Ameresco, Inc. (AMRC) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Ameresco First Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to Suzanne Messere. Ma'am, you may begin.

Thank you, Shannon, and good morning, everyone. Thank you for joining us today for Ameresco's First Quarter 2014 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 first share brief highlights from the prepared remarks we've published this morning. Management will then 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 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 17, 2014, 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. GAAP to non-GAAP reconciliations, as well as explanations regarding management's use of non-GAAP financial measure, are available in our press release, as well as our prepared remarks. I will turn the call over to George Sakellaris. George?

Thank you, Suzanne, and good morning, everyone. We experienced some positives in the first quarter. Revenues were ahead of our expectations, and contracted backlog increased by 15% year-over-year. While the contracted backlog improvement was encouraging, we are looking for a sustained improvement over a longer period of time before we can indicate that market conditions are starting to improve. The pipeline of development opportunities and RFPs is improving in some segments, and overall proposal activity is healthy. While we maintain our focus on pipeline development, the conversion of awarded projects continues to be challenging. The weighted average conversion time of an awarded project to a signed contract increased to 15 months from 12 months in the fourth quarter. The average project size of $5 million, which is in line with historical average, is up from $3 million in the last quarter. As experienced in previous quarters, larger projects have been more challenging to convert as is indicated by the increase in both the conversion time and average project size. As you may know, a major ice storm impacted Savannah River in the first quarter, which had an adverse effect on our earnings. However, we do have a variable outcome from the storm this year. Working closely with our customer, local partners and the surrounding community, Savannah River was able to utilize nearly 30,000 tons of storm-damaged woody debris as renewable fuel. We believe that first quarter results have positioned us well for the full year. We remain on track to deliver 2014 financial results within our guidance. While 2014 guidance for revenues has not changed, we have updated our estimated tax rate for 2014 due to the investment tax credits related to the renewable energy plants that have been or are expected to be placed in operation in 2014. We now expect net income for 2014 to be in the range of $8 million to $14 million. 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. Andrew?

Thank you very much, George, and good morning. The financial highlights from the quarter are as follows. Revenues for the first quarter of 2014 were $101 million compared to $110 million in 2013, or a decrease of 9%. The year-over-year change in revenue was primarily due to an 18% decrease in project revenues. Revenues from all of the service offerings increased 6% in the first quarter to $47 million. We continue to expect revenues from all other service offerings to increase 6% in 2014. Revenue from small-scale infrastructure increased by 8% year-over-year. Two renewable energy plants were placed into operation during the first quarter. We placed another plant into operation in April, and the final plant is expected to go into operation in the second quarter. We continue to expect revenue for small-scale infrastructure to increase more than 20% in 2014. Integrated-PV revenue increased by 16% year-over-year; the increase is primarily due to demand for off-grid solutions from corporate customers. We continue to expect integrated-PV revenues to increase approximately 10% in 2014. O&M revenue decreased 5% year-over-year. The prior year included nonrecurring revenue associated with the replacement of certain equipment. Excluding the impact of the nonrecurring item last year, the year-over-year change would have been flat. We continue to expect 2014 O&M revenue to be consistent with 2013. Gross margin for the first quarter was 17.4% compared to 19.5% a year ago. The drivers were more weather-related -- the drivers were weather-related direct costs at Savannah River, an additional charge for the final settlement of the customer warranty issue discussed on the last call and an unfavorable mix of lower-margin projects. The additional direct cost related to the customer warranty in Savannah River was approximately $1.25 million. First quarter 2014 operating loss was $7 million compared to a loss of $2 million a year ago. The primary driver was lower gross profit. In addition, we invested more than $800,000 in expanding and augmenting our service offerings and incurred $700,000 in severance charges. First quarter 2014 adjusted EBITDA was a loss of $900,000. The first quarter 2014 net loss was $8 million compared to a net loss of $2 million a year ago. Other expenses net were $1.7 million in the quarter, consisting of approximately $1.2 million of interest expense, $200,000 of noncash deferred financing fees and a $300,000 foreign currency exchange loss. First quarter 2014 net loss per share was $0.18 compared to a loss of $0.04 in 2013. The first quarter effective tax rate for 2014 was 3%, which is also the rate we expect for the full year. We generated $2.4 million in cash from operating activities during the first quarter. Adjusted free cash flow was $5.6 million, which reflects $3.5 million in proceeds from federal ESPC projects. We invested $8.3 million in renewable energy projects that we will own and operate. And finally, we ended the first quarter with a fully contracted backlog of $395 million, which was an increase of 15% year-over-year. During the first quarter, we converted approximately $87 million of awards to signed contracts, and project revenues from backlog was approximately $53 million. And with that, I'll turn the discussion back to George.

