Good day, ladies and gentlemen, and welcome to the Q4 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 call may be recorded. I would now like to introduce your host for today's conference, Mr. Gary Dvorchak. You may begin.

Thank you, Chrystal, and good morning everyone. We appreciate you joining us for Ameresco's fourth quarter of 2017 earnings conference call. On today's call are George Sakellaris, Ameresco's Chairman, President and Chief Executive Officer; and Executive Vice President and Chief Financial Officer, John Granara. George and John will review the operating and financial highlights of the quarter and the year, and then we'll take questions. Keep in mind that we have a deck with supplemental financial information. You can download that deck from the Investor Relations section of our Web-site. Before I turn the call over to George, I would like to make a brief statement regarding forward-looking remarks. This call contains forward looking information regarding future events and the future financial performance of the Company. We caution you that such statements are predictions based on management's current expectations or beliefs. Actual results may differ materially as a result of risks and uncertainties that pertain to 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 or forward-looking statements. We also assume no obligation to revise any forward-looking statements made on today's call. In addition, we'll 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, prepared remarks, and in the Appendix to the slides. I'll now turn the call over to George Sakellaris. George?

Thank you, Gary, and good morning everyone. Fourth quarter results were outstanding. Revenue was up 21%, adjusted EBITDA grew 47%, and net income more than doubled. This performance completed a robust year that continued the acceleration of our business. Full year revenue was up 10%, adjusted EBITDA grew 13%, and net income also more than doubled. For the quarter and year, we achieved two of our key objectives, we grew profits faster than revenues and we increased our visibility by growing our backlog, which is at record high. Our strong performance comes in the context of steady improvement in performance over the past five years. While we intend every year to be better, we make business decisions with a view towards a long-term impact. We have done an excellent job over the past few years. Our adjusted EBITDA more than doubled from five years ago. We intend to continue to grow both revenue and profit at an attractive rate in the years ahead. We believe Ameresco's strong momentum is a result of our focused effective strategy. We told you at the beginning of the year that we plan to accelerate our growth through three strategies. First, we upped our investment in project development in order to build our pipeline. Second, we focused on increasing our geographic expansion. And third, we aggressively built the energy asset portfolio. Execution against this strategy was particularly sharp this year, as demonstrated by our results. Let me review each of these strategies and how they drove our results in 2017. First, investment in the sales pipeline, we incurred additional cost for project development, which are all the activities around securing projects. We increased that spending by 19% in 2017 in response to a growing number of opportunities. You can see the result of this effort…

Thank you, George, and good morning everyone. Our press release and supplemental slides contain all the figures and comparisons you need, so I'm not going to repeat all the numbers. Instead we are going to focus on the analysis of the factors that influenced results. We are pleased to report strong financial performance, including double-digit revenue expansion, even faster growth in profitability, and increased visibility from record backlog and growing recurring revenue. More importantly, we expect further improvement in all these metrics in 2018. Seeing that results that the transformation of our business model over the past few years is working. Our recurring revenue streams have delivered greater profits, greater visibility and they balance the impact of the national lumpiness of the project business. I'll start with some brief comments about our Q4 results before turning to full year 2017 and 2018 outlook. All figures refer to Q4 2017 and all the comparisons are for the year-over-year changes unless I say otherwise. It is worth noting upfront that we recorded a tax benefit in Q4 as a result of the Tax Cuts and Jobs Act. The benefit was approximately $14 million or $0.30 per diluted share, as a result of our initial re-measurement of our deferred income taxes. Even excluding the impact of this one-time benefit and the noncontrolling interest, EPS was $0.18. Revenues also exceeded expectations, coming in above the upper end of our guidance range, due to higher than expected project revenues. Project revenue growth was broad-based will all of our core groups contributing. Revenues from the U.S. Regions rebounded and Federal continued its strong growth. Energy sales were also up. Let me point out that the Q4 results did not include any contribution from a renewable natural gas plant we originally expected to place in service in…

[Operator Instructions] Our first question comes from Craig Irwin from ROTH Capital Partners. Your line is open.

Good morning and congratulations on the really strong results this quarter. So, George, with the guidance being stronger than what analyst consensus was it would be poor, you've quite clearly seen an acceleration in the EBITDA growth, the overall growth at Ameresco. Your contracted backlog has fairly consistently grown over the last number of quarters and you have got the two landfill gas projects coming online that you have been talking about for a while. Can you maybe talk about the business that you are bidding on, the broader pipeline that's not yet captured, is it something that you see as potentially supportive of similar growth through 2018? And do you see a portfolio of projects on the green gas, the cellulosic renewable natural gas that you could start putting into service maybe in the back end of 2018 or 2019 that can allow the profit uplift on that side of the house as well?

