Good day, ladies and gentlemen and welcome to the Q2 2017 Ameresco Inc., 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 is being recorded. I would like to introduce your host for today's conference, Gary Dvorchak. You may begin.

Thank you, Glenda, and good morning, everyone. We appreciate you joining us for Ameresco's second quarter 2017 earnings conference call. On today’s call are George Sakellaris, Ameresco's Chairman, President, and Chief Executive Officer; and John Granara, the company's Chief Financial Officer. George and John will review the operating and financial highlights of the quarter then we will take questions. Starting with this call we have a deck with supplemental financial information, you can download the slides from the Investor Relations section of our website. Before I turn the call over to George, I would like to make a brief statement regarding forward-looking remarks. The call contains forward looking information regarding future events and the future financial performance of the company. We caution you that such statements are just predictions actual results may differ materially as a result of risks and uncertainties that pertain in our business. We refer you to the company's press release issued this morning and our SEC filings. These documents discuss important factors that could cause actual results to differ materially from those contained in the company's projections are forward-looking statements. We assume no obligation to revise any forward-looking statements made on today's call. In addition, we will be referring to non-GAAP financial measures during 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, any prepared remarks and in the Appendix of the slides. I will now turn the call over to George Sakellaris. George?

Thank you, Gary, and good morning, everyone. We had a great quarter, operating income was up 86%, net income more than doubled, and adjusted EBITDA increased 17%. The solid results keeps us on track to achieve double-digit profit growth this year. John will offer more color on the financial results shortly. We believe that our visibility continues to be under appreciated. We would like to emphasize a significance of this key element of our business module. Backlog in our core project business grew 6%, contracted backlog was up 45% and remains well over $0.5 billion, our highest level since 2010. Furthermore, the backlog visibility is far better because awarded is now double the size at over $1 billion. This means we have great visibility for two to four years of revenue if we maintain our historical conversion rates. The visibility in Ameresco’s model was beyond project backlog, however, we have over $800 million of future operational maintenance revenue that is under long-term contract. Also, 175 megawatts of energy producing assets that are selling under long-term purchase power agreements, and we have another 95 megawatts in development. Furthermore, repeat project business is more important to us with each passing quarter. We see existing customers choosing Ameresco again and again for new efficiency projects. A great example of this is our work with GSA National Deep Energy Retrofit program. Our federal group has now been selected for its 5th award in this program. GSA recently selected Ameresco to retrofit various federal buildings in the so-called Region 4, which encompasses Georgia, South Carolina, and Tennessee. We are currently in the design phase of this new project. Another example of repeat federal business is the Bureau of Prisons Award in Illinois. The deal follows on similar work we won at Butner, North Carolina. The…

Thank you, George, and good morning, everyone. Our press release and supplemental slides contain all the figures and comparisons you need. So I am not going to repeat all the numbers. Instead, we are going to focus on the analysis of the factors that influenced the results. Keep in mind that we are referring to Q2 figures unless I say otherwise, and all comparisons are year-over-year. The growth and revenue was driven by favourable timing in federal projects several of which are progressing ahead of schedule. O&M grew mid-single-digits in normal rate. Looking at energy sales, renewable gas was down slightly due to some planned maintenance. Solar electric sales were up meaningfully and we recognized quite a bit more rack revenue. Gross margin was 21.2% primarily as a result of a higher proportion of our recurring revenue streams, which each have a higher gross margin. Rack revenue was notable in its contribution to gross profit because racks are 100% gross margin. However we expect gross margins to return to a more normal level in the second half as we typically have more project revenue. We controlled operating expenses with the growth well below the growth in gross profit; keep in mind that operating expenses last year included a restructuring charge. Excluding that the change in operating expense, which driven mostly by higher project development cost this is by design. We have discussed in the past how we are investing more in the front end of the project development in order to drive pipeline growth, And we are pleased with results so far as George noted in this opening. Investing in growth while expanding operating margin demonstrates the strength of our business model. The revenue growth and better margins flow to the bottom-line with net income and EPS up substantially. Adjusted…

[Operator Instruction] And our first question comes from the line Craig Irwin from Roth Capital Partners. Your line is now open.

