Ameresco, Inc. (NYSE:AMRC) Q2 2019 Earnings Conference Call August 8, 2019 8:30 AM ET

Company Participants

Leila Dillon - Vice President, Marketing & Communications
George Sakellaris - Chairman, President & Chief Executive Officer
Mark Chiplock - Vice President Corporate Controller & Chief Accounting Officer
Doran Hole - Senior Vice President & Chief Financial Officer

Conference Call Participants

Chris Van Horn - B. Riley
Noah Kaye - Oppenheimer

Operator

Good day, ladies and gentlemen thank you for standing by. And welcome to the Ameresco Inc. Second Quarter 2019 Earnings Call. At this time, all participants are I a listen-only mode. Later, we will conduct a question-and-answer session [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to our host Ms. Leila Dillon, Vice President Marketing and Communications. Mr. Dillon, you may begin.

Leila Dillon

Thank you, and good morning, everyone. We appreciate you joining us for today's call. Joining me here are George Sakellaris, Ameresco's Chairman, President and Chief Executive Officer; Mark Chiplock Vice President, Corporate Controller and Chief Accounting Officer; and Doran Hole, Senior Vice President and Chief Financial Officer.

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 upon 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 this call. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. Our GAAP to non-GAAP reconciliation as well as an explanation behind the use of non-GAAP financial measures is available in our press release and in the appendix of the slides which can be downloaded from our website.

I'll now turn the call over to George. George?

George Sakellaris

Hey, Leila and good morning everyone. Our second quarter results were solid and in line with our expectations. Further we are on track for strong second half comparisons and have outstanding visibility for 2020 and beyond. Ameresco continues to execute on its long-term strategy of growing recurring revenue businesses. We are doing this by leveraging our institutional knowledge of innovative technology and our broad geographic footprint.

In this year's second quarter we succeeded to posting a 6% increase in net income and a 10% increase in adjusted EBITDA a modest revenue growth. This is the result of the continued shift towards higher-margin energy assets and O&M revenues. The contribution from these businesses more than offset our investments in acquiring and developing the strong talent needed to compete in the advanced technology markets.

Our energy asset business continues to show impressive pipeline growth. Total assets in development more than doubled from the second quarter of 2018 reaching 258 megawatts equivalent by quarter's end. Our assets in development now exceed the number of megawatts we currently have in operation, excluding this pipeline – executing this pipeline will lead to continued visibility and growth.

During the quarter, we placed an additional 14 megawatts in operation bringing our year-to-date totaled to 21 megawatts. Diversification of technology and geography continues to be a priority for the company's energy asset business. We have balanced our historic concentration of New England-based solar assets with our biogas assets spread throughout the country. We are now supplementing this base with solar and other distributed energy resources in all regions.

In Q1, we began commercial operational on our Phoenix RNG plant and we have the ribbon-cutting ceremony in Q2. This asset is the largest biogas to RNG facility at a wastewater treatment plant in the U.S. It provides the city with substantial economic benefits and helps us to achieve its ambitious sustainability goals. We continue to actively pursue large RNG opportunities around the country. We have a good pipeline of green gas projects both in our reported assets in development metric as well as the five to six earlier-stage projects we have spoken about in previous calls.

In addition, market data indicates that there is a healthy available market of biogas facilities fed by landfill gas, sewerage treatment plants and other feedstocks. We believe our technical expertise and client relationships will allow us to grow our leading market share in this space. We see increased market awareness of biogas with many government and institutional clients actively looking to add this resource to their renewable energy mix.

As with any energy project green gas projects have some variability in priority pricing. However, we maintain a positive outlook for renewable fuels and continue to take a disciplined approach to developing this asset class. While our RNG operations continue to rapidly grow, solar remains an important contributor to Ameresco's energy asset business. We were pleased to have passed the 100-megawatt milestone for operating solar assets during the quarter. We continue to aggressively leverage our existing footprint across North America to expand this business.

Moving to our smart energy project business. At the end of the second quarter, our contracted backlog was up 16% year-over-year to $789 million. This growth was driven by strong performance in our U.S. regions as well as great execution in our federal business. Our people continue to win and execute technically difficult projects. These comprehensive projects comprise a greater percentage of our pipeline, and these projects not only save our customers' money, but they also provide resiliency and security along with measurable environmental benefits. Multiple factors are driving demand for energy and water solutions that include or add resiliency to new or existing projects.

The Department of Defense supports and I quote "Pursing energy security and energy resiliency for continuity of operations for a minimum of 14 days at military bases". In addition many municipalities, universities, hospitals and other institutional clients are investing in resiliency programs, such as microgrids, CHP and battery storage. These advanced technologies are becoming more common in the projects we are winning and executing. And of course, this trend plays very well into Ameresco's core technical competency.

One project, which perfectly highlights this trend is our recently completed $91 million project at the Marine Corps' energy savings performance contract installation at Parris Island. This system will ensure a reliable, secure energy supply to the base while reducing life cycle operating costs and managing future commodity price volatility. The project combines distributed generation, battery storage and secure microgrid controls. This gives the facility the ability to continue its operations even in the event of a storm or other related loss of electricity from the local grid.