First, the general activity in the marketplace about projects, we [indiscernible] with activity, and even though some of the U.S. regions, they were slower to come back than the federal government, the federal government as you see the growth has been very, very good and we anticipate it will be good this year and next year, but the activity in the rest of the country, in the Regions, it seems to have picked up especially the last I would say six months, we see more projects, larger projects and more comprehensive, and the type of projects that they play to our strength. So, I feel that – that's why I made the statement I did that we see our business top line and bottom line accelerate. As far as the renewable gas plants, the two that are coming online this year, I think I did say on the last call that we have several other ones, two to three of five, that we think they will end up being built, and most likely those plants, they will not come into service in late 2019 one of them and the other one is probably 2020. But the activity in that market is very good. The only drawback and we are a little bit cautious is how we expand that business is what's going on in Washington. And you see some of the meetings that they had in the White House and various individuals are lobbying for various things to happen. So we are monitoring that situation very, very closely. But as far as the potential in the marketplace, we do have the assets that we can develop down the road. So we feel pretty good. And then the other thing, don't forget that development of the solar business, even though we did get the impact by the tariff and we did little bit [indiscernible] in the marketplace as well and the prices went up in the short-term and they started coming down little bit for the solar [indiscernible]. So we still feel very good about that section of the market. And also what makes me feel a little bit better is we develop – the business is changing in the marketplace and one of the leverages that we can achieve in Ameresco, having all units be able to market all of our offerings. And some of the regions that were slower to adopt I will say to the new business model, otherwise going after solar residents or distributor generation, whatever the case might be, but we have been successful in the last couple of quarters in getting those people aboard, and I think you will see the level of business coming out from the other regions, other than the East and the Federal, would accelerate.

Great. And then one question specifically about the U.S. Federal, in the last year your revenue mix has shifted a little bit towards U.S. Federal and I know that Federal has been a very nice chunk of your backlog growth, and since it's one of your higher-margin services business lines, is this something that can potentially help margins a little bit in 2018 and do you expect this to continue mixing up at a similar pace to what we have seen over the last year?

You have a couple of things working there. The performance contracts, as we know, the margins on those have actually gone down a little bit in all market segments, whether it's the U.S. or the Federal. But the operations and maintenance business, the margin has held steady, and the more complex the projects get, the better margin we can achieve. So, the overall mix, and that's why we are not forecasting the margin to go up, we say it will stay relatively constant, because the performance contracts that we used to know, they are getting to be a little bit more commoditized, the margin is getting pushed down. But the complexity of the projects brings them up and then the operations and maintenance and then of course having the assets portfolio it helps us and we feel pretty good that we will maintain the overall weighted margin around 20% to 21%.

Great. Congratulations again on the fantastic execution this quarter. I'll hop back in the queue.

Our next question comes from Noah Kaye from Oppenheimer. Your line is open.

Maybe we could start with a question on free cash flow profile. John, I think in your remarks you talked a little bit about the timing of some of the cash flows around working capital. If I step back and kind of look at the conversion of adjusted EBITDA to free cash flow, over the last couple of years it's probably been I guess between 50% to 60% on a full-year basis, this year it looks like it is coming in closer to 40%. So, can you maybe comment to kind of some of the timing of some of these capital swings? And then really what I want to get to here is to how to think about a free cash flow conversion profile for 2018? Is it going to take where you are guiding to, $75 million to $85 million in EBITDA, if I take just 50% of that, that puts me at $40 million in free cash flow, adjusted free cash flow for 2018, is that the right way to be thinking about it here?

It is. A couple of things that happened though that drove the number down a little bit was that if you look at our detailed balance sheet, you will see that our unbilled revenue, which is revenue we have recognized but not yet billed contractually, that went up year-over-year from $56 million to $105 million and went up steadily. We did get, we were able to build a good portion of that in Q1, just do it hitting milestones. And so, I would expect an influx of cash as we bill and collect that money. So, it isn't going to be an even amount and it's going to be lumpy, much like our project business is, but I think you are thinking about it the right way at that amount, because what will happen is it's going to continuously be a cycle, and right now that project business which comprises of 70% of our revenues, the DSOs related to that business are in the 90 to 120 days. So, what you're seeing is a little bit of a delay in the second half revenues, which is the stronger performance from the project revenue side.

