Ameresco, Inc. (AMRC) Q3 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to your Q3 2013 Ameresco Inc. Earnings Conference Call, hosted by George Sakellaris. My name is Benny, and I will be your event manager this morning. [Operator Instructions] And now, I would like to hand over to Suzanne. Please, go ahead.

Thank you. Thank you, Benny. And good morning, everyone. Thank you for joining us today for Ameresco's Third Quarter 2013 Earnings Conference Call. I'm joined today by George Sakellaris, Ameresco's Chairman, President and Chief Executive Officer; and Andrew Spence, the company's Chief Financial Officer. On today's call, management will share brief highlights from the prepared remarks we published this morning. Please note that the prepared remarks include information pertaining to the previously restated financial results for 2012. Following the brief highlights from the quarter, management will take questions from the audience. Before I turn the call over to George and Andrew, I would like to make a brief statement regarding forward-looking remarks. Today's call contains forward-looking information regarding future events and the future financial performance of the company. Ameresco cautions you that such statements are just predictions, and actual results may differ materially as a result of risks and uncertainties that pertain to our business. Ameresco refers you to the company's Press Release issued this morning and its Annual Report on Form 10-K, filed with the SEC on March 18, which discusses important factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. Ameresco assumes no obligation to revise any forward-looking statements made on today's call. In addition, the company 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, as well as our prepared remakes. I will now turn the call over to George Sakellaris. George?

Thank you, Suzanne. And good morning, everyone. Third quarter financial results were below our expectations. However, we did see some encouraging signs of improvement. Most importantly, we had a 15% increase in contracted backlog, a return to profitability, and a 9% revenue growth from our other offerings. The third quarter revenue shortfall was approximately $26 million, of which $19.5 million was related to the delayed sale of 5 renewable projects. We believe that we have taken the appropriate steps to get this back on track. We expect to be able to recognize this revenue in the fourth quarter. Approximately $7 million of the shortfall was related to customer delays in the central region and Canada. This revenue is now expected to be recognized in 2014. We were pleased with the year-over-year increase in contracted backlog, the first in 10 quarters, or since the fourth quarter of 2010. We expect this trend to continue into the fourth quarter, which would provide greater visibility and position us well for 2014. As we discussed last quarter, an improvement in contracted backlog during the second half of 2013 was necessary in order to achieve our guidance for 2013, as well as to prepare for return to growth in 2014. The weighted average conversion time for contracts signed in the third quarter was 18 months. This was at the high end of our expectations. And even though, a 15% increase in contracted backlog is a positive development, it was slightly below our expectations. We have identified a total of $50 million in revenue from customer delays that is no longer expected to be recognized in 2013; $7 million of that is associated with the revenue shortfall from the third quarter. The expected customer delays are in the central, Canada, eastern and southwest regions. And many of the projects that were delayed had actual closing dates scheduled, but were delayed by our customers for one reason or another. Based upon these customer delays, we now expect 2013 total revenue in the range of $570 million to $590 million and net income in the range of $11 million to $13 million. The high end of the range reflects the customer delays that we are aware of today. The low end of the range reflects the possibility of further customer delays. Our 2013 guidance is based upon the assumptions provided in our prepared remarks and press release. And now, I do like to turn the call over to Andrew, our Chief Financial Officer, who can provide more details about our financial results.