The project will save $6.9 million in annual utility and operational costs that reduce utility energy demand by 75% and water consumption by 25%. And Ameresco will operate and maintain this project under a 22-year contract. Cost savings and the environmental benefits of renewable energy continue to be important considerations for our customers. For example, our recent solar project at NASA's facility in Wallops Island, Virginia, we reduced the facility's carbon footprint by over 4,000 metric tons per year. A combination of our earlier efficiency project, additional infrastructure upgrades and a new solar project will lower the energy spending by $3.6 million annually.

In summary, the second quarter was a period of solid execution for Ameresco setting the stage for healthy growth in the periods ahead.

Before I turn the call over to Mark to review the financials, I would like to thank him for his tireless work as our Interim CFO during our search process. Mark remains a key part of the Ameresco team as Vice President, Corporate Controller and Chief Accounting Officer.

I would also like to formally welcome our new Chief Financial Officer, Doran Hole. Doran joined us from ReneSola, a global renewable energy company where he most recently served as Chief Executive Officer, North America and Group Vice President of Strategy. Previously, Doran has held many financial roles throughout his career and has a long history in the renewable energy industry.

Doran would like to say a few words. Doran?

Doran Hole

Thanks, George and good morning, everyone. I just quickly want to say that I'm very happy to be joining the team here. Clean energy market is entering a new growth phase and Ameresco is well-positioned to capitalize on this because it has the right ambitions and it has a platform that can execute with conviction. I really look forward to meeting you all in the near future.

George Sakellaris

Thanks Doran. Now Mark will review our second quarter financial results. Mark?

Mark Chiplock

Thank you, George, and good morning, everyone. I'm pleased to review the company's second quarter financial performance, which supports the expectations we had when providing full year 2019 guidance earlier this year. Please refer to our press release and supplemental slides for more complete financial information. All numbers relate to Q2 unless we state otherwise.

Revenue was up slightly year-over-year, reflecting positive momentum in our energy asset business and integrated PV sales included in our other category. We continue to see year-over-year growth in revenue and EBITDA being generated by our operating portfolio of energy assets. Recurring revenues represented approximately 21% of our total revenue, up 150 basis points from the same period last year. This growth helped to offset lower project revenue, which was primarily due to timing issues in our federal segment and in certain geographies.

Gross margin of 21.8% was similar to last year. Operating expenses were $30 million, 4% ahead of last year's level. As we stated at the end of last year, we will continue to invest in strategic technical resources throughout the country. These investments will ensure that we have the ability to implement increasingly complex projects as well as to support future growth in our recurring revenue streams.

Net income attributable to common shareholders of $9.2 million, increased 6% from $8.7 million last year while EPS of $0.19 was flat. Adjusted EBITDA significantly outpaced revenue growth increasing 10% to $23.6 million. Our recurring revenue business accounted for 58% of this year's second quarter adjusted EBITDA and 65% year-to-date.

Visibility in our projects business remained strong with awarded project backlog levels of approximately $1.2 billion at the end of the second quarter. We continue to backfill our contracted projects with new awards. Our contracted project backlog increased 16% to $789 million.

Importantly, we are seeing an increase in gross margins embedded in our backlog as lower-margin contracts progress and are replaced with higher margin contracts. We believe the increasing complexity of both government and institutional projects will continue to lead to not only larger but higher margin awards.

Our 250 megawatt equivalent of operating assets and our O&M business provide us with multiyear visibility. At the end of Q2, these lines of business represented over $1.8 billion in contracted revenue with a weighted average life of almost 15 years. At the end of the second quarter, our energy asset pipeline of 258 megawatt equivalent was more than double the 114 megawatt in development at the same time last year. Solar assets comprise the majority of energy assets in development.

Ameresco's liquidity remains strong with ample cash and available credit to execute our asset development pipeline plans. During the quarter, we improved our senior credit facility and now have a larger and more flexible credit line to support our growth.

Turning to outlook. We are reaffirming, our 2019 full year guidance, namely for revenue to be in the range of $845 million to $885 million, adjusted EBITDA of $95 million to $103 million and EPS of $0.77 to $0.85.

Now I would like to turn the call back to George for closing comments.

George Sakellaris

Before we move on to your questions, I would like to make a few closing comments. Ameresco has the technical know-how and has built a great corporate platform to take advantage of the expanding advanced technology market. In particular, the demand for solutions with added resiliency, including microgrids, battery storage, CHP and other distributed energy resources is rapidly growing.

Projects incorporating these technologies tend to be larger and more profitable. As advanced technologies are just beginning to be rolled out continued cost declines and greater familiarity will increase their penetration. At the same time, we continue to execute on our long-term business model for growing recurring revenues.

We are looking ahead to strong second half on a year-on-year revenue and earnings growth. The key first half metrics provide excellent visibility and support our long-term growth outlook namely contracted backlog increased 16% from year ago levels and energy assets in development more than doubled year-over-year.