Okay, that's very helpful. Thanks. And then just some housekeeping, I noticed there was some reclassification of the segments. It looked like some of the solar [as direct] [ph] revenue taking out of the Regions, can you just sort of help us understand how you are reorganizing the reporting here a little bit and kind of what's motivating that? Clearly I think you are trying to showcase the true generating performance of the energy assets, but just a little bit of clarification would be helpful.

George referenced this in his prepared remarks that we want all of our lines, we want all of our segments and reporting units to sell all of our lines of businesses. And so, if you looked at our historical numbers, the Federal group is developing assets for our own balance sheet. Canada has been doing that as well. We had one outlier with our East group with still being reported separately within the Small-Scale Infrastructure. But that group primarily concentrates on the East, primarily concentrates on the state and local customers and that mush market. And so, when we changed our strategy in 2014, instead of building the projects for others, which would have ended up in the East region, it was ending up in the Small-Scale Infrastructure. So what you are seeing is, this is really a continuation of the evolving of our business in that we want all business units going after all lines of business, including assets and O&M for the recurring revenues. So, big picture, when you look at the year-over-year performance, and the way I think about our segments now is more on a market basis, the state and local market In particular, we are developing and owning a lot of assets for that market.

Okay, thanks for that. And so, the segment that's now non-solar DG, that is which assets, that would just be the landfill gas assets?

So landfill gas are, and it is anything non-solar because we will have some operations and maintenance of some co-generation plant things in there as well, and our segments are really a result of, it's really a GAAP, it's a U.S. GAAP of how we report our numbers internally up through George and how he sees and allocates the asset. So, all of our groups have solar development teams within them. The non-solar group is more of a national practice and they operate more as a vertical and actually work with all of the other business units in developing non-solar DG assets and whether we are building them for customers or whether we are owning and operating them. So that is a more distinct business that just focuses on non-solar.

Okay, great. Thank you for that clarification. And maybe one more from me, certainly as we see rising interest rates, we'd really like to understand what kind of impact that may be having on the business in multiple segments, you have got the ESPC projects, so curious about any impact you may be seeing on project scope and size so far or in the margin profile there you can get? And then certainly as you think about putting $60 million plus of CapEx to work on the asset side, whether that's affecting the IRRs, how should we be thinking about the impact of interest rates on the business?

First let's look at the energy, the performance contract business, because most of the projects, their goal is to self fund them, especially the federal government and states and so on. And as the interest rates rise, it will have some minor impact. It will not be that substantial impact. What usually happens, let's say you get 50 basis point increase of the interest rate, it might reduce the overall scope of the project, might be $50 million project, it might become $45 million. Or the other thing that we might do, extend the term of the financing. Let's say the project was cash flow in 15 years now, it might cash flow in 20 years. And if you recall, back when we were doing projects, because that question came up before, when interest rates were 8% and 10%, but in projects [indiscernible] lower and the length of the contracts were longer. So, it does impact it but not as much as you would think. As far as the IRR or the investment that we are making for the equity, we are still looking for a similar IRR, and if debt is going up, that means maybe we have to do the deal a little bit differently or some deals might not make the cut. That's why we say we are disciplined in our approach in allocating capital. So, we look at the IRR with the increased rate if that's the case is, if it's especially the delivered project.

Great. And just one last one on this, the guidance that you put out, what kind of increase in interest rates are you assuming in your outlook for 2018?

So, a couple of things, on our nonrecourse project financing, that is all fixed, and so the only – the variable debt we have right now is on our corporate line and it's about $20 million of our total debt. So if you are looking at this from a modelling perspective, and you need to look at maybe 25 to 50 basis point improvement, you might see a small uptick there. But based on our total debt profile, I wouldn't expect it to have a material impact.

And the same goes for the overall business. The contract we have forecasted to put together as a backlog at the end of the year, basically we had assumed what people are talking on the street maybe another 50 basis points to 75 increase.

That's very helpful. Thank you so much.

Our next question comes from Chip Moore from Canaccord Genuity. Your line is open.

Congrats on the nice results. I guess on sales investments, you have seen some nice results there. Looking forward, obviously Texas momentum is continuing, U.K. you have got some early success, and California has got a lot of potential. How are you thinking about those investments next year and beyond and where you think you can prioritize some of those?