Thank you very much, George. And good morning, everyone. The financial highlights from the quarter are as follows. Energy efficiency revenue was flat in the third quarter and declined 23% year-to-date. We had anticipated a more substantial increase in the third quarter. However, year-over-year revenue increases in several segments, as expected, were offset by a revenue shortfall related to customer delays within the central and -- central region and Canada. Renewable energy revenue declined 5% in the third quarter and increased less than 1% year-to-date. The revenue shortfall from the delayed sale of 5 renewable energy projects that George mentioned earlier, was partially offset by better-than-expected increases from renewable energy projects in the Southwest region and from integrated-PV. Gross margin during the third quarter decreased from 21.2% to 18.6%. Year-to-date gross margin decreased from 20.1% to 18.8%. The primary driver for the decline in gross margin was in renewable energy, which decreased from 25.7% in 2012 to 18.4% in the third quarter. Year-to-date renewable energy gross margin decreased 21.8% in 2012 to 18.4%. The decrease in gross margin is primarily related to a larger mix of lower margin renewable energy projects. Energy efficiency gross margin was essentially flat. Operating expenses for the third quarter decreased 7% overall. Salary and benefit expenses decreased 17%. Lower salary and benefit expenses reflect better employee utilization rates and the effect of fine-tuning of the organization. Project development costs decreased from $4.3 million to $4 million. G&A expenses for the third quarter increased 10%. The higher G&A reflect an increase in professional fees, insurance and depreciation and amortization, which was partially offset by decreases in other expenses. We expect the full year effective tax rate to be approximately 23%. For cash flows, we generated $3.7 million of cash flow from operations during the third quarter of 2013 compared to $3.1 million last year. For investing activities, we invested $4.1 million in renewable energy project assets during the third quarter. And we amended our corporate credit facility to reduce the minimum trailing 4-quarter EBITDA requirement from $40 million to $30 million. And finally, moving on to backlog. We ended the second quarter with a contracted backlog of $324 million. During the third quarter, we converted approximately $160 million of awards to signed contracts, and revenue generated from backlog was approximately $115 million. We ended the third quarter with contracted backlog of $366 million, which, as George mentioned, was 15% -- with a 15% year-over-year increase. And with that, I will turn the discussion back to George.

Thank you, Andrew. Revenue from our all other offerings increased by 9%. We continue to expect this revenue to increase by more than 5% year-over-year in 2013. Revenue from small-scale infrastructure was flat. We expect the 4 plants that are currently in development to generate revenue in late 2013. However, due to electric utility interconnection delays for 3 of the LFG plants, we have lowered our revenue expectations slightly. We now expect small-scale infrastructure revenue to increase by more than 5% in 2013. Integrated-PV revenue increased by approximately 18%. We established a distribution center and added new salespeople to create an east coast presence. In addition, we have been successful in pursuing some larger-than-average projects. We now expect integrated-PV revenue to increase by more than 5% in 2013. Our revenue -- other revenue increased by approximately 8%. Revenue from operation and maintenance was stronger than expected due to additional projects where we have operation and maintenance staff on customer sites. Other revenues also benefit from acquisition of the -- of energy savings partners in the United Kingdom. We continue to expect revenue growth to increase by more than 5% in 2013. In closing, market conditions remain challenging. We plan on continuing to adapt to market conditions and focusing on converting a large and well-seasoned backlog and developing innovative customer solutions to drive Ameresco and the industry forward. We believe that our actions should translate into a stronger financial performance into the future. Further, we believe that the long-term fundamentals for energy efficiency remain strong, which was confirmed by the Navigant research report published in September. Based upon that report, we are well positioned in the marketplace at #2 with 13% market share, only 1 percentage point behind the current leader. We are determined to maintain our leadership status within our market, which we believe still has a lot of growth potential. Over the long term, our goal is to strengthen our leadership position and most importantly, expand our market share. We are currently working on strategic initiatives and plans for 2014 and beyond that support our goal. We will share this with you on our next call. And now, we do like to answer your questions. And I will turn the call back over to our coordinator, Benny.

[Operator Instructions] We have a question that comes from John Quealy from Canaccord.

Just a few questions here. First, on the backlog. Congratulations, for it moving upwards. But, when you compare it to 2010, it's still down pretty significantly. Can you talk qualitatively, George, about are we going to continue to grow that contracted backlog number? And is it going to be in smaller increments, or should we start to see that get chunkier awards in that backlog?

The awarded backlog, like we said before, continues to grow. But the most of the contracts had been in converting the awarded backlog to the executed contracts. And the executed contracts, you saw that we moved up by 15%. And we are anticipating that we will -- that increase will continue, the improvement will continue into the fourth quarter. And we think that by the end of the year, we should -- what we will call substantial increase in contracted backlog, that will position us very good for 2014.

Okay. And my second question, this has been an issue for a while, but visibility or prognostication of estimates continues to be poor. Can you talk about -- I realize you guys are on a tough business and projecting quarterly is incredibly difficult, in my opinion, for this type of business. But that being said, the visibility and the expectations are not aligned. So can you talk about how you're going to align them for us moving forward?

