Ameresco, Inc. (AMRC) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Ameresco’s Incorporated 2016 Earnings Conference 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] As a reminder, this conference call is being recorded. I’d now like to hand the call over to your host Gary Dvorchak. Sir, you may begin.

Thank you, Eric, and good morning, everyone. Thank you for joining us for Ameresco’s first quarter 2016 earnings conference call. I am joined by George Sakellaris, Ameresco’s Chairman, President and Chief Executive Officer; and John Granara, the company’s Chief Financial Officer. On the call, management will review the operating and financial highlights of the first quarter of 2016, following the highlights; we will take questions from the audience. Before I turn the call over to George and John, I’d like to make a brief statement regarding forward-looking remarks. This call contains forward-looking information regarding future events and 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 it’s Annual Report on Form 10-K filed with the SEC on March 4, 2016, 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 the call. These non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles. A GAAP to non-GAAP reconciliation as well as an explanation behind the use of non-GAAP financial measures is available in our press release as well as our prepared remarks. I’ll now turn the call over to George Sakellaris. George?

Thank you, Gary, and good morning everyone. We are happy to report that the business momentum we built during 2015 continued into the first quarter, getting this year off to a strong start. Revenue was up 16%, gross margin expanded, and we kept operating expenses under tight control, resulting in a 64% improvement in adjusted EBITDA. We continued to improve our visibility, with strong new awards. The awarded backlog grew by 19%, and total backlog grew by over 11%. Our core line of business, projects, continues to perform exceptionally well, with revenue up 24%. Our key recurring revenue streams of operation and maintenance and energy sales from our assets grew 23% and 18%, respectively. Overall, we are pleased with our performance this quarter. We continue, however, to see a lag in our integrated PV sales, which were down 32%. That business had been selling mainly into oilfield microgrid applications, a market that is still under real pressure. So let’s review the operating highlights by line of business, starting with our core business of projects. Project revenue of $85 million was up 24%. The Federal group continued to drive results, and their project revenue up over 75%. Federal project growth reflects our high level of awards and contracts over the past couple of years. Also, our Federal implementation teams performed exceptionally well. In general, a mild winter this year enabled a pace of implementation that was faster than usual for the winter months. You will also be happy to learn that we are seeing improvement in Canada, which we believe is the result of actions taken last year. Canada project revenue was up 43% to over $12 million. More importantly, Canada stopped losing money, generating positive adjusted EBITDA. The new leadership team has already established momentum, with several projects getting underway and contributing to growth. The strong project revenue growth in Federal and Canada was partially offset by a decline in project revenue in the U.S., where we encountered some delays. As we look ahead in our project business, we are enthusiastic about our new award wins. We were awarded over $133 million in new projects, an amount 59% greater than the new awards we captured a year ago. Our awarded backlog is now over $1 billion, 19% higher than a year ago, and 8% higher than where we started the year. Part of that growth is due to the trend towards larger projects. For instance, we were awarded several school district projects in the $5 million to $10 million range-these are typically less than $5 million. Higher education projects are also getting larger, as many start to include central heat and power, which can double the size of the project. The Federal segment is seeing more RFPs from the military, which tend to be large anyway, but are getting even larger. They are now addressing resiliency and security in addition to energy efficiency solutions and renewable technologies. These special needs play to our strength. Our broad technical expertise makes us a leader in innovation within our industry. One example of this is the demonstration project we recently completed at the Portsmouth Naval Shipyard in Maine, which we announced this week. We installed a microgrid control system that integrated load-shedding software and battery storage with onsite cogeneration and backup generators. System tests proved the ability to maintain power at the shipyard in the event of grid outages. Reliable power, especially in emergency situations, is a key requirement in most military sites. We expect this innovation to be replicated at other facilities