Ameresco - Q2 2019

Transcript

Operator (participant)

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Ameresco, Inc second quarter 2019 earnings call. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to our host, Ms. Leila Dillon, Vice President, Marketing and Communications. Ms. Dillon, you may begin.

Leila Dillon (VP of Marketing and Communications)

Thank you, and good morning, everyone. We appreciate you joining us for today's call. Joining me here are George Sakellaris, Ameresco's Chairman, President, and Chief Executive Officer, Mark Chiplock, Vice President, Corporate Controller, and Chief Accounting Officer, and Doran Hole, Senior Vice President and Chief Financial Officer. 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 upon 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 and in the appendix of the slides, which can be downloaded from our website. I will now turn the call over to George. George?

George Sakellaris (Chairman, President, and CEO)

Thank you, Leila, and good morning, everyone. Our second quarter results were solid and in line with our expectations. Further, we are on track for strong second-half comparisons and have outstanding visibility for 2020 and beyond. Ameresco continues to execute on its long-term strategy of growing recurring revenue businesses. We are doing this by leveraging our institutional knowledge of innovative technology and our broad geographic footprint. In this year, second quarter, we succeeded to posting a 6% increase in net income and a 10% increase in Adjusted EBITDA on modest revenue growth. This is the result of the continued shift towards higher-margin energy asset and O&M revenues. The contribution from these businesses more than offset our investments in acquiring and developing the strong talent needed to compete in the advanced technology markets. Our energy asset business continues to show impressive pipeline growth.

Total assets in development more than doubled from the second quarter of 2018, reaching 258 MW equivalent by quarter's end. Our assets in development now exceed the number of megawatts we currently have in operation. Including this pipeline, in executing this pipeline will lead to continued visibility and growth. During the quarter, we placed an additional 14 MW in operation, bringing our year-to-date total to 21 MW. Diversification of technology and geography continues to be a priority for the company's energy asset business. We have balanced our historic concentration of New England-based solar assets with our biogas assets spread throughout the country. We are now supplementing this base with solar and other distributed energy resources in all regions. In Q1, we began commercial operation of our Phoenix RNG plant, and we held the ribbon-cutting ceremony in Q2.

This asset is the largest biogas to RNG facility at a wastewater treatment plant in the U.S. It provides the city with substantial economic benefits and helps it to achieve its ambitious sustainability goals. We continue to actively pursue large RNG opportunities around the country. We have a good pipeline of green gas projects, both in our reported assets in development metric, as well as the five to six earlier-stage projects we have spoken about in previous calls. In addition, market data indicates that there is a healthy, available market of biogas facilities fed by landfill gas, sewage treatment plants, and other feedstocks. We believe our technical expertise and client relationships will allow us to grow our leading market share in this space. We see increased market awareness of biogas, with many government and institutional clients actively looking to add this resource to their renewable energy mix....

As with any energy project, clean gas projects have some variability in project pricing. However, we maintain a positive outlook for renewable fuels and continue to take a disciplined approach to developing this asset class. While our RNG operations continue to rapidly grow, solar remains an important contributor to Ameresco's energy asset business. We were pleased to have passed the 100-megawatt milestone for operating solar assets during the quarter. We continue to aggressively leverage our existing footprint across North America to expand this business. Moving to our smart energy project business. At the end of the second quarter, our contracted backlog was up 16% year-over-year to $789 million. This growth was driven by strong performance in our U.S. regions, as well as great execution in our federal business. Our people continue to win and execute technically difficult projects.

These comprehensive projects comprise a greater percentage of our pipeline, and these projects not only save our customers money, but they also provide resiliency and security, along with measurable environmental benefits. Multiple factors are driving demand for energy and water solutions that include or add resiliency to new or existing projects. The Department of Defense supports, and I quote, "Pursuing energy security and energy resiliency for continuity of operations for a minimum of 14 days at military bases," unquote. In addition, many municipalities, universities, hospitals, and other institutional clients are investing in resiliency programs such as microgrids, CHP, and battery storage. These advanced technologies are becoming more common in the projects we are winning and executing, and of course, this trend plays very well into Ameresco's core technical competency.

