Ameresco - Q2 2018
August 7, 2018
Transcript
Operator (participant)
Good day, ladies and gentlemen, and welcome to the Q2 2018 Ameresco Inc. Earnings Conference Call. Currently, at this time, all participants are in the listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. Should anyone require assistance at any time during the conference, please press star and zero on your touch-tone telephone. Also, as a reminder, this conference call is being recorded. At this time, I'd like to turn the call over to your host, Gary Dvorchak. Sir, please go ahead.
Gary Dvorchak (Managing Director)
Thank you, Dylan, and good morning, everyone. We appreciate your 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 or predictions are 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 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 to the slides. I'll now turn the call over to George. George?
George Sakellaris (Chairman, President, and CEO)
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 30% growth in our total project backlog, as well as the 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 power purchase agreements and other contractual arrangements.
Furthermore, energy assets will have a meaningful impact on our profit growth this year due to the addition of two 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 of equivalent in operation, two-thirds of which is renewable gas and the rest being solar. Importantly, our asset portfolio and 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 the sales price of the gas and the D3 RINs we earn. 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 an 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 refined renewable gas. The RNG is then injected into the natural gas distribution system for use as transportation fuel. Like Woodland Meadows, 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 two additional RNG facilities. Those two are not yet in our 114 megawatts of assets under development. Beyond those two, 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 two-thirds 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 a capacity of over 5 megawatts. When these acquisitions close, 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 Communities project, which I will discuss in a moment, includes 6 megawatts of rooftop solar that 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 healthcare sectors. Beyond the current 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 including 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. We signed a 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 water efficiency upgrades for 5,800 housing units. It includes 6 MW 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 operation and maintenance work, which adds a total of $130 million to our operational maintenance backlog. Notably, this project is the first developed by our joint venture with Lendlease. We expect productive future collaboration with Lendlease, especially in this key market to 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 healthcare. 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 actions 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 that 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?
John Granara (CFO)
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 influenced 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 costs, which is the main driver of backlog growth. Halfway through the year, Adjusted EBITDA is tracking to the higher annual guidance I will 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 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 revenue to be in the range of $780 million-$820 million. EPS is anticipated to be in the range of $0.65-$0.75, and Adjusted EBITDA should come in the range of $77 million-$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, Dylan, to run the Q&A session.
Operator (participant)
Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press star and one. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from Craig Irwin from Roth Capital. Question, please.
Craig Irwin (Managing Director and Senior Research Analyst)
Good morning, and thanks for taking my questions. First, I should say, John, George, congratulations on another really strong quarter here.
John Granara (CFO)
Thanks, Craig.
George Sakellaris (Chairman, President, and CEO)
Thank you, Gary.
Craig Irwin (Managing Director and Senior Research Analyst)
So the build in awarded backlog, really nice to see the progress there. As things moved into contracted and gave us that big, 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 maybe 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?
John Granara (CFO)
Sure. So it was 28%, and that was specifically for the awarded backlog. Our project backlog was over 20%. So, 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 one large project. So we have been adding projects at a steady pace, and I would say the average-sized 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 one or two 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.
As George said, although not as significant from a or in comparison to the whole, we did and we are seeing some growth in the Canada backlog as well.
Craig Irwin (Managing Director and Senior Research Analyst)
Great. That's really good to hear. So the two 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?
John Granara (CFO)
I would characterize it as saying they're 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 and operating efficiently. And so what we've seen based on the plants as we bring them on, it does take a good 3-6 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 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-$25 million range for the two plants, and that would be the two 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. Could be higher, could be lower, but I would just say on average, probably in that $10 million range.
Craig Irwin (Managing Director and Senior Research Analyst)
Okay. So then the 20-25 you mentioned, is that reflecting the 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 shakedowns completed over the course of the year?
John Granara (CFO)
That would be the full run rate on an annualized basis. The contribution this year is probably closer to $10 million-$15 million.
Craig Irwin (Managing Director and Senior Research Analyst)
Okay. Okay. That's perfect. 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 maybe 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, a catch-up to federal as we see the strength building a little bit across the economy?
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 will pick up much more than what we have right now, it's difficult to anticipate how much faster we can go, but the pace that we envision right now is pretty healthy.
The other thing that we are very encouraged, and that's why you see the growth for comparison quarter-to-quarter is pretty good, is the U.S. regions, whether it's the state and local governments, and higher education and healthcare across the country is picking up. Because the projects are getting more technologically advanced and they play to our competitive strength, we are getting pretty good market traction, and we're winning 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 one to two years going down the road.
Great. 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 were 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?
George Sakellaris (Chairman, President, and CEO)
I will let John answer that question in 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 influences it a lot, John.
John Granara (CFO)
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 seeing 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.
Craig Irwin (Managing Director and Senior Research Analyst)
Great. Thanks again for taking my questions, and congratulations again on the really strong quarter.
George Sakellaris (Chairman, President, and CEO)
Thank you.
John Granara (CFO)
Thanks.
Operator (participant)
Thank you. Our next question comes from Chip Moore of Canaccord. Please go ahead.
Chip Moore (Director of Equity Research)
Morning. Thanks. I'll echo my congratulations on the continued momentum and very strong visibility here, guys. Maybe we could talk a little bit more about Island Palm. That 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.
