Good day, ladies and gentlemen, and welcome to the Q2 2018 Ameresco, Inc. Earnings Conference Call. Currently, 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] Also as a reminder, this conference call is being recorded. At this time, I would like to turn the call over to your host, Gary Dvorchak. Sir, please go ahead.

Thank you, [Dylan], and good morning everyone. We appreciate you joining us for Ameresco's second quarter 2018 earnings conference call. Joining me today is George Sakellaris, Ameresco's Chairman, President, and Chief Executive Officer; and John Granara, Chief Financial Officer. First, George will review the operating highlights and John will review the financials of the quarter, and finally we will 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 website. Before I turn the call over to George, I'd 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 to 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 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, prepared remarks, and in the Appendix of the slides. I'll now turn the call over to George. George?

Thank you, Gary and good morning everyone. Our performance this quarter was outstanding, demonstrating great execution by our team and the momentum and visibility we have in our business. All key financial metrics grew substantially. Revenue was up 18%, gross profit up 20%, earnings per share grew over 40%, and adjusted EBITDA up 39%. Our visibility was improved by the 20% growth in our total product backlog as well as the growing portfolio of both, operation and maintenance contracts and energy assets. Because of this, we are raising our guidance for the year as well. I want to first review the results of our energy asset business as it reflects the evolution of our business model over time. Sales of renewable gas and electricity from our portfolio are recurring high margin and locked in for many years through purchased pilot agreements and other contractual arrangements. Furthermore, energy assets will have a meaningful impact on our profit growth this year due to the addition of two renewable gas plants that go into operation this year. Energy assets revenue was only 11% of total revenue, but the portfolio contributed nearly half of adjusted EBITDA. Revenue is up 25% from last year. We now have 212 megawatt equivalent in operation, two-thirds of which is renewable gas and the rest being solar. Importantly, our asset portfolio pipeline is diversified geographically with good penetration in most major renewable energy markets. Our extensive geographic coverage will benefit us as more renewable energy markets develop across the country. Now, I would like to discuss renewable gas in more detail. A Woodland Meadows plant in Michigan reached full operations late in Q2, making a contribution in the quarter. We buy landfill gas from the owner of the landfill and then our facility converted to green gas and we…

Thank you, George, and good morning, everyone. Our press release and supplemental slides contain all the figures and comparisons that you need, so I'm not going to just repeat it all. Instead, we are going to focus on the analysis of the factors that influence results. Keep in mind that we are referring to Q2 figures, unless I say otherwise, and all the comparisons are year-over-year. As George mentioned, we had a great quarter. Let's go through the income statement first. Revenue growth was balanced, driven by greater than 20% growth in both core projects and energy asset revenue. Notably, the 27% growth in energy asset revenue is driven by the Michigan renewable gas plant as well as the solar assets that we placed into service in the second half of 2017, which are now fully contributing. With both Woodland Meadows and soon Phoenix contributing in the second half, energy asset revenue growth should accelerate. In contrast, O&M revenue was flat. We had expected some growth from new contracts that were not finalized, but we do anticipate starting that work in the near future. Gross margin was higher due to a favorable mix of project revenues. As you would expect in a growing business, operating expenses were up, but grew at less than half the pace of gross profit. This was exactly on plan and reflects our disciplined spending culture. We continue to invest in project development cost which is the main driver of backlog growth. Halfway through the year, adjusted EBITDA is tracking to the higher annual guidance, I'll discuss shortly. Drilling down on visibility, the project backlog increased meaningfully, especially in awarded backlog which grew by 28%. This growth capped off $890 million of new awards for the last 12 months, which represents our best 12-month period ever.…

Thank you sir. [Operator Instructions] Our first question comes from Craig Irvin from ROTH Capital. Question please.

Good morning and thanks for taking my questions. First, I should say, John, George, congratulations on another really strong quarter here.

Thank you, Craig.

Thank you, Craig.

So, the build in, in awarded backlog -- really nice to see the progress there. As things moved into contracted and gave us that big 30 -- I think you said 38% jump, that is a huge build. Can you maybe break that down as far as any specific large projects that might have contributed to the big increase? And can you indicate for us may be if federal is continuing to see the typical momentum that it has in the past several quarters, if it continues to lead in your awarded and contracted backlog progression?

Sure. So, I would -- so the -- it was 28%, and that was specifically for the awarded backlog, our project backlog was over 20%. So, from a -- as George mentioned, we are continuing to see the trend of larger projects continue, but the good thing about our backlog is, it's quite balanced and it's not solely dependent on one large project. So, we have been adding projects at a steady pace. And I would say the average size project right now, is about $10.8 million in our awarded backlog. So, that is a little bit higher than what we saw last quarter. But it's not a significant jump where we're just dependent upon one or two projects. With regards to the components of -- or the composition of, that growth, we're actually seeing growth across both the federal and the U.S. regions, which is nice to see. And as George said, although not as significant from a -- from -- or in comparison to the whole, we did and we are seeing some growth in the Canada backlog as well. Thanks.