One project which perfectly highlights this trend is our recently completed $91 million project at the Marine Corps Energy Savings Performance Contract installation at Parris Island. The system will ensure a reliable, secure energy supply to the base while reducing lifecycle operating costs and managing future commodity price volatility. The project combines distributed generation, battery storage, and secure microgrid controls. This gives the facility the ability to continue its operations, even in the event of a storm or other related loss of electricity from the local grid. The project will save $6.9 million in annual utility and operational costs, reduce utility energy demand by 75% and water consumption by 25%, and Ameresco will operate and maintain this project under a 22-year contract. Cost savings and the environmental benefits of renewable energy continue to be important considerations for our customers.

For example, our recent solar project at NASA's facility in Wallops Island, Virginia, will reduce the facility's carbon footprint by over 4,000 metric tons per year. A combination of our earlier efficiency project, additional infrastructure upgrades, and a new solar project will lower the energy spending by $3.6 million annually. In summary, the second quarter was a period of solid execution for Ameresco, setting the stage for healthy growth in the periods ahead. Before I turn the call over to Mark to review the financials, I would like to thank him for his tireless work as our interim CFO during our search process. Mark remains a key part of the Ameresco team as Vice President, Corporate Controller, and Chief Accounting Officer. I would also like to formally welcome our new Chief Financial Officer, Doran Hole.

Doran joined us from ReneSola, a global renewable energy company, where he most recently served as Chief Executive Officer, North America, and Group Vice President of Strategy. Previously, Doran has held many financial roles throughout his career and has a long history in the renewable energy industry. Doran would like to say a few words. Doran?

Doran Hole (SVP and CFO)

Thanks, George, and good morning, everyone. I just quickly want to say that I'm very happy to be joining the team here. Clean energy market is entering a new growth phase, and Ameresco is well positioned to capitalize on this because it has the right ambitions, and it has a platform that can execute with conviction. I really look forward to meeting you all in the near future.

George Sakellaris (Chairman, President, and CEO)

Thanks, Doran. Now Mark will review our second quarter financial results. Mark?

Mark Chiplock (VP of Corporate Controller and Chief Accounting Office)

Thank you, George, and good morning, everyone. I'm pleased to review the company's second quarter financial performance, which supports the expectations we had when providing full year 2019 guidance earlier this year. Please refer to our press release and supplemental slides for more complete financial information. All numbers relate to Q2, unless we state otherwise. Revenue was up slightly year-over-year, reflecting positive momentum in our energy asset business and integrated PV sales included in our other category.... We continued to see year-over-year growth in revenue and EBITDA being generated by our operating portfolio of energy assets. Recurring revenues represented approximately 21% of our total revenue, up 150 basis points from the same period last year. This growth helped to offset lower project revenue, which was primarily due to timing issues in our federal segment and in certain geographies.

Gross margin of 21.8% was similar to last year. Operating expenses were $30 million, 4% ahead of last year's level. As we stated at the end of last year, we will continue to invest in strategic technical resources throughout the country. These investments will ensure that we have the ability to implement increasingly complex projects, as well as to support future growth in our recurring revenue streams. Net income attributable to common shareholders of $9.2 million increased 6% from $8.7 million last year, while EPS of $0.19 was flat. Adjusted EBITDA significantly outpaced revenue growth, increasing 10% to $23.6 million. Our recurring revenue business accounted for 58% of this year's second quarter adjusted EBITDA and 65% year-to-date.

Visibility in our projects business remains strong, with awarded project backlog levels of approximately $1.2 billion at the end of the second quarter. We continue to backfill our contracted projects with new awards. Our contracted project backlog increased 16% to $789 million. Importantly, we are seeing an increase in gross margins embedded in our backlog as lower-margin contracts progress and are replaced with higher-margin contracts. We believe the increasing complexity of both government and institutional projects will continue to lead to not only larger, but higher-margin awards. Our 250 MW equivalent of operating assets and our O&M business provide us with multiyear visibility. At the end of Q2, these lines of business represented over $1.8 billion in contracted revenue, with a weighted average life of almost 15 years.

