roth Capital.

First, I should say, John, George, congratulations on another really strong quarter here. So the build in, in awarded backlog -- really nice to see the progress there. As things moved into contracted and gave us that big 30 -- I think you said 38% jump, that is a huge build. Can you, maybe, break that down as far as any specific large projects that might have contributed to the big increase? And can you indicate for us may be if federal is continuing to see the typical momentum that it has in the past several quarters, if it continues to lead in your awarded and contracted backlog progression?

Sure. So I would -- so the -- it was 28%, and that was specifically for the awarded backlog, our project backlog was over 20%. So from a -- as George mentioned, we are continuing to see the trend of larger projects continue, but the good thing about our backlog is, it's quite balanced and it's not solely dependent on 1 large project. So we have been adding projects at a steady pace. And I would say the average size project right now, is about $10.8 million in our awarded backlog. So that is a little bit higher than what we saw last quarter. But it's not a significant jump where we're just dependent upon 1 or 2 projects. With regards to the components of, or the composition of, that growth, we're actually seeing growth across both the federal and the U.S. regions, which is nice to see. And as George said, although not as significant from a -- from -- or in comparison to the whole, we did, and we are seeing some growth in the Canada backlog as well.

Great, that's really good to hear. So the 2 most recent landfill gas facilities, green gas facilities. Can you maybe give us a little color on the sequential EBITDA contribution? How much of the upside that we had in EBITDA would you attribute to maybe those projects going better than expected during the quarter?

I would characterize it as saying they are going as expected. So as we've talked about in the past, it does take you a while to ramp up to get to full optimization or in operating efficiently. And so what we've seen based on the plants as we bring them on, it does take a good 3 to 6 months to get them operating optimally, as I would say. With regards to Phoenix, you may recall we originally had anticipated, putting that into service this quarter, but it did get delayed and it's now -- we now anticipate it to be in Q3. So there is some fluctuation around with the timing there. In terms of the incremental EBITDA contribution, I think we're comfortable in saying that at the current levels, you're looking at probably an annualized rate of somewhere in the $20 million to $25 million, for the 2 plants, and that would be the 2 plants that were going into operation this year. And then in terms of moving forward, I think you're going to be looking at anywhere from $7.5 million to $10 million a plant, just from that standpoint, depending on the size. It could be higher, could be lower, but I would just say on average, probably in that $10 million range.

Okay. So then the $20 million to $25 million you mentioned, is that reflecting that plants today currently at full run rate, annualized today or that's sort of where [we stand] right now, and it's likely to build as we continue to see the shakedown is completed over the course of the year?

That would be the full rate -- full run rate on an annualized basis. The contribution this year is probably closer to $10 million to $15 million.

Okay, okay, that's perfect. So then changing gears, regulatory. It seems that the Trump administration is actually providing pretty strong support for performance contracting for upgrading federal facilities off the ESPC line that's out there. Can you may be describe for us whether federal is likely to see continued build in its overall momentum? Or if you would expect other markets across the country, maybe some of the MUSH markets or public housing and things like this to see a little bit more of an acceleration and catch up to federal as we see the strength building a little bit across the economy?

Look, it was very encouraging. It was a great start to see the administration come up with a new Executive Order. And even though, the federal facilities they were implementing infrastructure upgrades and resiliency and so on for their facilities through the energy savings performance contracts, to get it through the administration to support that effort is very, very positive. And I think the growth for the immediate future, let's say a couple of years in the federal market, we are very encouraged on the activity that we see there. Whether it would pick up much more than what we have right now, it's difficult to anticipate, how much faster we can go, all right. But the pace that we envision right now is very healthy. And the other thing that we are very encouraged and that's why you see the growth for comparison quarter-to-quarter is very good is the U.S. regions, where the states and local governments and higher education and health care across the country is picking up. And we are -- and because the projects are getting more technological advanced, and they play to our competitive strength, we are getting pretty good market traction, and we win in a pretty good percentage of the contracts out there. So that's why I said in my remarks, we are pretty bullish about the project business for the immediate future, and that's probably 1 to 2 years going down the road.

Great and the last question if I may, on gross margins. I think this was a company record this quarter. Can you maybe clarify for us if there are any project closeouts that lifted that? Or are we really just seeing the benefit of scale and the benefit of some of these larger projects, the mix of larger projects sort of tending to move through the P&L versus historically smaller projects over the last couple of years?

I'll let John answer that question with greater detail, but from a higher up level, we like to compare margins on the annual basis because it's very lumpy and very noisy from quarter-to-quarter. But the trend, if we're going to see any improvement at all, it will be because of the asset mix, rather than the particular project mix, because the project mix from quarter-to-quarter, it moves a lot. John?

Yes, George hit the nail on the head there, but the only thing I would add is that through the first half of the year, project revenues don't contribute as much as they do in the second half of the year, so we'll see a natural decrease as the project revenues increase in the second half of the year that brings down the consolidated gross margin. But what we're saying is that we are seeing expansion in the gross margin for the asset revenue being slightly offset by the margins in the larger projects which tend to have a lower than average gross margin. But obviously it's contributing significantly from a dollar standpoint.

Our next question comes from Chip Moore of Canaccord.

Congratulations on the continued momentum, and very strong visibility here guys. Maybe we could talk a little bit more about Island Palm. It seems like a great announcement, I think, you talked about potential for more opportunities, particularly in the military housing market maybe you can expand on that addressable market a bit more?