And now we turn the call over to the operator for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Chris Van Horn with B. Riley. Your line is open.

Chris Van Horn

Thanks for taking my call. And congrats on the quarter.

Mark Chiplock

Thanks Chris.

Chris Van Horn

I was wondering if you could just to -- dig into the guidance a little bit, some of the puts and takes of your revenue and adjusted EBITDA range. Is it timing of projects? Is it dependent on some of the recurring mix? Just any sort of clarity there on the range?

Mark Chiplock

Yes. I mean we -- so we reaffirmed that we feel pretty good about the full year outlook. Coming into the year we knew that a large portion was going to be back-end weighted so second half-weighted. But we have really strong visibility. We expect about 80% of the revenues in the second half that come from contracted sources with the rest coming out of our awarded backlog.

So again, we've got pretty strong visibility and we feel pretty good about both the revenue range. There were no real triggers to move anything on the EBITDA. We've come in kind of where we've expected in the first half and so we feel pretty good about the EBITDA range as well.

Chris Van Horn

Okay. Got it. And then on the recurring mix, I think you said it is around 24%. I'm wondering how that might look in the next 12 to 18 months or maybe even further out if you can give some more visibility there?

Mark Chiplock

Yes. I mean, I think that as we continue to put more of the assets that are currently in the development pipeline into operations we just -- we could see that percent has become a little higher. But we're also seeing some pretty strong growth in the backlog and the size of the projects.

And so again, I think it might be somewhat balanced. I think it'll depend on how quickly we move assets out of the development pipeline and into operations. And I think what we've said before is that the existing pipeline we would put that into operations over the next 12 to 30 months. And so, I think the timing of that will somewhat dictate the growth in that recurring number.

Chris Van Horn

Okay. Got it. I will jump back in the queue. Thank you so much.

Operator

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

Noah Kaye

Thanks, good morning. So you mentioned -- I believe you've placed 14 megawatts in service this quarter. Is the outlook still to place 50 to 60 megawatts in service this year? And will that mostly be in the solar space. How should we think about that?

George Sakellaris

Yes.

Mark Chiplock

Yes. We feel pretty good about that target Noah. And yes that would all come from solar. So…

Noah Kaye

Okay. And then you mentioned a very healthy development pipeline for RNG and also that you're taking a disciplined approach to development. Can you expand on that a little bit particularly in terms of how you're taking this disciplined approach? Certainly, we're all seeing the RIN price fluctuations in the market. How does Ameresco go about developing these projects to mitigate some of that risk?

George Sakellaris

Basically every time we develop projects, we look in the market and estimate or sometimes we get quotes as to what the future prices might be what the potential for hedging those particular prices. And then if they meet our internal rates of return, then we will execute them. If not we will push them aside. And the ones that we have been developing right now, we are talking to various individuals to see how we can hedge some of that output.

A good thing that's happening about the green gas business what I call is that now many institutional, government, entities and so on they are interested even some gas utility companies, interested in purchasing the green gas outputs. And that to us is very, very encouraging. And we are talking to some -- actually we have a couple that we are working with some long-term contracts in order to hedge that output.

Noah Kaye

Okay, that's helpful. And then you talked about the mix improvement in the back half partly based on how project size and complexity in the contracted backlog. So, just about how much uplifts should we be contemplating sequentially on the gross margin line? That's part one of that.

And then the other part of that is did that carry forward into kind of some of the earlier-stage projects you have in development or you're seeing quoting activity on?

Mark Chiplock

Yes, I wouldn't expect a big uplift in margin in the second half. I think that that -- I think we are seeing some positive trends in the awarded backlog with our margins as some of the larger projects the more complex projects start to come in.

But we're still -- we still have some large but somewhat lower margin, kind of, lower than our average margins progressing through the backlog and progressing through the contracted backlog. So, that will be part of that second half mix that I think will help to kind of keep the gross margin balanced.

So, yes, I wouldn't really expect a significant uplift in the second half. But again as these projects progress through the backlog and we start to convert some of the larger awarded projects into contracted, then I think on a go-forward basis we'd see some gradual increasing in the margin.

Noah Kaye

So, that's really a 2020 and beyond story. So, in other words no real sequential change in gross margin here in the back half.

George Sakellaris

The pickup on the second half is driven primarily by project revenues. And that's right -- we feel pretty good about the second half because of the 16% increase in the project backlog. The $789 million that we have in our contracted backlog and outlook that puts us in a pretty good position.

Noah Kaye

Okay. Thanks very much. Good color.

George Sakellaris

Thanks Noah.

Operator

Thank you. [Operator Instructions] I'm showing no further questions at this time. I would now like to turn the call back over to CEO, George Sakellaris.

George Sakellaris

Thank you. And thank you all for participating on today's call. We look forward to speaking with you throughout the quarter. Again, thank you very much and we'll talk to you soon.

Operator

Ladies and gentlemen, that concludes today's call. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.