George Sakellaris (Chairman, President, and CEO)
The only drawback is a great deal and a great partnership that we have with Lendlease, and we are envisioning more projects coming down the pike with them. Actually, we have about three projects that we are working on right now, but I will caution you because we announced this partnership more than two years ago, and it took us a couple of years to get to this point. But the potential is very large, and we hope that we will continue working with Lendlease, and we are very encouraged that we will have substantial business from this part of the market segment.
John Granara (CFO)
Yeah. So as George said, we do have three projects in our awarded backlog. I would say that the Island Palm project is larger, and I don't expect the remaining three to be the same size, but we are working with Lendlease and evaluating their entire portfolio. And as we identify projects, you'll see them come in our awarded backlog first, and so you'll see the you'll be able to see it come in our awarded backlog in terms of from a visibility standpoint.
Chip Moore (Director of Equity Research)
Got it. And I guess just looking further out, is there potential that you could look for some more partnerships with infrastructure companies like a Lendlease? How do you think about that?
George Sakellaris (Chairman, President, and CEO)
Again, actually, we did one with Corvias. It's not a partnership. It's just an individual project for that particular client. And we will look at other ones as well, but our primary focus right now is with the Lendlease opportunities to develop their sites first.
Chip Moore (Director of Equity Research)
Yeah. Okay. That's good. Maybe one last one for me on Canada getting some momentum back, good to see. You called out that nice utility project. Beyond that, what makes you more optimistic, and what are you seeing in Canada? Thanks, guys.
George Sakellaris (Chairman, President, and CEO)
The pipeline that we have right now, especially in the federal sector in Canada. It's very encouraging.
John Granara (CFO)
Yeah. I'd say in particular, the federal market is quite active right now, and we've traditionally played pretty well in that market in Canada. So that's where we're optimistic.
George Sakellaris (Chairman, President, and CEO)
We see more technologically advanced projects, right, combined heat and power, streetlight upgrades, and battery storage, and microgrids. As the market expands, we feel pretty good that we are in a good position to take advantage of the opportunities.
Chip Moore (Director of Equity Research)
All right. Great. Thanks, and congrats again, guys.
George Sakellaris (Chairman, President, and CEO)
Thank you.
John Granara (CFO)
Thank you.
Operator (participant)
Thank you. Ladies and gentlemen, if you have a question at this time, please press star and one. If your question has been answered or you wish to move yourself from the queue, please press the pound key. Our next question comes from Noah Kaye of Oppenheimer. Please go ahead.
Noah Kaye (Managing Director and Senior Analyst)
Thanks. Good morning, George and John. 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 to us 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 and sort of the project business, the energy efficiency project business being good for the next 1-2 years. Does anything feel a little bit different to you structurally that might sustain this kind of awards win rate over a longer period of time?
George Sakellaris (Chairman, President, and CEO)
No. And that's a 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. It has moved into the microgrids, like you said, many utilities. I'm 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, whatever the case might 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 at Ameresco as a company in a very good position to take advantage of those opportunities.
If you look at the projects that they become larger and they have more of an operation and maintenance tail 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. 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, they can sell distributed generation, whether it's solar, whether 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. That's what makes it otherwise, it has expanded.
If you were to look just energy performance contracting business, it's about $8-$9 billion. If you put distributed solar, combined heat and power, microgrids, and so on, you're talking $20 billion-$30 billion market opportunity. So if we were to take 12% of that market share, we would be a very good large company down the road. So that's where we are.
Noah Kaye (Managing Director and Senior Analyst)
I think that's a really helpful perspective for us and for everyone to understand. Let me ask one sort of a similar I don't know if you'd call it a 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 by penetration efforts from hackers, some of them 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 propositions that you may have around cybersecurity and grid security for the microgrid offerings that you're participating in? Do you have partners for that? Is there anything that you've had to invest in to kind of beef up your security?
George Sakellaris (Chairman, President, and CEO)
It's a very, very good question. And because we have 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 sometimes. 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 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 in order and we have hired a couple of outside consultants, top-level companies, to help us maintain great cybersecurity for our assets and our customers. It's a good question. It's a good question. It's a good question. It's getting bigger and bigger of an issue.
Noah Kaye (Managing Director and Senior Analyst)
Yeah. And then maybe one more immediate one. I think you'd previously guided to about 40-50 megawatt equivalents of energy assets placed in service in 2018. Any update to that implied in this higher guidance?
John Granara (CFO)
Yeah. No, we're still tracking to that. So year to date, we have placed in 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.
Noah Kaye (Managing Director and Senior Analyst)
Okay. Great. Well, it sounds like close to the upper end of that, but that's great to hear. Thank you so much for taking the question.
Operator (participant)
Thank you. Ladies and gentlemen, if you have any further questions at this time, please press star and one. If your question has been answered or you wish to move yourself from the queue, please press the pound key. I see no further questions in the queue at this time. I would like to turn the call over to the CEO, George Sakellaris, for closing remarks. Please go ahead.
George Sakellaris (Chairman, President, and CEO)
Thank you, John. To conclude, we believe our business momentum is strong and sustainable and that 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.
Operator (participant)
Thank you, sir. Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.