We -- the only drawback -- it's a great deal and a great partnership that we have with Lend Lease, and we are envisioned more projects coming down the pipeline with them, actually we have about 3 projects that we are working on, right now. But I will caution you, because we announced this partnership for more than 2 years ago and it took us couple of years to get to this point. But the potential is very large, and we hope that we will continue working with Lend Lease. And we are very encouraged that we will have a substantial business in it from this part of the market segment.

Yes, so as George said, we do have 3 projects in our awarded backlog. I would say that the Island Palm project is larger, and I don't expect the remaining 3 to be the same size. But we are working with Lend Lease and evaluating their entire portfolio. And as we identify projects, you'll see them come in our awarded backlog for us and so it's -- you'll see the -- you'll be able to see it come in our awarded backlog in terms of -- from a visibility [standpoint]

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Got it. And just looking further out, is there a potential that you could look for some more partnerships with infrastructure companies like Lend Lease? How do you think about that?

Again, actually we did one with [Corbis]. It's not a partnership, it's just individual project for that particular client, and we will look at the other ones as well. But our primary focus right now, is with the Lend Lease opportunities to develop their sites first.

Yes. Okay, that's good. Maybe last one from in Canada getting some momentum back, good to see. You called out that nice utility project. Beyond that, what makes you more optimistic and what you see in Canada?

It's the pipeline that we have right now, especially in the federal sector in Canada is very encouraging and...

Yes, I'd say in particular the federal market is quite active right now, we've traditionally played pretty well in that market, in Canada. So that's where we're optimistic.

And we see more technological advanced projects right combined heat and power, streetlight upgrades and battery storage and microgrids. So as the market expands, we feel pretty good that we're in a good position to take advantage of the opportunities.

(Operator Instructions) Our next question comes from Noah Kaye of Oppenheimer.

Can I pull back for a second here? Obviously the short-term trends are very attractive and speak for themselves. But George, you've seen the ups and downs of the ESPC project business over the years. It feels a little different, this go-around. The TVA, the Tennessee Valley Authority said a couple of weeks ago, they're not going to build any baseload power for the next decade plus, because energy efficiency is so much more economical that they just don't see overall rising power demand. You talked before about visibility in sort of the project business -- the energy efficiency project business being good for the next 1 to 2 years. Does anything feel a little bit differently to you structurally that might sustain this kind of awards win rates over a longer period of time?

No, this is -- that's very, very good question, Noah, and it does feel different, because the business, it has evolved more than just being an Energy Savings Performance Contracting company, or product offering. If you move into the microgrids, like you said, many utilities are not going to build that many more centralized power plants. And the microgrids, the battery storage, the distributed generation, whether it's combined heat and power or solar or whatever the case may be, it's beginning to take very, very good hold across the country, and that's why I feel more optimistic than ever before that we are, as Ameresco as company, in a very good position to take advantage of those opportunities. And if you look at the projects that they become larger and they have more of an operation and maintenance trail to it, are the projects that basically they solve a bigger question of what's going to happen into the power generation and the utility industry in general. And I feel we are in a very, very good position to play in that market. That's why I'm encouraged and that's why the last couple of years we've been transforming the company that all units across the company and they can sell distributed generation whether it is solar, or it's combined heat and power, or whether it's battery storage or whatever the case might be.

And take advantage of the opportunities that they are out there. The market is changing. It's no -- and that's what makes it -- otherwise it has expanded. If you were to look just energy performance contracting business, it's about $8 billion, $9 billion. If you put distributed solar, combined heat and power, microgrids and so on, you're talking $20 billion to $30 billion market opportunity. So if we were to take 12% of that market share, we'd be very [much] large company down the road. So that's where we are.

I think that's really helpful perspective for us for everyone to understand. Let me ask one, sort of a similar, I don't you've call it thematic question, but the topic of grid cybersecurity has been increasingly in the news over the past few years and most recently with the Department of Homeland Security confirming that upwards of several hundred U.S. electric utilities may have been compromised via penetration efforts from hackers someone connected to foreign countries. You've talked about your projects having, obviously, a focus on resiliency and O&M. Can you just talk about any responsibilities that you may have or value proposition that you may have around cybersecurity and grid security for the microgrid offerings that you're participating in? Do you have partners for that or is there anything that you had to invest in to beef up your security?

It's a very, very good question and because we have, what, almost 40 plants operating across the country right now, and we do see attempts to break into our security system, several a day you might say sometime. But we are very diligent and actually we have brought this issue up to our board, and we are concerned and we're doing whatever possibly we can in order to protect ourselves and our assets and our customers. And then John might want to add anything more color to that, but it's an issue that we are very concerned and we try to do whatever we can and we have hired couple of outside consultants, top-level companies to help us maintain grid cybersecurity for our assets, and our customers. It's a good question, it's getting a bigger and bigger of an issue.

Yes, and then maybe one more very -- more immediate one. I think you previously guided to about 40 to 50-megawatt equivalents of energy assets placed in service in 2018. Any update to that implied in this higher guidance?

Yes, John?

Yes, no we're still tracking to that, so year-to-date, we have placed in the service about 21, and we're planning to place about 28, 28.5 for the remainder of the year, so we're still tracking to the number that we guided to earlier.

(Operator Instructions) I show no further questions in the queue at this time. I'd like to turn the call over to the CEO, George Sakellaris for closing remarks. Please go ahead.

Thank you, [Dulham]. To conclude, we believe our business momentum is strong and sustainable, and that new -- and few companies can match our level of visibility. Ameresco has never been in a better shape. Thanks to the hard work of our employees and the support of our shareholders. We look forward to maintaining this level of performance in the quarters ahead. Thank you for your attention this morning. I will now turn the call back to the operator. Thanks.

Thank you, sir. Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.