Thank you, Andrew. We believe that we are well positioned to deliver 2014 financial results. Due to our solid commitment and strong belief in the industry's potential, we have continued to invest in and refine our value proposition. We believe that comprehensive solutions, in-house technical expertise and financing structured around energy savings are the key differentiators for a successful value proposition. As a result of our continued investment in defining our value proposition, we have been able to maintain the same percentage of revenues from public sector customers, even though revenues from energy efficiency projects has decreased. The examples include solar, LFG projects and waste to energy projects, as well as using our exchange point solutions that identified additional energy savings for an existing [indiscernible] customer. The examples demonstrate that we have been able to leverage sales from our existing customer base. We have also gained traction within our other service offerings. The percentage of revenues from other service offerings has increased from 18% in 2011 to 32% in 2013. In 2013, the revenue expansion from our other service offerings was primarily related to small-scale infrastructure, integrated-PV and operation and maintenance. We have also invested in offerings of -- for analytics and consulting. While analytics and consulting is small in comparison to some of our other offerings today, we are positioning ourselves for future growth over the long term. Our approach emphasizes the importance of subject matter expertise and relevant real-time data [ph] delivered through our Software-as-a-Service platforms. This platform is typically offered to multi-year contracts, help our customers understand and manage their utility bills, energy procurement and energy usage, while identifying opportunities for savings through energy efficiency projects that can meet the required returns on invested capital and reduce operating cost. Today's customers include Fortune 500 companies, federal and MUSH projects. As an example, some of our customers include Schwan Global Supply Chain, Marriott International, AutoZone in the U.S., CapGemini in the U.K. and Allegheny Technologies in the U.S. and U.K. as well. As for financing, we have a financing mechanism in place for energy efficiency projects in the public sector. However, our financing solutions need to be further enhanced, as we target additional vertical markets and nontraditional projects. We believe that our value proposition of our comprehensive service offerings and in-house technical expertise addresses the needs for our commercial and industrial customers as well. We are strategically targeting those customers and beginning to see some traction in our offerings. However, it will take time to expand these customer relationships in order to generate meaningful incremental project revenues. A noticeable change in diversifying our customer mix or the percentage of revenue from C&I customers is still a few years away. We expect that continuing to refine our value position will enable us both to strengthen our relationship within our core vertical markets and to expand into additional vertical markets while increasing market share. Ameresco provides far more services than a traditional ESCO. Our goal is to become the trusted sustainability partner for our customers by creating and implementing customer-valued energy-efficient solutions. We expect that achieving our goals will generate great value for our stakeholders in process. And now, we would like to answer your questions, and I will turn the call back over to our coordinator, Shannon.

[Operator Instructions] Our first question is from John Quealy of Canaccord Genuity.

So my question goes towards some of the new initiatives in terms of the analytics and services. George, can you help frame the opportunity on average in terms of ASP or timeframe or -- I know energy procurement has a different revenue profile than managing electric bills or gas bills or things like this. But just quantify what type of opportunity per customer site you're looking at.

We look at the number of customers, the traction that we have gotten so far. We have approximately, I would say, couple hundred clients, probably the mix is about half and half. Half of that will be on the adjacent customers that we've been working with, and the other half will be on the C&I market. In the range of the, I would say, of the contracts that we execute with them, that they might be anywhere, like I said, 3 years. They average between $50,000 to $1 million. So if you say, "George, what's the average?" I would say around a couple of hundred thousand dollars. But again, and I will say this much, too, that's why we've been working with this -- and that's we have done some of the acquisitions over the last 2 or 3 years. But we were not talking too much about it until we start putting all these groups together and start getting some traction on the other side. And generally, all of this software analytics business that we have, they are profitably, with the exception of the one that we -- I will say, still under research and development, Seldera, which we acquired recently, and that's why you see some of the expenditures, part of the $800,000 we talked about. And we will continue to invest in that software and technology because we think it has some competitive advantage in the marketplace. So when we look at this business, it's what I will call low-cost customer acquisition, and I'm looking for the long term and establishing the relationships, strengthening the relationship with the particular customers, know how they're using the energy, know where the potential might be on energy efficiency projects. And then if we can couple that with some kind of creative financing mechanism, hopefully, we will upscale those projects to what I'll call energy efficiency projects. And to give you a little bit perspective, unlike the asset planning tool that we had acquired, that very small acquisition I think we acquired with less than $150,000. But right now, it's -- and then, we added another acquisition to it. It's very profitable, it's contributing, and basically, we get to know how the particular customer identified what kind of maintenance or what I would call deferred maintenance he has in his particular facility. So we get to know his facility and then tell them what deferred maintenance they have, and hopefully from that, and we have several examples. Toronto Community Housing was such a project. We upscale to doing over $50 million contract. Vancouver Housing Project was a similar one. So and then, of course, on the analytics of the energy like exchange point, we have some bluechip customers that basically not only tell them how they're using energy, we go to the next stage and we have identified several projects that we have implemented with the customers. And the other thing about -- that I like about this particular analytics project is the fact that we get in one of their sites and then they like what we are doing and then we expand to other sites, and then try to -- look, at the end of the day, we want to develop some kind of a stickiness, what I call, with the particular customers. And I think this type of service is the -- it provides some stickiness.

