Ameresco, Inc. (AMRC) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Ameresco First Quarter 2015 Earnings Call. At this time all participants are in a listen-only mode, later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would like to introduce your host for today's conference, Ashley Patterson. Ms. Patterson, you may begin.

Thank you, Will, and good morning, everyone. Thank you for joining us today for Ameresco's first quarter 2015 earnings conference call. I am joined today by George Sakellaris, Ameresco's Chairman, President and Chief Executive Officer and John Granara, the Company's Chief Financial Officer. On today's call management will review the operating and financial highlights of the first quarter as well as assess our outlook for the balance of the year. Following the highlights we will take questions from the audience. Before I turn the call over to George and John, 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 06, 2015, 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 remarks. I will now turn the call over to George Sakellaris. George?

Thank you, Ashley and good morning, everyone. Before we start, I want to make some comments about our Chief Financial Officer transition. First, I want to thank Andrew Spence for his years of service to Ameresco and to wish him all the best in his retirement. Andrew joined us in 2002 a couple of years after our founding and was instrumental in our success. In addition to building our reporting and control structures, he was a key player in helping us raise the capital that we needed to grow over the years. In addition to his work, helping to raise nearly $2 billion in project financing, he negotiated our operating facilities and of course was critical to our successful IPO. He has a great track record and should be proud when he looks back on his years with Ameresco. Our finance function will remain in good hands with the promotion of John Granara to Chief Financial Officer, which became official on May 01. John joined us a year and a half ago as Chief Accounting Officer and has been making valuable contribution. John has led the implementation of enhancements to our reporting functions that build upon all this with work which are now providing us with even deeper analytic insights. John has extensive experience with public companies and in the Clean Tech sector and we feel he is the right person to succeed Andrew as Chief Financial Officer. John will be taking over the financial commentary on the call and you will hear from him shortly. Now on to Q1 results. The results we are reporting today demonstrate that 2015 is off to a strong start. Our plans to restore revenue growth and improve profitability is now firmly in place. The various restructuring actions and efficiency improvements we undertook in 2014 are starting to bear fruit. Revenue growth was 15% driven by resurgence in the federal sector, strong performance in several U.S. regions and excellent project implementation. Gross margin, would have exceeded our corporate target of 20% after removing the effect of challenges in one Canadian project that I will discuss shortly. Positive adjusted EBITDA of $2 million compares favorably to an adjusted EBITDA loss last year. Finally, we grew our contracted backlog and awarded projects sequentially which improves the visibility of 2015 guidance. Further, we also increased our assets in development by $8 [ph] million year-over-year to $148 million. Looking across our business segments, strength in the federal sector was the highlight of the quarter. Federal provided more than 20% of our revenues and about 30% of our contracted backlog. As our revenue of approximately $24 million was up 93% and adjusted EBITDA of $3.6 million was an important contributor to our first quarter performance. We are seeing strength in the federal for a couple of reasons. Furthermore, is better execution in indentifying and winning project opportunities. Beginning in 2012 we reasserted our internal focus to address federal opportunities with innovative and integrated solutions to enhance our competitive position. We also diversified our federal operations beyond traditional energy savings performance contracts. We are now addressing contracting opportunities for our operations in maintenance, design built projects, and power purchase agreements. The improvement we can see is a result of our enhanced internal procedures and marketing approach. The work we started a couple of years ago is gaining traction now a reflection of the 18 to 24-month cycle that is no more for federal procurements. The second reason for strength in the federal sector is that the administration continues to make energy efficiency and renewable energy a high priority for federal agencies. These were formalized with the President's performance contracting challenge which began in 2011. It requires energy plan term [ph] into $4 billion in energy performance contracts through the end of 2016. Then this March the President issued an Executive Order which qualifies a set of long term sustainability requirements for federal energies for the next 10 years. We believe that this order will help provide continuity to Federal ESPC utilization beyond 2016 and should increase opportunities for marketing our renewable energy capabilities. Combined with a persistent deferral maintenance that can be addressed by ESPCs we expect the order to be a positive tailwind for our federal business for the foreseeable future. Let me highlight one federal sector win that can give you a flavor of our success here. You may have seen the large department of interior headquarter project we announced a couple of weeks ago. That ESPC project which encompasses energy and water savings is expected to generate $77 million in revenues to us over its 20-year term. We placed $26 million into contracted backlog for the two-year implementation phase. The balance is recurring revenue from ongoing energy management services. While we are proud of our results, we are mindful that there is always room for improvement. When we look at all of the business units and segments that we track internally, a few still have gross margins below our coverage goals and a couple reported negative adjusted EBITDA for the quarter. The fact that we have opportunities to perform better leaves us optimistic about the upside we can deliver through our stockholders in the future. Our goal for these units and segments is to optimize their gross margins and ensure that all are cash flow contributors. Another important initiative for us is to further develop our recurring revenue streams. We are working to identify ongoing O&M opportunities on more value projects. In fact we were awarded two such new contracts this quarter. O&M was a good contributor this quarter with profitability above our corporate average. Looking at our O&M contract portfolio, extending out for the next 18 years we have visibility on approximately $700 million of revenue. On top of O&M we are aggressively building our renewable energy portfolio. We believe this business should continue to grow in the years ahead, especially for solar power and distributed generation due to favorable market conditions. The cost of PV hardware [ph] continues to fall supporting good internal rates of returns and the cost of financing remains exceptionally low. We would question the results that we must navigate certain headwinds. For instance in 2016 the full 30% section 48 investment tax credits of solar will expire. Despite that, we believe the outlook is bright for solar and distributed generation. As a result of our strategic decision to own and operate certain assets, last quarter we began to separate report our assets in development. We have more than $200 million we generate in assets on our balance sheet and another $148 million under development. We placed 2.4 MW of solar projects in service during the quarter. A great example of our efforts in solar is a large scale renewable energy plant we are building at Fort Detrick in Maryland. Ameresco will build, own, operate and maintain this solar facility. Fort Detrick will purchase the electricity for Ameresco with a 25-year purchase power agreement. This 18.6 MW project broke ground on April 1, and is expected to go into operation in March of 2016. Another great example is our Massachusetts Department of Transportation Solar Project. Ameresco was selected by Massachusetts Department of Transportation to design, finance, install, own and operate 5.5 MW of solar arrays across 10 sites along three major highways, including the Mass Turnpike. The solar arrays are now in process of being installed on otherwise underutilized land. It will provide both, clean energy and cost savings to the conveyor [ph]. Our renewable energy portfolio revenues were up 16% and made a meaningful contribution to adjusted EBITDA. Before I turn the call over to John for financial details, let me circle back to my earlier comments on our Canada segment. As we discussed last quarter, we have struggled there due to one difficult project. We will lose money on it as we approach completion this year and we fully reserved for the loss this quarter. We have identified the business and leadership issues that caused the problem and we do not expect a repeat of the mistake we made. Our results still met our expectation despite the challenges in Canada. But as I mentioned a better run rate analysis of our business is to remove the effects of this one project. Absent that effect we will have achieved gross margin of over 20% and generated $5 million of adjusted EBITDA. Based on our solid first quarter results we are reaffirming our guidance for 2015. Now I will turn the call over to John to provide more details about our financial results and guidance. John?

