Ameresco - Q1 2018
May 1, 2018
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the Ameresco Inc. Q1 2018 earnings conference 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. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. 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.
John Granara (CFO)
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 will 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 into 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 this 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. With that, I'll now turn the call over to George. George?
George Sakellaris (CEO)
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 reinforce our confidence. Revenue was up 24%. Profitability grew substantially, and total backlog was up 15%. The 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 operation and 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 two plants are not the only activity in our energy portfolio. In Massachusetts, we executed agreements to purchase two 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 in our core project business as well. Total pre-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 a 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?
John Granara (CFO)
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 one-time tax benefit and the effects of non-controlling 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. Region 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 the 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-$0.70, up from $0.55-$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 are 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 (participant)
Thank you. Ladies and gentlemen, at this time, if you have a question, please press the star then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, you may press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. And again, to ask a question, please press star, then one. And our first question comes from the line of Craig Irwin from Roth Capital Partners. Your line is now open.
Craig Irwin (Managing Director and Senior Research Analyst)
Good morning, and thanks for taking my questions. So congratulations on a really strong start to 2018. This is an impressive result. The first thing I wanted to. Thank you, George. 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, the bigger goals a little bit faster than what some of us external watchers or 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 gas or landfill gas arena, if you could talk about, you know, whether or not you credibly see an opportunity for a couple plants a year for the next few years.
George Sakellaris (CEO)
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 will start 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 incorporates in solar, it incorporates in battery 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 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 for going on in 2019 looks better than what it was for this year. So we are 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 three other assets, and we could potentially have more. However, we are very careful how we're developing that particular business because this little, or I would say, some uncertainty into the marketplace, and I think last time I said I would 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 where 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 anymore.
Craig Irwin (Managing Director and Senior Research Analyst)
Thank you for that. So then the next question I wanted to ask about is 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? Would you expect to exit 2018 somewhere in the 70%-75% range?
George Sakellaris (CEO)
Yeah, 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, and as far as stability, but not that much lower than that. Go ahead, John.
John Granara (CFO)
Yeah, I mean, I think, Craig, a couple of things you're seeing is that Q1 is our lowest revenue-generating quarter.
Craig Irwin (Managing Director and Senior Research Analyst)
Yeah
John Granara (CFO)
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 it's not unreasonable to see us exiting the year at a run rate that is at or close to that amount.
Craig Irwin (Managing Director and Senior Research Analyst)
Great. That, 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, you know, $7 million, sort of what you've been executing in contracted backlog.
Can you describe whether or not you expect to get some 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?
George Sakellaris (CEO)
Yes. John has done some great analysis, so I will let him.
John Granara (CFO)
So, great question. So just overall, as the company, larger projects, we do get operating leverage. You know, and we're seeing that in our P&L. If you look at our OpEx, year-over-year increase was only 3%, and we had 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, 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 our 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, you know, we should be able to get some leverage from as well. So that's. We are able to get leverage from the larger projects.
Craig Irwin (Managing Director and Senior Research Analyst)
Great. Thanks for that. I'll hop back in the queue now.
Operator (participant)
Thank you. As a reminder, if you would like to ask a question at this time, please press star then 1. If your question has been answered or you wish to remove yourself from the queue, you may press the pound key. Our next question comes from the line of Noah Kaye from Oppenheimer. Your line is now open.
Noah Kaye (Managing Director and Senior Research Analyst)
Thanks. Good morning.
John Granara (CFO)
Morning, Noah.
Noah Kaye (Managing Director and Senior Research Analyst)
Let's start with... Good morning. If we could start with cash flow line item. It looks like you spent about $21 million on acquisitions in the quarter. What were those for?
John Granara (CFO)
Yeah, George had made reference. We actually did acquire solar assets, two of them in particular, during the quarter from a developer. And so those are in construction, and expecting those to go online, either late this year or early next year.
Noah Kaye (Managing Director and Senior Research Analyst)
Okay, great. So that's actually separate from the CapEx. And can you give us a sense of the magnitude of those?
John Granara (CFO)
Sure. So 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 during the last call, we expected to place about 30 megawatts in service this year. With the acquisition, we're now expecting closer to 40-50, so probably, you know, in that 45 range.
Noah Kaye (Managing Director and Senior Research Analyst)
Terrific. And then if we look at the total amount of funding needed to bring, you know, 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.
John Granara (CFO)
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 was- 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.