Great, that's really good to hear. So, the two most recent landfill gas facilities, green gas facilities. Can you may be give us a little color on the sequential EBITDA contribution? How much of the upside that we had in EBITDA would you attribute to may be those projects going better than expected during the quarter?

I would characterize it as saying they are going as expected. So, as we've talked about in the past, it does take you a while to ramp up to get to full optimization or in operating efficiently. And so what we've seen based on the plants as we bring them on, it does take a good three to six months to get them operating optimally, as I would say. With regards to Phoenix, you may recall we originally had anticipated, putting that into service this quarter, but it did get delayed and it's now -- we now anticipate it to be in Q3. So, there is some fluctuation around with the timing there. In terms of the incremental EBITDA contribution, I think we're comfortable in saying that at the current levels, you're looking at probably an annualized rate of somewhere in the $20 million to $25 million, for the two plants, and that would be the two plants that we're going into operation this year. And then in terms of moving forward, I think you're going to be looking at anywhere from $7.5 million to $10 million a plant, just from that standpoint, depending on the size. It could be higher, could be lower, but I would just say on average, probably in that $10 million range.

Okay. So, then the $20 million to $25 million you mentioned, is that reflecting that plants today currently at full run rate, annualized today or that's sort of where we stand right now and it's likely to build as we continue to see the shakedown is completed over the course of the year?

That would be the full rate -- full run rate on an annualized basis. The contribution this year is probably closer to $10 million to $15 million.

Okay, okay, that's perfect. So, then changing gears, regulatory. It seems that the Trump administration is actually providing pretty strong support for performance contracting for upgrading federal facilities of the ESPC line that's out there. Can you may be describe for us whether federal is likely to see continued build in its overall momentum? Or if you would expect other markets across the country, may be some of the MUSH markets or public housing and things like this to see a little bit more of an acceleration and catch up to federal as we see the strength building a little bit across the economy?

It was very encouraging. It was a great start to see the administration come up with a new Executive Order. And even though, that federal facilities they were implementing infrastructure upgrades and resiliency and so on for their facilities through the energy savings performance contracts to get it through the administration to support that effort is very, very positive. And I think the growth for the immediate future, let's say a couple of years in the federal market; we are very encouraged on the activity that we see there. Whether it would pick up much more than what we have right now, it's difficult to anticipate, how much faster we can go, all right. But the pace that we envision right now is very healthy. And the other thing that we are very encouraged and that's why you see the growth for comparison quarter-to-quarter is very good is the U.S. regions, where the states and local governments and higher education and health care across the country is picking up. And we are -- and because the projects are getting more technological advanced and they play to our competitive strength, we are getting pretty good market traction, and we win in a pretty good percentage of the contracts out there. So, that's why I said in my remarks, we are pretty bullish about the project business for the immediate future and that's probably one to two years going down the road.

Great. And then last question if I may, on gross margins. I think this was a company record this quarter. Can you maybe clarify for us if there are any project closeouts that lifted that? Or are we really just seeing the benefit of scale and the benefit of some of these larger projects, the mix of larger projects sort of tending to move through the P&L versus historically smaller projects over the last couple of years?

I would let John answer that question with greater detail, but from a higher up level, we like to compare margins on the annual basis because it's very lumpy and very noisy from quarter-to-quarter. But the trend, if we're going to see any improvement at all, it will be because of the asset mix, rather than the particular project mix, because the project mix from quarter-to-quarter, it moves a lot. John?

Yes, George hit the nail on the head there, but the only thing I would add is that through the first half of the year, project revenues don't contribute as much as they do in the second half of the year, so we'll see a natural decrease as the project revenues increase in the second half of the year that brings down the consolidated gross margin. But what we're saying is that we are seeing expansion in the gross margin for the asset revenue being slightly offset by the margins in the larger projects which tend to have a lower than average gross margin. But obviously it's contributing significantly from a dollar standpoint.

Great. Thanks again for taking my questions and congratulations again on the really strong quarter.

Thank you.

Thanks.

Thank you. Our next question comes from Chip Moore of Canaccord. Please go ahead.

Morning. Thanks.

Good morning.

Echo my congratulations on the continued momentum and very strong visibility here guys. Maybe we could talk a little bit more about Island Palm. It seems like a great announcement, I think, you talked about potential for more opportunities, particularly in the military housing market maybe you can expand on that addressable market a bit more?

We -- the only drawback it's a great deal and a great partnership that we have with Lendlease, and we are envisioned more projects coming down the pipeline with them, actually we have about three projects that we are working on, right now. But I will caution you, because we announced this partnership for more than two years ago and it took us couple of years to get to this point, but the potential is very large and we hope that we will continue working with Lendlease. And we are very encouraged that we will have a substantial business in it from this part of the market segment.

Yes, so as George said, we do have three projects in our awarded backlog. I would say that the Island Palm project is larger, and I don't expect the remaining three to be the same size. But we are working with Lendlease and evaluating their entire portfolio. And as we identify projects, you'll see them come in our awarded backlog for us and so it's -- you'll see the -- you'll be able to see it come in our awarded backlog in terms of -- from a visibility standpoint--

Got it. And just looking further out, is there a potential that you could look for some more partnerships with infrastructure companies like Lendlease? How do you think about that?