At the end of the second quarter, our energy asset pipeline of 258 MW equivalent was more than double the 114 MW in development at the same time last year. Solar assets comprise the majority of energy assets in development. Ameresco's liquidity remains strong, with ample cash and available credit to execute our asset development pipeline plans. During the quarter, we improved our senior credit facility and now have a larger and more flexible credit line to support our growth. Turning to outlook, we are reaffirming our 2019 full-year guidance, namely for revenue to be in the range of $845 million-$885 million, adjusted EBITDA of $95 million-$103 million, and EPS of $0.77-$0.85.

Now, I would like to turn the call back to George for closing comments.

George Sakellaris (Chairman, President, and CEO)

Before we move on to your questions, I would like to make a few closing comments. Ameresco has the technical know-how and has built a great corporate platform to take advantage of the expanding advanced technology market. In particular, the demand for solutions with added resiliency, including microgrids, battery storage, CHP, and other distributed energy resources, is rapidly growing. Projects incorporating these technologies tend to be larger and more profitable. These advanced technologies are just beginning to be rolled out. Continued cost declines and greater familiarity will increase their penetration. At the same time, we continue to execute on our long-term business model of growing recurring revenues. We are looking ahead to strong second half on a year-on-year revenue and earnings growth. The key first half metrics provide excellent visibility and support our long-term growth outlook.

Namely, contracted backlog increased 16% from year-ago levels, and energy assets in development more than doubled year-over-year. Now I will turn the call over to the operator for your questions. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, at this time, if you have a question, please press star then the one key on your touchtone telephone. That's star one to ask a question. If your question has been answered and you wish to remove yourself from the queue, you may do so by pressing the pound key. Our first question comes from the line of Chris Van Horn with B. Riley. Your line is open.

Chris Horn (Senior Equity Research Analyst)

Good morning. Thanks for taking my call, and congrats on the quarter.

Mark Chiplock (VP of Corporate Controller and Chief Accounting Office)

Thank you. Thanks, Chris.

Chris Horn (Senior Equity Research Analyst)

I was wondering if you could, you know, just to dig into the guidance a little bit, you know, some of the puts and takes of your revenue and Adjusted EBITDA range. Is it timing of projects? Is it dependent on some of the recurring mix? Just any sort of clarity there on the range.

Mark Chiplock (VP of Corporate Controller and Chief Accounting Office)

Yeah, I mean, you know, so we reaffirmed because we feel, you know, we feel pretty good about the full-year outlook. You know, coming into the year, we knew that, you know, a large portion was gonna be, back-end weighted, so second-half weighted. But, you know, we have really strong visibility. We expect about 80% of the revenues in the second half to come from contracted sources, with the rest coming out of our awarded backlog. So again, we've got pretty strong visibility, and we feel pretty good about, about both the revenue range. There were no real triggers to move anything on the, on the EBITDA. You know, we've come in kind of where we've expected in the first half, and, and so we feel pretty good about the EBITDA range as well.

Chris Horn (Senior Equity Research Analyst)

Okay, got it. Then on the recurring mix, I think you said it's around 24%. I'm wondering, you know, how that might look in the next 12-18 months or maybe even further out, if you can give some more visibility there?

Mark Chiplock (VP of Corporate Controller and Chief Accounting Office)

Yeah, I mean, you know, I think that, you know, as we continue to put more of the assets that are currently in the development pipeline into operations, you know, we could, we could see that, that percentage become a little higher. But, you know, we're also seeing some you know, pretty strong growth in the backlog and the size of the projects. And so, you know, again, I think it might be somewhat balanced. I think it'll depend on how quickly we move assets out of the development pipeline and into operations. You know, I think what we've said before is that the existing pipeline, we would put that into operations over the next 12-30 months.

And so, you know, I think the timing of that will somewhat dictate, you know, the growth in that, in that recurring number, so.

Chris Horn (Senior Equity Research Analyst)

Okay, got it. I'll jump back in the queue. Thank you so much.

Mark Chiplock (VP of Corporate Controller and Chief Accounting Office)

You got it. You're welcome.

Operator (participant)

Thank you. Our next question comes from the line of Noah, Noah Kaye with Oppenheimer. Your line is open.

Noah Kaye (Managing Director and Senior Analyst)

Thanks. Good morning. So you mentioned, I believe you placed 14 MW in service this quarter. Is the outlook still to place 50 MW-60 MW in service this year?