Noah Kaye (Managing Director and Senior Research Analyst)
Great. And that leads into the next question. So, understanding that the project debt is almost all non-recourse, which I appreciate you calling out, and, and everyone should understand that, where do you think consolidated leverage is gonna shake out, once you get these assets up to full run rate and have fully financed them?
John Granara (CFO)
Yeah, so I mean, we're gonna be in that $300-$400 million range, depending on the timing, when you look at it holistically. So I think, you know, that, you know, if you look at where we're at now and just add the hundred, I mean, it's really gonna be dependent upon, the variability is gonna be dependent upon our corporate line and how much we've drawn on the line.
So, you know, right now, we're at about $40 or $50, but I would expect when we do the financing to that, that number will actually drop down. So you're gonna see an increase in non-recourse 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.
Noah Kaye (Managing Director and Senior Research Analyst)
Great. And so is there... I mean, that's helpful. If I, if I could ask the question another way: Is there a, is there a right kind of, leverage target to think about on a consolidated basis? I mean, what, what would you be comfortable with, once all of your assets are, either that you're financing, are, are fully operating?
John Granara (CFO)
Yeah, so you know, we're running at, because 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, you know, I would expect on a consolidated basis is in that 50%-60% range.
Noah Kaye (Managing Director and Senior Research Analyst)
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?
John Granara (CFO)
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.
Noah Kaye (Managing Director and Senior Research Analyst)
Okay. Yeah, and then, you know, you touched on it before, but I mean, obviously, the clear improvement in U.S. Regions, you know, on both, revenue and profitability, I think this color on project size, and the leverage there is helpful to understand.
But as we see kind of interest rates, you know, rising, I mean, typically, we've thought about, you know, that as maybe a little bit of a challenge to project size. It doesn't seem like you're seeing it, certainly not in the current projects.maybe not in the backlog as well. Is that a fair assessment? And if so, why not?
George Sakellaris (CEO)
You know, we see it, but it's a very small impact. And, couple of projects that we executed after the rise in the interest rates, maybe the scope was reduced slightly, but not significantly.
John Granara (CFO)
Yeah, 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, it works, it works actually in both ways from that standpoint. But you know, as we've often said, I mean, we wouldn't exist if we didn't you know, save our customers money, and the projects fund themselves. So I think that that you know, that still speaks true in any interest rate environment.
Noah Kaye (Managing Director and Senior Research Analyst)
Yeah. Thank you so much for taking the questions.
George Sakellaris (CEO)
Welcome.
Operator (participant)
Thank you. Our next question comes from the line of Craig Irwin from Roth Capital Partners. Your line is now open.
Craig Irwin (Managing Director and Senior Research Analyst)
Thank you. Just one quick follow-up here. So the Chicago streetlight 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, you know, maybe it's spread out through the second, third, and fourth quarters of 2018?
John Granara (CFO)
Sure. So if, you know, specifically, I think we were able to install more lights than we originally had planned, and the weather was, you know, more mild than we expected. Although, the city of Chicago, I'm sure the people would complain that they had a bad winter, but it didn't prevent us from installing as many lights as we did. So, so that... the weather certainly played into a factor. You know, I would say that, you know, the point we wanted to make is that the $10 million is or is not something we would expect an incremental $10 on a quarterly basis.
And so it was largely pulled in from Q2, but, you know, they're assuming that they stay on schedule, you know, we could get it to the end of the year and be $0-$10 million higher than we originally planned at the beginning of the year. But the important point we wanted to make is we're not expecting $10 million in each of the four quarters, so we're not expecting, you know, the city of Chicago project to be $40 million higher than we originally planned. So I think it's gonna be more spread out, to answer your question directly.
Craig Irwin (Managing Director and Senior Research Analyst)
Okay, great. And just, 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-
John Granara (CFO)
Yep
Craig Irwin (Managing Director and Senior Research Analyst)
... be ahead of schedule at the end of the year.
John Granara (CFO)
That's correct.
Craig Irwin (Managing Director and Senior Research Analyst)
Okay.
John Granara (CFO)
I mean, yeah, it. That's correct. I mean, the point I would make is that, you know, we saw a very strong Q1 year-over-year, 24%. You know, 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%, you know, 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.
Craig Irwin (Managing Director and Senior Research Analyst)
Great. Thank you very much for that.
Operator (participant)
Thank you. That concludes our question and answer session for today. I'd like to turn the call back over to George Sakellaris for closing remarks.
George Sakellaris (CEO)
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.
Operator (participant)
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.