Good morning and congratulations on the strong results today. So first thing I wanted to ask about is the federal projects that have been moving better than anticipated this past quarter. Is it possible that this results in some early completions or did early completions already happen that allow you to possibly initiate or complete additional work in the second half that you had not originally anticipated?

Craig, I would say that it is primarily a timing difference, so it’s not going to be incremental to the year just yet. Any incremental work would come in the conversion of awards, which you would see in our contracted backlog. So, I think most of the pull in was timing within the year, and so nothing incremental as of yet and most of the work were being done is within the contracted phase and still within the year.

Great, thank you for that. And that actually touches my next question, so contracted backlog up 25% sequentially, you called out Chicago there, but we are up 45% year-over-year, it's just really impressive growth over the last couple of quarters. Can you maybe share with us how the duration of that backlog is changing, this isn't five year backlog, is it? Is this something you would expect to burn over the course of the next two years or how should we be looking at this as far as a contribution to 2018 visibility?

Yes and John can add more color to it, but some of these larger projects, they have as much as three year construction schedule. The City of Chicago for example is a three year construction schedule. So the implementation phase, as the projects get larger you see them being extended to more than one year, two to three years.

Yes, and I would just say looking ahead, Craig it's typically been 12 to 24 months, so we're seeing that stretch out to the 36 months, so we're getting the benefit of longer term visibility with the larger projects. They do come with the longer conversion time, we're seeing that these larger projects, the ones that are greater than $20 million are taking upwards of two years to convert. So looking at it from that perspective, 12 to 36 months in the contracted, we're going to convert what's been awarded on average in 18 to 24 months and then you're going to be recognizing revenue on that. So the key takeaway is that our visibility is quite strong right now when you look at our combined contracted backlog in terms of both not only the dollar amount, but in terms of the number of years that we can now see out. And so, I think in the prepared remarks we said two to four years, which from the visibility standpoint, it is the best that we've seen in recent memory.

Yes, the other thing I might add Craig that we're seeing too and you see that as the award begins to increase, it will be more lumpy, because the larger projects they tend to take longer time to develop. So our pipeline activity for example, it's very high right now, but as they convert to the awards it takes a bit longer than they did before.

Great, thank you for that. So changing subjects, Tuesday a week ago at the EPA hearings on the renewable fuel standards proposed volumes for 2018, I had an opportunity to sit in on the testimony of your federal representatives, your lobbyists that represents you in Washington, and in her prepared remarks she mentioned that you have 2 of the 24 or so landfill gas projects that are being developed in this country targeting cellulosic RINs, so that's something I believe that’s new, so I wanted to check and see if any of your existing fleet of landfill gas assets has been able to sort of restructure their obligations so that they can generate the cellulosic RINs. And how do you see the eligibility to generate these RINs impacting the two landfill gas plants that you have in construction right now?

We've been generating the RINs on our San Antonio plant for one of them for some time right now, and that contract has been for size, you may say very, very good, and actually we tried looking at this back in 2014-15 when we converted that plan and we wanted to get the experience before we expanded some of our other plants. So we have two that we have in construction right now. And that as we point it out, it will be completed by the end of the year or early next quarter, but they will meaningfully contribute to the EBITDA next year. The prices for those RINs that are qualifying, they're pretty good right now. And as you saw, we're trying to convince EPA not to change the amounts, but they're trying to reduce it that we would like to see it stay where it was before. Even though with the recommended reaction, we have not seen in the price reduction in the RIN value right now. In the long-term, it might affect it, that’s why we would like to see that requirement not to go down. I would say this much to you Craig, and we have several other sites by that way that we’re looking to convert or develop because some of the sites that we have, we have excess gas. So, we’ve several of them that we’ll be able to develop them, but again it will depend on economics. Right now, they are in development stage and we’ll see how many of them make it through the process. But we think it’s a great opportunity and that’s why I said, we feel that our gas assets give some intrinsic value that we hope we can develop in the future and we have the expertise in that market. And the other thing that can happen and that’s why you see us developing put more efforts in the development on the growing gas is that until about six months ago, maybe little bit longer we were not able to get to what I will call longer term contracts, longer than three to five years. But lately, we’ve been getting several calls in people that they would not only want to invest equity into the projects, but they’re willing to sign long-term contracts. So we’re consciously optimistic.