as well as in other markets to drive additional business for us. While we are proud of the pace of new award wins, the $1 billion number generally consists of larger awards, which we have found take longer to get to contract. For instance, the slower conversion rate this quarter was mainly due to delays in projects we are expecting from the General Services Administration under the National Deep Energy Retrofit program. In fact, after the end of the quarter, we announced that we signed a $25 million contract under this framework with the GSA for a project out west. There is another, even larger, GSA project, which has been delayed but we expect to sign soon. So we feel very comfortable in our ability to continue to convert awards into contracted backlog, and we expect our visibility to continue to improve during the year. Before I go on to our other lines of business, I want to discuss another project that highlights how we use innovation to drive our project business and add more value for customers. In Tucson, Arizona, we are working with the city on a very large street lighting LED replacement program. Tucson’s needs are unique and very delicate. They have a large number of observatories that are big contributors to the local economy. The project is designed to save money, and the city will ultimately save $180,000 per month, but light quality is equally critical. Our design for the project is utilizing advanced LEDs with Wi-Fi to reduce ambient light and enable individual control. There will be lower operating cost, better light quality and it will not cost them a penny, since the project will be funded through savings. As an industry leader, we continue to embrace advanced technology and innovative solutions to support our customers’ unique needs. Now, let’s move on to our lines of business that produce recurring and higher margin revenue, a critical element of our business model and business plan going forward. While we drove high growth in our core project business, we did not lose focus on continuing to build recurring revenue. In fact, these lines of business performed exceptionally well in the quarter. Operations and maintenance grew 23%, an impressive amount considering inherent stability of this revenue source. The incremental O&M revenue was contributed by the Federal segment, where O&M grew 31% year-over-year, and 14% sequentially. Meanwhile, energy sales grew 18% year-over-year and 10% sequentially, as the Fort Detrick solar installation plant was in operation for the full quarter. We are optimistic about the outlook of these two lines of business. We continue to see Federal RFPs, including renewable power as an increasingly important component of the project and agencies seeking to outsource more of the operation and maintenance. And in Massachusetts, after several months of delay, the solar net metering cap was lifted in April through legislation signed by the Governor. We have 20 megawatts of solar projects ready to move forward now that this issue is resolved and we expect them to move quickly due to the solar renewable energy credit sunset at year-end. For example, within days of the legislation, the Town of Easton, Mass was finally able to move forward with a 20-year purchase power agreement. Ameresco will design, build, own and operate 700 kW of roof-top solar systems at two of their local schools. Now, let me briefly address one of our weak spots, integrated PV sales. This is an attractive, higher margin business for us, but revenue has been under pressure due to the CapEx slowdown in oilfield services. We do believe in the long-term attractiveness of this business line, but we must confront the reality of current market conditions. We took action recently, reducing the workforce by 10%, which should result in $600,000 a year in savings. We are re-examining how we go to market, and working on strategies to drive more sales of complete systems. Many of our customers are selectively buying components from us, rather than complete kits, which is an obvious lost opportunity for revenue and margin. We are also seeking new applications outside of oilfield microgrid, such as remote cell towers, highway signs or irrigation pumps. Our goal is to stabilize this revenue stream this year while improving the profitability. Before I turn the call over to John, I want to mention our share repurchase program. Given our strong performance and confident outlook, we do not believe our share price fairly reflects the intrinsic value of the company. Our board approved an up-to-$10 million share repurchase program, effective immediately. We believe that occasional share repurchases are in effective and high return use of capital. Importantly, the repurchase program will not impact any of the other uses of cash we have planned such as CapEx or investments intended to fuel our continued growth. John will offer more details on the program. And now, let me turn the call over to him to provide more details about our financial results, guidance and share repurchase program.