Again, actually we did one with [Indiscernible]. It's not a partnership, it's just individual project for that particular client and we will look at the other ones as well. But our primary focus right now, is with the Lendlease opportunities to develop their sites first.

Okay, that's good. May be last one from in Canada getting some momentum back, good to see. You called out that nice utility project. Beyond that, what makes you more optimistic and what you see in Canada? Thanks guys.

It's the pipeline that we have right now, especially in the federal sector in Canada is very encouraging and--

Yes, I'd say in particular the federal market is quite active right now; we've traditionally played pretty well in that market, in Canada. So, that's where we're optimistic.

And we see more technological advanced projects right combined heat and power, streetlight upgrades and battery storage and microgrids. So, as the market expands, we feel pretty good that we're in a good position to take advantage of the opportunities.

All right, great. Thanks and congrats again guys.

Thank you.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Noah Kaye of Oppenheimer. Please go ahead.

Thanks. good morning George and John. Can I pull back there for a second here; obviously the short-term trends are very attractive and speak for themselves. But George, you've seen the ups and downs of the ESPC project business over the years. It feels a little different, disco around. The TVA, the Tennessee Valley Authority said a couple of weeks ago, they're not going to build any baseload power for the next decade plus, because energy efficiency is so much more economical that they just don't see overall rise in power demand. You talked before about visibility in sort of the project business -- the energy especially project business being good to next one to two years. Does anything feel a little bit differently to you structurally that might sustain this kind of awards win rates over a longer period of time?

No, this is -- that's very, very good question, Noah and it does feel different, because the business, it has evolved more than just being an Energy Savings Performance Contracting company, or product offering. It has moved into the microgrids, like you said; many utilities. I'm not going to build that many more centralized power plants. And the microgrids, the battery storage, the distributed generation, whether it's combined heat and power or solar or whatever the case may be, it's beginning to take very, very good hold across the country, and that's why I feel more optimistic than ever before that we are, as Ameresco as company, in a very good position to take advantage of those opportunities. And if you look at the projects that they become larger and they have more of an operation and maintenance trail to it, are the projects that basically they solve a bigger question of what's going to happen into the power generation and the utility industry in general. And I feel we are in a very, very good position to play in that market. That's why I'm encouraged and that's why the last couple of years we've been transforming the company that all units across the company and they can sell distributed generation whether it is solar, or it's combined heat and power, or whether it's battery storage or whatever the case might be. And take advantage of the opportunities that they are out there. The market is changing. It's no -- and that's what makes it -- otherwise it has expanded. If you were to look just energy performance contracting business, it's about $8 billion, $9 billion. If you put distributed solar, combined heat and power, microgrids and so on, you're talking $20 billion to $30 billion market opportunity. So, if we were to take 12% of that market share, we'd be very much large company down the road. So, that's where we are.

I think that's really helpful perspective for us in terms to understand. Let me ask one, sort of a similar, I don't you've call it thematic question, but the topic of grid cybersecurity has been increasingly in the news over the past few years and most recently with the Department of Homeland Security confirming that upwards of several hundred U.S. electric utilities may have been compromised by penetration efforts from hackers someone connected to foreign countries. You've talked about your projects having, obviously, a focus on resiliency and O&M. Can you just talk about any responsibilities that you may have or value proposition that you may have around cybersecurity and grid security for the microgrid offerings that you're participating in? Do you have partners for that or is there anything that you had to invest in to beef-up your security?

It's a very, very good question and because we have, what, almost 40 plants operating across the country right now and we do see attempts to break into our security system, several a day you might say sometime. But we are very diligent and actually we have brought this issue up to our Board, and we are concerned and we're doing whatever possibly we can in order to protect ourselves and our assets and our customers. And then John might want to add anything more color to that, but it's an issue that we are very concerned and we try to do whatever we can and we have hired couple of outside consultants, top level companies to help us maintain grid cybersecurity for our assets, and our customers. It's a good question; it's getting a bigger and bigger of an issue.

Yes, and then maybe one more very -- more immediate one. I think you previously guided to about 40 to 50-megawatt equivalents of energy assets placed in service in 2018. Any update to that implied in this higher guidance?

Yes, John?

Yes, no we're still tracking to that, so year-to-date, we have placed in the service about 21 and we're planning to place about 28, 28.5 for the remainder of the year, so we're still tracking to the number that we guided to earlier.

Okay, great. Well, sounds like closer to the upper end to that. That's great to hear. Thank you so much for taking the questions.

Thank you. [Operator Instructions] I show no further questions in the queue at this time. I would like to turn the call over to the CEO, George Sakellaris for closing remarks. Please go ahead.

Thank you, Dylan [ph]. To conclude, we believe our business momentum is strong and sustainable and that new -- and few companies can match our level of visibility. Ameresco has never been in a better shape. Thanks to the hard work of our employees and the support of our shareholders. We look forward to maintaining this level of performance in the quarters ahead. Thank you for your attention this morning. I will now turn the call back to the operator. Thanks.

Thank you, sir. Thank you ladies and gentlemen for attending today's conference. This concludes the program. You may all disconnect. Good day.