Yes. And that's why -- what we did before, we said we're spending much more time in drilling down to the project and see where each and every project stands and what the customers think. And when -- actually, that's why I mentioned it, we had actual dates given to us by the various customers when various contracts will be signed. But unfortunately, for one reason or another, and good reasons from the customer side, those dates moved. What we did -- to give you a better perspective, John -- what we did, we analyzed the conversion rates. Because you might say, managing this company for so long sometimes you get spoiled and you get lagging the past. And now our crystal ball has gotten to be foggier in the past. So what Suzanne did, we analyzed and looked at every unit. What has happened to the historical conversion rates? And what happens to -- where we are now? And that's why we said, the conversion time was 18 months on the average. The central region, for example, historically, we were 6 to 12 months. If you take the average of the contracts that we executed for that particular region in the last quarter, the average was -- straight average was 8 months. But when you get the weighted average, because the contracts are getting larger, it's 17 months. And that one really drifts us up. And that's why we forecasted for the region, the central region, was a substantial improvement, even though the contracts have been executed right now. But the weighted average was 17 months, where we will forecast in between 6 to 12, otherwise the 8 months. And on the average, we were correct, but on weighted average, we were wrong. The eastern region, generally, we had 12 to 19 months. All the contracts that were executed the last quarter they were [indiscernible] trying to move stuff around. On the federal market, again, we had 12 to 24 months. The average was 19 months. No major change there. The Northwest was 6 to 12, 13 -- anyway, the bottom line, what I'm trying to say, what we're going to do on the forecasting going forward, we will use these numbers. So you might say, we will become a little bit more conservative rather than using some of the historical data. And we will update the score based on whatever the latest number was. And I think the other thing that we were doing before, and that was based on our historical experience -- at the beginning of the year, we would say as much as $50 million, which is 10% to 20% of our revenue, would come from contractors' awards in categories. I think you will see us change that metric going forward. And by using this number, the actual numbers, until that market changed, we will do much better job going into the future.

And that last point, George, is my last question. In terms of, you talked about, sharing on the Q4 call with investors, some of your thoughts about whether it's new metrics or -- are you thinking about realignment of the business or restructuring or repositioning? What are some of the topics that we should think about as we get into the year-end call for Ameresco?

Yes. I think you will see some of that, but not major changes as far as the organizational structure. But probably more focused of how we integrated our offerings. And what kind or what product offerings we think will take us forward to accelerate our growth. And if you get the chance to read the Navigant report, which I suggest, I encourage people to take a good look at it because that's a very interesting competitive intelligence, you will see that the market is forecasted to grow at 8%. But we are hoping that we will come up with a plan that -- it will be better than that. And that's why I said we are looking to increasing our market share. So you will see more specific around our product offerings and how we are going to achieve higher market share in the future. I hope I answered your question.

Now we have another question. It comes from Craig Irwin from Wedbush.

So George, as one of the largest shareholders at Ameresco, I'm sure you're disappointed to be reducing guidance for this year. When many of us from the outside look at the business, we see opportunity to significantly improve [indiscernible] by reducing expenses of the company. Obviously, you've chosen not to do that, or at least not to do that up unto this point. Can you maybe discuss with us a little bit about why you've chosen not to do that over the last several quarters? What you're seeing in the business that keeps you optimistic that your existing capacity is needed to execute? And whether or not you see any opportunities to use your overall execution capacity in potentially different ways to serve other markets, potentially international or maybe demand response, in ways that they haven't been served already?