Mark Chiplock (VP of Corporate Controller and Chief Accounting Office)

Yes.

Noah Kaye (Managing Director and Senior Analyst)

Will that mostly be in the solar space? How should we think about that?

Mark Chiplock (VP of Corporate Controller and Chief Accounting Office)

Yes. Yeah, we feel pretty good about that target, Noah. And, yeah, that would all come from solar, so.

Noah Kaye (Managing Director and Senior Analyst)

Okay. Okay. And then, you know, you mentioned, you know, a very healthy development pipeline for RNG, and also that you were taking a disciplined approach to development. Can you expand on that a little bit, particularly in terms of, you know, how you're taking this disciplined approach? You know, certainly we're all seeing the RIN price fluctuations in the market. You know, how does Ameresco go about developing these projects, you know, to mitigate some of that risk?

George Sakellaris (Chairman, President, and CEO)

Basically, every time we develop projects, we look in the market and estimate, or sometimes we get quotes as to what the future prices might be, what the potential for hedging those particular prices. And then if they meet our hurdle rates of returns, then we will execute them. If not, we will push them aside. And the ones that we have in development right now, we are talking to various individuals to see how we can hedge some of that output. And the good thing that's happening about the green gas business, what I call, is that now many institutions, government entities and so on, they are interested, even some gas utility companies, interested in purchasing the green gas outputs. And that to us is very, very encouraging.

We are talking to some, actually, we have a couple that we are working with, with some long-term contracts in order to hedge that output.

Noah Kaye (Managing Director and Senior Analyst)

Okay, that's helpful. And then, you know, you talked about the mix improvement in the back half, partly based on higher project size and complexity in the contracted backlog. So, you know, just about how much uplifts, you know, are, or should we be contemplating sequentially on the gross margin line? That's part one of that, and then the other part of that is, does that carry forward into kind of some of the earlier stage projects you have in development or you're seeing quoting activity on?

Mark Chiplock (VP of Corporate Controller and Chief Accounting Office)

Yeah, I wouldn't expect a big uplift in margin in the second half. I think that, you know, I think we are seeing some positive trend in the awarded backlog with our margin as some of the larger projects, you know, the more complex projects start to come in. But, you know, we still have some large but somewhat lower margins, you know, kind of lower than our average margins progressing through the backlog and progressing through the contracted backlog. So that will be, you know, part of that second half mix that I think will help to kind of keep the gross margins balanced. So, yeah, I wouldn't really expect a significant uplift in the second half.

But again, as these projects progress through the backlog, and we start to, you know, convert some of the larger awarded projects into contracted, you know, then I think, you know, on a go-forward basis, we'd see some, you know, some gradual increasing in the margin.

Noah Kaye (Managing Director and Senior Analyst)

Right. That's really a 2020 and beyond story. So in other words, no, no real sequential change in gross margin here in the back half,

George Sakellaris (Chairman, President, and CEO)

No, because it's the pickup on the second half is driven primarily by project revenues.

Noah Kaye (Managing Director and Senior Analyst)

Yep.

George Sakellaris (Chairman, President, and CEO)

That's why we feel very good about the second half because of the 16% increase on the project backlog. The $789-

Noah Kaye (Managing Director and Senior Analyst)

Great. Thank you so much.

George Sakellaris (Chairman, President, and CEO)

$1 billion that we have on the contracted backlog now.

Noah Kaye (Managing Director and Senior Analyst)

Yep.

George Sakellaris (Chairman, President, and CEO)

That puts us in a very good position.

Noah Kaye (Managing Director and Senior Analyst)

Great. Good. Thanks very much for the call.

Mark Chiplock (VP of Corporate Controller and Chief Accounting Office)

Thanks, Noah.

Operator (participant)

Thank you. As a reminder, ladies and gentlemen, if you'd like to ask a question at this time, you may press star then the one key on your touchtone telephone. I'm showing no further questions at this time. I will now like to turn the call back over to CEO George Sakellaris.

George Sakellaris (Chairman, President, and CEO)

Thank you. Thank you all for participating on today's call. We look forward to speaking with you throughout the quarter. Again, thank you very much, and we'll talk to you soon.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you for, for participating. You may now disconnect. Everyone, have a wonderful day.