Thank you George, and good morning everyone. As we get started with the financials, please note that unless otherwise stated all the amounts I referenced relate to Q1 2015 and the comparisons for the year-over-year changes. Starting with the P&L, total revenues of $115 million were up 15% driven by 28% increase in project revenues. Revenues from all other service offerings were essentially flat. As George highlighted, federal revenues of $24.1 million nearly doubled and were a key element of growth. Revenues from U.S. regions and small-scale infrastructure also grew with both up around 15%. We grew total revenues despite a 33% decline in revenues from Canada. I should note that we do have some foreign-exchange exposure related to our Canada and U.K. operations and fluctuations in the value of the U.S. dollar can impact our revenue on a constant currency basis revenues would have grown approximately 17%. As George mentioned, an important initiative in our communications with investors is to better highlight our growing recurring revenue streams, principally our O&M and energy revenues. Our O&M revenue this quarter was $13.5 million, up slightly. Revenues from our operating assets, which mainly come from our LFG and solar PV projects were $12.4 million, up 16%. Moving on to gross margin and operating expenses. Gross margin for the first quarter was 17%, down slightly from last year. As George mentioned, we did absorb a significant loss in one Canadian project. Removing that effect, our gross margin would have been over 20%, which is more in line with our expectations and indicates that we continue to achieve our runway profitability objectives. Note that we have restructured and refocused our Canadian operations and if we remove the loss associated with that one project the rest of the Canadian business is expected to return to profitability this year. SG&A expenses were $24 million below both the year ago quarter and Q4 of 2014. The sequential improvement reflects our continued expense discipline as well as seeing the benefits of the restructuring activity done in 2014. Operating income was a loss of $4.4 million in line with our expectations and with normal seasonality. Net loss was $4.2 million or 9% per diluted share. Net loss and loss per share were half of what they were last year. If we remove the effects of the loss in Canada, net income and EPS would have been approximately breakeven. Adjusted EBITDA and non-GAAP measures, that we believe to be reflective of our economical performance was a positive $1.8 million or $0.04 per share. This compares to an adjusted EBITDA loss of $918,000 removing the Canada effect our adjusted EBITDA was a healthy $5 million. Below the operating income line other expenses were $2.7 million. This includes approximately $1.3 million or $0.03 per diluted share of foreign-exchange loss primarily relates to the strengthening U.S. dollar. Before I turn to the balance sheet I do want to touch upon our effective tax rate which was 41% in the quarter. As a result of the losses in Canada we are planning to record a non-cash tax valuation allowance in 2015. Excluding the impact of the valuation allowance our estimated effective tax rate for the year would have been close to the 20%. Having said that even with this valuation allowance we still expect our effective tax rate for the year to be closer to 25% and this is because we should capture solar related ITC credits on three projects that we expect to complete this year. Turning to the balance sheet, as expected some of our key metrics were impacted by the seasonal decline in activity in Q1. Cash was down $5.3 million since December 31, and while DSO was up sequentially it was well lower than Q1 of 2014. Total debt declined to $100.8 million and is down from $102 million on December 31. If we remove project debt, which is nonrecourse to us, corporate debt was $25.5 million, down from $29 million at the end of last quarter. Looking at CapEx we invested $5.9 million of renewable energy projects that we plan to own and operate. For the year we continue to expect CapEx to be $75 million to $90 million with most of it related to the assets in development. During the quarter we executed a sale leaseback arrangement with a commercial bank that will allow us to finance certain solar assets. Under the arrangement we will sell the completed systems to a tax equity investor and then we will lease back the systems. During the quarter we received $7.6 million of proceeds related to the first two projects and we realized a $1 million cash gain that will be differed for book purposes and recognized over the life of the assets. In addition we recorded a capital lease liability of $3.5 million related to these projects. This financing arrangement was an important step to support our long-term strategy to grow our renewable energy portfolio by reducing our financing burdens. Specifically this deal allows us to finance projects with little or no capital by monetizing the ITC. Meanwhile we are still able to retain the economic benefits related to ownership, which includes the sale of the solar renewable energy system. Looking at backlog and visibility, we started the year with $386 million in fully contracted backlog and ended the quarter with $387 million. During the quarter $68 million was converted to revenue while we added $70 million from project awards to contracted backlog. We ended the quarter with awarded backlog of $168 million. Newly awarded projects in the quarter were $90 million. With our strong start to the year we remain confident in the guidance we provided on the last call. For the year we continue to expect revenues to be in the range of $610 million to $640 million. We are expecting double-digit revenue growth from both our federal and U.S. region business segments, which is being partially offset by a decrease in Canada. Of the $610 million to $640 million of expected revenues we now believe $350 million will come from contracted backlog based on contracts signed in the quarter. This represents improved visibility when you compare it to our prior estimate of $310 million. We expect $50 million to $90 million of revenue to come from awarded projects and pipeline. The remaining revenue will come from energy sales, O&M and other revenues. We anticipate gross margin to be between 19% and 20% and operating expenses to be around 16% to 17% of revenue. As I mentioned earlier, although our effective tax rate was 41% in Q1 we anticipate the rate for the full year to be around 25%. This all should lead to EPS in the range of $0.16 to $0.24 and adjusted EBITDA in the range of $43 million to $48 million. Finally related to our outlook for the second quarter, we expect revenues to be within the range of $139 million to $145 million and EPS around breakeven. This guidance assumes that our effective tax rate remains at 41% in Q2. As I noted, while we expect our effective tax rate for the year to end up around 25% the timing of the transactions that would affect that rate is still uncertain at this time. With that, we would now like to open the line for questions, so I'll turn the call back over to our coordinator Will, to run the Q&A session.