That’s really good to hear. So, George, another big picture question, so couple years ago you used to disclose pipeline, I know that I guess it was disclosed in annual proxy and then you’d discuss occasionally on your calls. And you stop disclosing at, I’m not faulting that because I know it’s a very tricky metric, but your conversion rate on projects both awarded and those not yet awarded has actually been very good over the last two years. Can you maybe share with us, how your total pipeline today compares to where you were a year ago and two years ago, are you seeing the total number of projects that Ameresco can address increased meaningfully. Or are we really seeing more of a closure of projects improved capture driving the contracted backlog?

Yes, I mean I think we did indicate it that’s why I said the colleges activity is pretty high the pipeline if we were to compare it to last year, it’s substantially higher than where it was before last year. I’ll say it’s probably over 20% higher in that neighborhood. But -- and as far as going from the awarded to contract, we still see the same ratio with all I said over 90% converts the projects that go into the awarded category they go to the contracted category eventually. And the other one as far as our success rate in the markets from the pipeline to the award, again we were well over 30% and we’ve maintained that percentage win rate for the last few several years right now. And if anything I think our traction in the marketplace is slightly better than what it has been in the past. Even though we see more competitors coming into the marketplace and what plays there to our strength is our broad and deep technical expertise and performance.

Thank you for that. And then last before I’ve hop back in the queue. I’ve not had a chance to review your 10-Q yet, but I wanted to see if there were any segments that were significant out performers or maybe under performers in the quarter that we need to discuss. I know for example in the first quarter you had development cost in the U.S. regions…

Yes, so I would say from the first quarter the trend continued in the second quarter where if you are comparing the comparison, I mean, the segments year-over-year, U.S. regions which is primarily are state local and housing business segments, they are down still year-to-date, I think about 8%, 9%. However, those businesses predominantly made -- their resources of revenue are predominantly project revenues and we typically see the higher project revenues in the second half of the year. So, likewise looking at the federal group which has a good portion of operations and maintenance revenue as well, they’re still up substantially as well both on a quarter basis and year-over-year. And a lot of that is as we’re in the implementation phase. Just -- but before I leave the U.S. regions we are expecting the second half of the year to be stronger as we start implementing City of Chicago and in particular some of the awards that George had referenced earlier in the Southwest States will be ramping up as well, we’re expecting the Southwest group to have in particular a ramp up in Q4. So we think for the year things will even out, but if you look out where we are right now quarter-to-date and year-to-date the U.S. region is down year-over-year, which was the same trend we saw in Q1. And also to follow-up on your point the project development cost if you were to look at the composition of our operating expenses we’re up about $1.5 million year-over-year. And so that’s an indication that we’re actually spending money pursuing new opportunities that will convert to award the backlog. Because once a contract converts to an award, we then capitalize those expenses as deferred cost and they end up on our balance sheet. So what we’re seeing now is that we are continuing to pursue new opportunities and we’re investing in that pipeline growth that we talked about.

Great thanks again for that and congratulations on the really strong progress.

Thanks, Craig.

Thank you. [Operator Instructions] And our next question comes from the line of Noah Kaye from Oppenheimer & Company. Your line is now open.

Thanks good morning George, John, appreciate the opportunity to ask some questions on another strong quarter. The slides that you’ve released the new slide deck, I think contains a very helpful incremental inside into the business and I’d just like to dig into one slide in particular where you show that 60% of adjusted EBITDA is now coming from recurring line of business, 45% from your renewable assets and 15% from O&M. If you’ve done this analysis, how we benchmark that profile that mix say against three years ago? And if you could kind of comment on a forward looking basis as you think about your portfolio of projects both on the energy side and your ESPC project how should we think about this mix trending over the next couple of years?

I think John has been doing all these analysis.

I don’t have the specific numbers looking back but suffice to say the percentage of the earnings or EBITDA coming from recurring was lower than 50%. So we’ve seen that expand. It was probably closer in the 40% range a few years back. As you look ahead it is going to be the thing I…

Ladies and gentlemen please standby your conference call will resume momentarily. Once again thank you for your patients and please standby.

John, George sounds like we are back online.