Very good question. I think we have what we have called in the past, rather than restructuring and reorganization, fine-tuning the organization. And that's why you have seen the operating expenditures, they have gone down by 7%. And we continue to do that. Basically, what we're trying to do in regions where they are not as busy, or you might say not a good utilization, then we reduce the labor force there. And we increase in other areas where they are busy. So we try to either relocate people or, basically, separate from those people that are not as busy. But there are many good things that are happening around the company. And that's why, being the largest stockholder, I look what value will we create in the future. And actually, we have used the opportunity because some other of our competitors, they did reduce more of their workforce than we did. Actually, we upgraded that, I would say, our workforce, by hiring some of that talent. And many good things have happened in and around the company. There are several projects that -- they are in the queue, that we're very optimistic. And you're right. We are refocusing some of the talent to take advantage of some of the other opportunities as they're presenting themselves. I think you will see us being more active, whether it was an integrated-PV or whether we built solar projects for others, or some of the renewable assets. That's why the 5 renewable assets that we had in our books in order to be sold for the last quarter, it did not happen in a timely fashion because some -- what you say, close in issues, they showed up close to the end. So -- and demand response, we are doing a little better. And you will see us maybe expanding more in the commercial and the industrial sector or doing more of the -- what I call the co-generation plants in the various industrial and commercial customers. So, we are thinking -- we are seeing opportunities in the marketplace that we think that are not making substantial profit will serve us well in the future. But look, when I got -- cut the operating expenditures and hope that you will have prosperity in the future, because the biggest barrier to this business, because we are in the service business, it's our people. It's the human resources. And one of the greatest assets that the company has is the great franchise around United States and Canada and the talent that we have in the organization. And that's why we have what I will call, the competitive advantage in the marketplace. It's our people. And as far as going into the international market, the U.K. acquisition that we made, I know it's a small one. It's complimentary to the supply management group. Because when we did it, because we wanted to have capability in serving some of our customers internationally. Actually, we have couple of successes already, that we expanded the contracts that we had with existing customers in the United States, now in the U.K. And hopefully, we can use that as a platform to offer our other offerings for the customers in the U.K., and hopefully, even beyond that. But we're going to focus in U.K. first because we feel comfortable with that environment. And the other thing -- otherwise, you get the chance to look -- to listen to some of our competitors' calls, and especially Johnson Controls, listening to their last call, what we got out of it is that their awards have not picked up yet where -- and their backlog has not picked, where ours has picked up. So you might say, we are maybe the leading indicator in the marketplace that things are beginning to turn. I don't know if I answered your -- it was a long-winded answer, Craig, but...

No, that was helpful. That was good and it helped me understand.

This industry can serve you very well. And I have them very, very well. And I tell you one of the biggest issues that they made when I set up this company back in 2000, the second time around, 32 people of my old company came over. And I didn't want to hire them, to be honest with you, but I did. And that was the best investment I made. Because I went to negative for about 6 months to 1 year. But -- and I think we are in the same situation now. If you ask me, "George, how you feel?" I mean, I'm extremely disappointed with this happening in the last couple of years because we sound like broken records missing on our numbers. And I'm not very happy about that at all. And I beat my head against the wall and all my managers. But at the end of the day, I came to the realization saying, "Look, maybe we're a little bit optimistic. I think we should use the guidelines, basically." That's why Suzanne and other people they calculated to see exactly what is the conversion time that we have and weigh that. I weighed it based on the project size rather than taking the straight average, and use that. Then we look around the company and see what's going on, and there are many good things going on around the company. And that's why, we feel -- I feel very good for we are.

Excellent. And my second question, George, is about your landfill gas facilities. So we see enthusiasm out there in the market for green yield coast, green reaps. We've seen a lot of private equity groups, investing groups, show interest in assets like this. You know, a couple transactions have occurred out there in the market. Can you maybe discuss with us what you would consider about your own assets if you were to value them? And whether or not, if an offer that was close to your asking price was made, if you would consider monetizing those assets?

Anytime, I always said, if you create great value, if the right price comes along, I will monetize them. But I got to have a place to put that money. Because if we monetize, it means it's going to take a good chunk of our EBITDA away from the company. And I have to replace it in order to continue to grow. But on the other hand, though, looking at some of the yield coast, et cetera, we are looking at quite a few things that I don't want to get ahead of ourselves and the board and some of our potential partners. We are looking at various things that we can, not only maximize the value of those assets, but create some solutions for some of the other markets that have not been addressed right now.

Okay. And is there anything in your existing landfill gas assets that you would point to for people out there to understand the value on those assets? Anything specific that you would highlight as unique versus other assets that might have come up in the market in the last year?

Well, I would say this much, that based on what I can see as far as the quality or the contraction of the quality and the availability of the plants, we probably have the highest availability in the marketplace. I mean, I think BMW is one of them, but we've been using over 98% availability for the last, what we have, 10 years in the books right now?

Yes.

And all the targets and dates are off on that particular asset. So we have assets, especially if you think it to be a yield coast, that maybe we can push them down like some other people have done. We have some options. It is always great to create some great assets and have some options. But we wanted to make sure we are in a point that we have significant amount of those assets, and we have some flexibility. And any time we move it away from the company, that we use those funds, make good investment, because we want to grow, rather than taking the money and then you pay it back as a dividend or buyback stock and stuff like that, which we wouldn't do. We want to grow.

[Operator Instructions] Okay. There is no question at the moment.

And since there are no more questions, and with that, I do like to thank you for joining us on today's call. And we will talk to you in the next conference call. Thank you very much, and have a good day.

Ladies and gentlemen, that concludes your call for today. You may now disconnect.