Thank you. [Operator Instructions] And our first question comes from the line of Noah Kaye from Northland Capital Markets. Your line is now open. Please proceed with your question.

Thank you. Good morning George and the team. Congratulations John on your new role and nice job in the quarter.

Great, thanks Noah.

Hello, good morning and thank you.

Let's start with the federal growth opportunities since you spent some time on that. I understand that the DOE $55 billion authorization IDIQ opportunity should get pretty soon, I believe the deadline has been extended out to mid-May. Can you give us an idea of how you're thinking about that specific opportunity and how that feeds into your commentary on the federal tailwinds?

Yes, well as the -- right now that we are going through and we have to submit along with everybody else. And as you might recall, right now there are 16 energy services companies that they qualified for that opportunity. And the new one at least stays, but they will only choose 10 companies and two of the large companies and two what I would say small business and minority owned business. And we feel very good about it because of our track records in the federal sector. So I think that we will be one of the companies that would be selected and I think in the long-term it's going to give us a great, great opportunity and based on the qualification that we have in past we have done very, very well.

Just to follow-up on that. It seems like as if - I am sorry, go ahead George.

And the other thing that I would say you know, because that the amount is so large we will not have a contract that still initially that we did have in the past, so the opportunity will be much, much larger than it has been in the past.

Right and it seems like there's a preference with this RFP to be able to bring both energy efficiency and renewable energy competencies to the table which you know, you obviously significantly developed?

Exactly and that was our strategy and next visit you bring that up one of the comment that we get back from the Federal Government, they said you guys are the only, ESCO [ph] company that their board, they are offering to do all the renewables and it just helped us in the last couple of years winning some pretty good projects like the Fort Detrick project and a couple other ones and the biomass down at Savannah River and where we are adding a second phase to it right now another biomass heating plant. So it seems to be working. The strategy seems to be working and if you look at who we are, we are the comprehensive development energy engineering company and financing. So it's of course our business will continue to be working.

Okay, great. And to move to the solar growth plan, I believe you stated last quarter you thought you would put about 20 MW or so projects into operation this year. I see you reiterated in your CapEx expectations related to assets and developments, so you still think that 20 MW figure sounds about right and how would you characterize the growth of your solar pipeline for next year at this point?

The growth has been very, very good in the pipeline and especially for the next year. As far as where we will reach to the 20 or it would be 15 or 20 or 25 MW this year, but I will tell you this much that we will be more than 20 projects that they are in construction and hopefully the better part of them will reach commercial operation by the end of the year.

Yes, Noah, this is John. So as we said we did place 2.4 MW into service this quarter. What we didn't say, but maybe we'll provide a little bit more color for you is that we actually added 6 MW to our assets and development pipeline during the quarter. So we were able to backfill the pipeline nicely this quarter.

That's only for and plus the 18.5 MW what didn’t refill.

Well, no but yes, but that was already in our number.

So I think you had disclosed a pipeline, total pipeline of remind me last quarter was what 75 to 80 MW range something like that, so you've incrementally added 6 MW to that since then or?

Well, as part of that 80 we added 6 of it to our assets in development. So we secured and award, we secured the rights to develop those projects.

Okay, excellent. So where would you put the total pipeline at versus the 80 this quarter versus last quarter or about the same?

Yes, I'd say it's about the same. We're continually backfilling with the new awards and we are continuing to b.i.d. on new opportunities, so the proposal activity is pretty healthy in the solar world right now.

Okay, thanks so much. I'll jump back in queue.

Thank you. And our next question comes from the line of Jim Giannakouros from Oppenheimer. Your line is now open.

Good morning, guys.

Good morning Jim.

Good morning Jim.

George, you mentioned and I apologize if I missed it. You mentioned, I believe you mentioned you have line of sight to $700 million in revenue. Can you break that down in what comes from backlog and other areas and was that mentioned to the 2016 figure?

The $700 million comes from contracts that we have in place right now for the operation and maintenance and that's over 18 years. And if you look at the average life we have an average life of those contracts of about 12 to 13 years there about. So otherwise some of them there might be three to five years and some that go out with this 20 to 25 years. And you know couple of the big ones that we have they go out for 20 years.

Understood, okay. And given the successes that you have in federal I guess it seems like there is runway there. You mentioned that the 4 billion and in the SPCs through 2016 was, is basically being hoped for or being imparted on the federal agency? Can you just update us specifically on is that tracking on pace, do you envision an acceleration in activity over the coming quarters to meet that goal and which agency specifically you look to be the most active there?

Yes, and so far this year it is about $213 million has been awarded associated with that particular order. We see an acceleration on the federal market across the board and I think it has to do primarily because right now they have some kind of a measuring stick that the Whitehouse is using that all agencies they have to report monthly what activities are they actually doing.