Yes, we are apologize for that. I was talking too much or not, I gave you three years of guidance, but you missed it. So actually getting back to the serious part. So I don't know where I left of Noah, but so let me just recap real quickly. The numbers in our slides relate specifically to Q2. They are consistent with where we saw fiscal year 2016, which is about 60%. We are expecting project revenues to increase in the second half of the year as they typically do. So I believe 60%, 65% is probably the still a good range for this year. It is going to be dependent upon when certain assets come online during the year, but we do expect that we would see an uptick closer to 70% if not may be a little bit over 70% to 75% for next year when you look at all the assets were placed into service this year. And also the two renewable gas plants that we plan to place into service next year. So we are -- we think it's strong, we think it’s a powerful message, we think it lends to the credibility of our visibility when we say we have good visibility. And so that's why we're trying to provide this information in a way that can be a little bit more transparent, but also support our story.

Yes, I appreciate that. And if I dig into the return profile of making those types of investment I mean if I just annualize your EBITDA run rate from the past six months, which may be understating and then I add in say $5 million or $6 million or so for interest expense. I kind of pencil out at something like a 10% to 11% cash on cash return. And I'm probably understating it. Is that the type of return profile we should expect on kind of a blended portfolio going forward as you look at the additional investments you're going to bring in? And if so what's your appetite to kind of increase the scope of investment activities within your portfolio.

Sure. So when we look at individual investment decision, we've said all along we're looking to get mid to upper teens internal rate of returns. And so if you're looking at the business as a whole which includes developing new assets, overhead expenses and things of that nature. Then yes you're going to be looking at some depression of those numbers and you're probably going to be in the range that you had talked about. We're probably a little bit higher than the 10% to 11%, but that includes all of the expense associated with running that business. If you look at just the assets and assets alone in the direct expenses, I think it actually get higher return. So we're not at the point where we’re going to be sharing those numbers right now, but that is something that we'll look forward to doing as our portfolio continues to grow. And clearly once we're at a certain mess; we think that those are the types of numbers that we will be including in a supplemental information in the future. But I think in terms of looking at expanding our investment, it all comes down to economics. What we’ve said is what we've always looked at the investment opportunities in a very disciplined manner. We're not going to do things that do not meet our hurdle rate. And so we do see opportunities out there, larger opportunities potentially to invest in, but there are others in the market that sometimes will depress the number to the point where we're not going to hit our returns and in that instance we're not going move forward with it. So we're doing it in a very disciplined manner where we need to ensure that we're getting the returns that we expect and want to get.

Yes, appreciate that color. And maybe just one more from me, and this is more on the retrofit regions project side. You commented before so kind of the growing scope and complexity of projects seems like energy storage is becoming much more common, you’ve got smart LED street lighting, which is basically platform for smart cities. So there kind of continues to be I think an increase in the sophistication, the complexity of the solution that you are integrating. I guess as we think about this and it's certainly positive for the business. How do you think about maintaining operational experience in the execution there? Do you have to bring on additional operations engineering support people as you deal with these higher levels of complexity? How do we think about unrelated question going to be incremental margins on that sort of added content?

Yeah. One of the thing and we've been talking about this a lot many times, but technologies I think especially the emerging ones they play to our strength. Whether it's the microgrids or whether it’s the battery storage and so on. But we have some expertise in-house but as the business grows and the opportunity grows, we have to increase our technical capabilities otherwise additional resources, human resources in that area. And sometimes if there is something that like for example some of the smart cities some of the technologies whether it is the communications we’ll probably bring some partners that technology partners that will complement to what we have. So -- but on the other hand we see all these opportunities the technical innovation you might say drive and expanding the scope of our business. And it's a good thing that’s happening for us.

Thanks so much and appreciate you taking my questions. Congrats on a this strong quarter.

Thanks, Noah.

[Operator Instructions] And I'm sure there are no further questions over the phone line at this time. I would like to turn the call back over to George Sakellaris for closing remarks.

Thank you, Glenda. To conclude, the results this quarter continue to highlight several attractive elements of Ameresco’s business model. High visibility the trend towards larger more complex projects, better penetration in certain geographic regions, and building our higher margin recurring revenue streams. Specifically operations and maintenance and energy assets, we believe our business model positions us with excellent growth prospects that are profitable and visible. Thank you for your interest and support. I’ll now turn the call back to the operator. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.