And in terms of the software itself, the pricing of it, I mean, you know better than I do, it's really difficult to wrap somebody into a fast contract on energy efficiency software because the first year looks phenomenal and year 5, depending on the price of the software, they don't see the savings and turns into cost avoidance. Can you just talk, George, about how you're positioning it or how you plan to sort of take on that challenge that I mentioned?

Yes. Look -- and in many of them, you're right, that because they have a very weak buyback, you signed a 3-year -- generally, they have 3-year contracts, some with maybe 5-year contracts, they would try to get the more multi-year level as much as we can. But what we are finding out by that time -- again, this is young and we will find probably more as we go forward. Developing that customer relationship and get them to depend on the analytics, the information that we provide. So we will continue to have the renewal of these contracts. But remember, we want to leverage that contract to do the energy efficiency projects.

I got it. And then just my last question. In terms of Savannah, any lingering charges or underutilization as we go through Q2 on this?

No. Not lingering charges. We've put everything behind us. And again, that was a major, major outage and that's one in 100 years, the freeze-up that we had down there. And not only we had additional fuel costs associated with the plant because of the freeze-up, we had basically used oil in order to get by. But we had to invest quite a bit of dollars in order to fix things up that they froze. So that was a one-time hit. And we put everything behind us. The plant is back up and operating and as efficiently as it has been before.

[Operator Instructions] Our next question comes from Jim Giannakouros of Oppenheimer & Co. James Giannakouros - Oppenheimer & Co. Inc., Research Division: Just tacking on that last question. Could you describe the margin profile of your analytics and consulting offerings versus your current average?

I mean, substantially better than the margin of the energy efficiency projects. The consulting business, anywhere from 30% to 50%. And the same with the software, pretty much in the same range. James Giannakouros - Oppenheimer & Co. Inc., Research Division: Got it. And switching over to your core business obviously, demand continues to be subdued. But can you talk about what you're seeing in the current marketplace from a competitive standpoint? Is pricing -- are there any players that are getting more aggressive on pricing? Or if you could just kind of get into what are the factors that are driving who is actually winning the awards that are actually out there? Are you seeing any market share shifts, et cetera?

That's a good question. This is an area that I felt very good. And we're Ameresco, we are in a competitive environment. We continue to win our share of projects. And the landscape, as far as the competitors, has not changed very much. It's the same people that we were talking before. And about the market, the activities and that's what I said earlier, especially in some regions like Canada, which was -- got impacted the most, is coming back on the RFP and the activity level. And then the central, especially Illinois, Indiana and Ohio. They are coming back very quickly, we see quite a bit of activity. And then the Southwest, especially on some of the new markets that we have targeted, like California and Texas, we see very good activity. And I think our winning rate against some of my few nemesis there has improved lately. I don't know if I answered your questions, Jim. But I feel pretty good where we are in the environment. And like I said, the market, I think, is still there. And actually it's slowly and gradually, I would say, coming back, especially in some regions. But converting contracts from the award to the executed continues to maintain to be a challenge. For example, the first couple of months they were very, very challenging in executing contracts. And over 50% of the contracts were executed, they were in March -- executed in March. And we see that trend continue to get slightly better than what we had in the past.

I'm showing no further questions at this time, I would like to turn the conference back over to George Sakellaris for closing remarks.

And with that, I do like to thank you for joining us on our call today. And have a good day.

Oh, Q2.

I'm sorry. Might as well -- since we are on the call, and since we gave a little bit guidance on the last call, might as well give a guidance for the Q2. And right now, we're forecasting that our revenues for the second quarter will be in a range of $115 million to $125 million. And the bottom line, we will be -- maybe a slight loss or a breakeven proposition. And again, thank you very much, and have a good day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.