Okay. And then…

And as far as which agencies, the one that's the slowest is probably the Air Force and the Navy, but just about every other agency is moving ahead I will say very aggressively, especially the GSA and the Bureau of Prisons, the Army, National Guard. So it's across the board and I think even the Navy and the Air Force they have begun moving.

Got it. Thank you, and forgive me if you did get into the granular points, but as far as the costs, the cost inflation or the execution issues that you had in Canada, you said that there was one difficult project there, what were the issues that drove the cost up?

It was a large project and it was a $100 million project and a retrofit in what I would say like we do over here, high property, the similar properties have been in Canada and the people that were there, I would think they did announce preliminary engineering and the contracts that they signed they do not protect us adequately and that's why we have made some changes in the leadership up there and change in the procedures.

Okay and just on that, and again, John opened up with some comments on the Canadian business if I understand it correctly that excluding this one project loss, I believe John you said that the rest of the Canadian business returns to probably this year, did I hear that right that the rest of the Canadian business still was running at a loss or…

Right, yes so we expect excluding this project that Canada will return to profitability, breakeven to profitable this year. The rest of the Canadian business was not profitable in Q1 as they still incurred a small loss, but as we look forward to the year and we look at their pipeline of opportunities and new projects that we expect we are expecting them to be profitable for the year the rest of the business.

Okay, thanks that's all I had.

Thank you.

Thank you. And our next question comes from the line of Chip Moore from Canaccord. Your line is now open.

Good morning, thanks. Just wanted to follow up on the pickup in federal activity so that the cadence of how that played out in the quarter, maybe you can talk about?

For going forward or over the last quarter?

No, which you saw this quarter when you saw things pickup specifically was that start of the year or how did that play out?

We started seeing the pickup actually last year by the amount of awards words that we started winning, but and that's why we placed several projects in construction and good sized projects and we were able to execute on them very well on the implementation. And I think what you saw this quarter is not only revenues, I will say they have accelerated some of the construction for the next quarter from the federal group. But although all for the year ago, we are forecasting very, very good growth in that particular market.

Okay, that's fair and obviously still early, but when you think about the next election cycle and any impact there on the federal side how did, what are your early thoughts?

You know because the federal government they have to do these kinds of projects in order to improve the infrastructure and they don't have the money to actually implement the projects using their own funds. You know, remember these projects are budget neutral. So we think we will continue and some of the, what I would say, major candidates that stand for President right now, I know they feel very strongly these kind of an offering, either side of the aisle. So I feel pretty good with the federal market. And especially with what President Obama did having this 10-year plan is the agency is beginning to move and the concept gets more and more traction and I think we are beginning to see those results that the energy feel more comfortable executing these kind of contracts and they are getting more familiar with them and they feel better about it and I think we are beginning to see the results. We anticipate that for the next few years the federal government is going to become a major driver of our business.

Okay, sounds great, that's helpful and then lastly on the renewable energy side, maybe just talk a little bit about competitive environment what you're seeing out there, I think you talked about 6 MW added especially this quarter, what are you seeing competitively?

I would say it is pretty tough on the solar market where we get the advantage is where we have the relationships and that's why I keep saying that actually we have a great franchise across the country and because many of the discussions is that we are winning projects with existing clients that we may have and we have done other services. And even though price counts a lot in these particular projects you will find that when they do the regulation other capabilities counts as well and the services are being dropped off and so on. And having 72 of this across United States and Canada it is helping us because they know we will be able to execute. Sometimes we lose projects, but many of them don’t happen and well at least with us each and every project we have done we have been able to build.

Okay, thanks, nice work.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to George Sakellaris for closing remarks.

Thank you, Will. Let me close the call by iterating that we got 2015 off to a good start with solid results, employee's notable improvements across most of our business units. Results were satisfactory despite a tough situation in one project in Canada. We are driving a solid recovery in our federal sector business. We are executing across most U.S. regions and continue to build a portfolio of renewable energy producing assets. We remain optimistic about the potential for additional operating improvements in the quarters ahead. I also want to mention two investor events coming up this month. Next week, on May 12, we will be hosting one-on-one meetings at the Deutsche Bank Clean Tech Conference in New York. The following day, we will be presenting and hosting one-on-meetings at the Oppenheimer Industrial Growth Conference also in New York. We invite any of you attending either conference to schedule a meeting with us through your respective sales person [indiscernible]. Thank you all again and this concludes the call and you may now disconnect and also please have a good day.