We will continue expansion in Texas and now in the neighboring states of Oklahoma and New Mexico since we have some [paper] [ph] successes there to start with. And California has been a challenge. We made some personnel changes and we feel pretty good. The potential there is tremendous and we've got a crack at that state. We have been at it for some time but we think – that's why I made the statement that this year and following on that we will do better. We see the light at the end of the tunnel I would say in that particular state. The other one, we are still a little bit weak on the Southeast, especially Georgia and Florida, and we are making some efforts to grow in that part of the country as well. [Indiscernible] geographic expansion and I will call it the increased market penetration because we are doing projects there but not as much as I would like.

Got it. Okay, that's helpful. And just one I guess on the model, and maybe you talked about it and I apologize if you did, but tax rate, where does that shakeout next year? Thanks, guys.

I didn't mention it, and good question. So, what I would say for now is about 10% to 15% for now. Their 179D was extended for 2017 and that will have an impact in Q1, but frankly we haven't fully embedded what we think the impact is going to be. So, I would say for modeling now 10% to 15%, and to the extent we need to – that 179D results in a material change, we will let you know.

Got it. But Q1 potential for a benefit on the retroactive stuff and then 10% to 15% sort of the go-forward rate?

That's correct.

Got it. Okay, thank you.

Our next question comes from Carter Driscoll from B. Riley. Your line is open.

Could you talk about maybe the biogas opportunity by region and maybe by type of source, whether it's agricultural waste or water recovery or landfill gas, particularly by region, and is the competitive landscape in California more pronounced for some of those projects? And then maybe as a follow-up, any worries at all about some that are coming from [indiscernible] you had about the RVO being changed and does that have any impact on your thoughts about where you allocate investment? Thank you.

Two, three questions there. I wish I was in the Regions, no question about it. The California is the best marketplace to be and I think you will see more focus from us in that particular state than any other state in the country as far as the renewable gas projects. But there are opportunities in other states and we are working on actually one asset that we own in Texas that we might convert to renewable gas, existing plant that we – existing site that we [indiscernible] to gas. And where you get most of the opportunities for our projects that we are developing, it's landfill gas or wastewater treatment plants, like the Phoenix plant that we are doing. Those are the two primary focus rather than the other aspect. As far as what's going on in Washington, and I will be a little bit cautious about it, in this market opportunity, we are watching to see what's going on, and depending on what they do, it might impact the price of the [indiscernible] that we are using coming out of our projects. So, it's just wait and see. But in the renewable volume obligation, of course it will make tremendous, tremendous difference as to what that level has been set in the future. But based on the legislation that we have today and the statement that they have made, we are I will say cautiously optimistic about this potential [indiscernible] market segment. [Indiscernible]

No, absolutely. And California, obviously [indiscernible] opportunity, can you just talk about the competitive landscape? I mean was that at all part of the decision to change up some of the personnel, was it just underperformance specifically within that region or was there a ramping up of the competitive bidding for certain projects, just trying to get a sense particularly in California?

It a competitive landscape, some of it people that we are trying to – we are competing with, they have been there for very, very long time, and that's why I say, the value, the franchise of Ameresco is great because we [indiscernible] two offices around the country. People that were there from the beginning, they have great traction, great leverage, and over 50% of the time it's the relationship that you have in this business and the track record of that particular state. I don't care how good to the company you are coming in from another state, you are not going to be as effective or [indiscernible] to bring people from other parts of the country. Again, we don't like to say it, but states continue to be very [indiscernible].

Okay, appreciate answering my questions. Thanks guys.

[Operator Instructions] I am showing no further questions coming from our phone lines. I would now like to turn the conference back over to George Sakellaris for any closing remarks.

Thank you, Chrystal. To conclude, I first want to thank our employees. Without their hard work and dedication, we could not have delivered such outstanding performance. I also want to thank our customers, who drive us to innovate in everything we do. I also want to thank our shareholders for their support. As we look ahead to 2018, we are very confident in our prospects. We have spent several years building a strong foundation for growth and for stability. Our revenue growth is accelerating due to the strength in the energy efficiency projects and expansion of our energy asset portfolio. Growing energy sales and O&M work is improving our visibility and profitability. We intend to continue to execute on our strategy in 2018 and beyond and look forward to another year of solid results. Thank you for your attention this morning. I would now turn the call back to the operator. Chrystal?

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