Thanks George and good morning everyone. As we get started with the financials. Please note that unless otherwise stated all the amounts in reference related to Q1 2016 and the comparisons are for the year-over-year changes. Also keep this in mind, George reviewed our revenue performance by our lines of business, which represents the services provide regardless of geography or end market. I will revenue and adjusted EBITDA using our traditional segment reporting in order to keep the time series comparable for you. So, total revenues of $133.8 million were up 15.9%, revenue on federal Canada and small scale infrastructure were up and partially offset by the declines in U.S. regions and our all other segment. Moving down the P&L, gross margin was 20.7% up from 20.4%. Although our reported gross margin last year was 17% that amount reflected the impact of the SRO project in Canada. We are pleased to see margins improve both year-over-year and sequentially a result of our focused on improving profitability. Gross margin was up due to a better mix of business as we generated more higher margin recurring revenue. We also benefitted from 1.1 million of revenue related to an O&M contract amendment. That revenue had no associated cost since it was acceleration of differed revenue related to the change in contract terms. SG&A expenses before restructuring were $25.5 million or 19.1% of revenue, which was down a 180 basis points from 20.9% last year. Total operating expenses were $25.9 million or 19.4% revenue, when including the restructuring charges of 368,000 [indiscernible] includes $1 million write-down of amounts due from SunEdison. We have another $3 million of exposure to SunEdison, which we are still evaluating and assessing our ability to collect. Operating income was $1.8 million, ahead of our expectations. This compares to an operating loss of $4.4 million last year. Earnings per diluted share were $0.02 compared to a $0.09 loss. Non-GAAP earnings per share were $0.03, compared to $0.02 loss last year. As we often remind you, we are only happy with our growth if it is profitable growth. So generating better adjusted EBITDA is a critical metric for us. Adjusted EBITDA was $8.4 million, up 64%. Importantly, most of our segments grew their adjusted EBITDA meaningfully Federal was up 96% percent, small scale infrastructure was up 62%, and Canada excluding SRO swung by $814,000 to a positive 393,000. Only regions was down due to the revenue decline we noted before. It still generated a positive $394,000 in adjusted EBITDA versus a little over $2.1 million last year. However, keep in mind that we are investing meaningfully to grow in the new areas of the U.S., especially in the west and south west regions. Based on our pipeline we are confident in the ability to grow revenue and adjusted EBITDA in that segment this year. Finishing up below the operating income line, other expenses were $0.08 million. This includes $1.4 million expenses, partially by $0.08 of foreign exchange gain. Our effective tax rate in the quarter was 25%, which is in line with the guidance that was communicated to you in the last call for modeling purposes. Now let’s turn to our balance sheet, all the comparisons here are against figures as of year-end. The cash balance of $17.1 million was down $4.5 million. We did receive proceeds of $10 million from the closing of the Fort Detrick tax equity financing that was used for paying down our corporate revolver. Receivables decreased, which is a normal seasonal pattern. We reduced consolidated debt by $9.2 million of that net amount we used $11.3 million to fully pay of the corporate revolver. We have $94.6 million of non-recourse project debt, which is the majority of our total debt. Looking at CapEx in Q1, we invested $8.6million in renewable energy projects that we plan to own and operate. Total project assets were $247.8 million at the end of Q1. With our solid start to the year, we remain confident in the guidance we provided on the last call. For the full-year, we continue to expect revenues to be in the range of $645 million to $680 million. This outlook reflects growth in our core businesses coupled with solid growth in energy sales. We continue to be expect Canada to be at least flat. We know expect integrated-PV sales to be down $10 million for year, which is softer than our original expectation of flat revenue. So we are making up for that softness with the strength in other segments. We expect gross margin in the range of 19% to 20% and operating expenses to be around 15.5% to 16.5% revenue. We expect EPS in the range of $0.25 to $0.30 and adjusted EBTIDA to be in the range of $51 million to $57 million. For the second quarter of 2016, we expect revenues to be within the range of $145 million to $155 million and EPS in the range of $0.46. The guidance we have provided excludes the impact of any non-controlling interest activity and any additional charges related to the SunEdison bankruptcy. Our confidence in this outlook is driving our capital allocation positions as George mentioned earlier. Most importantly for the year, we continue to expect to invest $50 million to $75 million in capital expenditures with most of it related to the assets and development. We may also invest up to $10 million on open market repurchases of our common stock. We have full discretion at the timing and the amount of purchases and the repurchase period is open ended. We feel and our Board concurred that the current valuation doesn’t reflect either our performance or our prospects. We believe that share repurchases at current levels represent a good use of cash. So with that, we would now like to open the line for questions. I’ll turn the call back over to our coordinator Eric to run the Q&A session.

[Operator Instructions] Our first question comes from line of Noah Kaye from Oppenheimer. Your line is now open.

Thank you very much. Maybe we could just start with the solar pipeline; you mentioned some of the receivables exposure to SunEdison, you also mentioned net metering revisions in Massachusetts, kind of all those factors where maybe you could give us an update on where the pipeline stands at this point? What your expectations are now for the year in terms of installations and maybe to what extent you had any exposure in the pipeline from SunEdison, as well as whether or not there kind of headwinds ended up possibly benefitting your pipeline? Thanks.

Sure. Yeah. So I think we mentioned on the last call Noah, we were going to - we were projecting to install about20 megawatts. A George said in his prepared remarks, we have about another 20 that freed up now because of the net metering. That’ll being said, I will tell you looking at the installation and estimates for COD dates, a good portion of them are either going be in Q4 or Q1. So while we do have the ability and we are going to be constructing more than 20 we originally said throughout the year. The timing is still a little bit in question. So, I don’t think we’re going to be able to bring in the entire 40, but I do think we have the potential to beat the 20 that we originally said. So we’re going to hedge a little bit and say we’re probably going to be somewhere in the middle of 20 to 40 and probably project 30, that being said, I do want to mention, it’s not going to impact revenue meaningfully in 2016. It’s really going to be setting us up for 2017. In terms of the pipeline and the headwinds related to SunEdison, outside of the receivables that I’d mentioned, the $1 million reserve we took this quarter and the $3 million of additional exposure, I’m happy to report we don’t have much exposure outside of that. Certainly, we are seeing activity now and we’re hearing of potential opportunities for some other projects that might now become available, but we haven’t yet reflected that in our assets and development. And so we are actively presuming projects whether it’s projects that were from SunEdison originally or just new projects that are freeing up as a result of the net metering. So, overall we feel good about the prospects.

George you’d mentioned previously that it’s going to kind of be one the focus areas to really broaden the activity of solar prospecting outside of Massachusetts into your regions more broadly. How do you feel that’s going? What kind of - how would you gauge your sort of early successful in that effort?

I think we are getting some traction, especially at the New York, New Jersey and all the way down to Merlin. I think about I would say 25% what we see as the projects that we will built-in over the next 18 months or so will come from outside Massachusetts. And we’ve - it takes little time to develop the team, hire the right sales people outside the Massachusetts and that’s what we’ve been doing last six months. We train in substantial amount of sales people across the company, otherwise sales people have been selling performance contract and I think we are about 90% complete in training all the sales force across the company to sales solar projects and of course we will target the state that they have some kind of renewal energy credits.

Sure. Understood.

We will get some traction and we’re estimating that at least 25% will come from outside Massachusetts.

Okay, very helpful. Maybe turning to the STC business and then we could focus on federal. You mentioned larger federal RFPs out there, and you also mentioned a bit of delay. What are your expiations for how, you know possibly the timing of the election this year could impact the timing and signing of contracts? Could we see an acceleration ahead of that? Could we see delays? In your experience, what’s kind of been the past pattern?

The programs are well established right now and the executive is basically driving many of these fees and all the agencies they have issued them. But they do take as the projects get larger, this is where we are finding out, they do take longer time to move them forward. But on the other hand, they are moving forward maybe little bit slower pace, but the backlog now in – for example in the Federal group is so large. Ultimately it will not make that much difference, it will impact number from quarter-to-quarter, but for the year I think we’re going to be okay. And as far as the election concerns, recall the programs are well established in even or the tax extenders as they go for the solar up to 2020 and 2021. We think that the programs are well established since now that impacted very much. The other thing that makes me feel very good especially on the performance contract is both size of the [indiscernible] they love the fact that these programs are self funded, it doesn’t require a government to put out any money, any upfront capital cost. In addition to that and I think it’s probably more important than anything else is that somebody on the hookup performance, the savings would be there at the long period of time and that’s companies like ours. So I feel very good of where we are and I mean if the Democrat’s win I think we are in great shape, if the Republican win again we will be in pretty good shape.

I don’t think there is – it’s not so much concern that we have on kind of the popularity of the program. I think it’s really just sort of more on the timing, and maybe if it’s not election related, maybe a related question would be in the past, not necessarily with your company but with the ESPCs going back many years, there was always concerns about measurement and verification. You’ve obviously put in place stronger controls, but I think what we might benefit from understanding is, is it kind of the technology complexity of the projects or is it the ability to kind of measure and verify the projected savings from those projects that’s kind of causing the delay?

I think the complexity of the project. I think it is an issue, and the size of the projects, the larger the projects get and the more complex they get, they do more and more approvals and they do higher using some consultants, I would say consultants in order to due diligence and it takes a little bit longer time.

Okay.

But on the other hand, I think the backlog is large enough especially if we execute the way we have planned for this year. I think by the end of the year, we’ll be in very, very good shape especially in the federal.

Okay great. Well, that’s all I have. Thank you so much.

Thank you. Our next question comes from the line of John Quilty [ph] from [indiscernible]. Your line is now open.

Hi, good morning folks.

Good morning.

Hi, guys. So a couple of questions. First in Canada good to hear that we’re getting back towards the path on profitability there. George, talk to us about the types of business that you’re trying to get Canada has got, new federal government regime in place and obviously the energy market is in a downturn there. So talk to us about the new pipeline in Canada if you will and then I just got a couple of follow-ups.

Basically similar projects like we have now in the United States energy saving performance contract and the good thing with the new government out there is the fact that we’ve seen substantial activity and especially on the federal sector, but it’s spilled over in other parts of the country as well. So you saw the awards are up, the execute contracts are up in Canada, the revenues are up and the margins are getting to be nor as good as the United States, but at least successfully higher than what they were before and again it’s the leadership team that’s driving the business out there. We feel pretty good where we are right now. We’re hoping that what we have deserved with that SRO project, it’s sufficient and so far so good and we cross our finger that we will by August that we have it schedule that we will be completed in our way and I think the numbers will continue to improve up there.

Okay, thank you. Back to the Federal Government question that was brought up previously, obviously we’ve seen the Federal Government do lots of different slips back in sequestration we had three or four quarters of just nothing going on, the last three or four and better than that has been good. With the presidential slip, do you expect some pause or some slowing as a new administration whomever it is gets their own people at the EPA and other places? How do you think about that George?

It’s possible to see little bit of the pause, but where we are right now, in fact we feel pretty good it’s because of the backlog on the Federal Group right now and if the Federal backlog is over $0.5 million and we have substantial amount of contracts they will move forward. So it might be a delay especially when they change leadership in various departments and of course we will have to make contact of them and articulate the benefits of this particular product offering and I think we will be successful. But in the short-term I think we are going to embedded with shape, it will not aggressively impact us.

Okay. My final two questions. You mentioned you’re working through a potential I think you said lighting a street lighting dealer lighting deal. Talk about competitive dynamics obviously you see a lot of hardware makers from lighting side trying to get down into integration and installation, talk about the any changing landscape that you see in your verification type model, if at all?

That’s – from the verification model, I think that’s one of the issue why contracts are taken a little bit longer. It is getting more complex and the customer especially the federal sector, they want more communicate MAV protocols and what kind of equipment we install in order to accomplish that. So that’s little bit more complicated, but on the other hand I think it’s better for the client and ultimately better for us because you will not have any agreements as to what happen or how you contacted the MAV.

Okay. Two final things sorry I just said one. First on M&A.

No, keep going that’s okay.

The M&A environment you’re very smart buyer of assets with solar kind of falling apart in some respect with Sun Edison and other supply chains and related contractors related to them. Have you seen any types of assets that you can pick up cheap that you’d like to or we need to wait till stress really has some of the sector players and more in the two years?

[Indiscernible] opportunities like that and we’ll be very careful. But sometimes you have to allow the market to or the deals to workout themselves and the expectations from the other side to become more reasonable and I think there will be opportunities.

The only thing I would there John, for us, it really needs to provide incremental value and something beyond technical expertise that we may have today or maybe geographical reach or maybe even getting us into a new customer vertical. But most of our groups today as George alluded to we are training our higher sales force to sale solar, but most of our groups today do solar and can do solar. So it would really have to be strategic in nature but otherwise we have the capabilities internally of doing solar projects to both development, owning operating or operating maintaining. So it would need to bring something accretive to us.

Okay. And my last question. So the buyback on the Class A, talk about the puts and takes I mean you’re not a terribly liquid stock anyway so I understand the concept of being undervalued and all that, hence the by rating at least from us, but there is also a problem liquidity for intuitions and other folks to transacted. So talk about how you balance that out? Thanks guys.

I mean the float out there on the stack about $18 million shares, so figure even that $10 million buyback is not adverse the impact of that much. But on the other hand, the value of the stock were the board felt, it’s not the price that we’re right now. So we thought it would be a good use of our cash. And since we have the cash, it do not impact the growth of the company at all. We spend lot of time analyzing what their needs would be over the next 12 months and we’ll felt very comfortable. And the liquidity it is where it is, but we don’t like to see the price. I answered your question, John.

Thank you. [Operator Instructions] I’m showing no further questions at this time. I would now like to pass the call back to George Sakellaris for any closing remarks.

Thank you, Eric. To summarize, we are happy with our business movement and our outlook. We delivered double-digit revenue growth, margin expansion and 64 broke growth in adjusted EBITDA. Our visibility is great; we thought the backlog up 11%. With this performance and the bright prospects we believe, our stock is undervalued and look forward to initiating our share repurchase program. Finally, let me thank all of our talented and hardworking employees for the effort they put each and every day. They are really the basis of our success. I also want to thank our shareholders for their support. We are optimistic about 2016 and look forward to reporting progress to you on our Q2 call in early August. Again thank you and have a nice day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.