Ameresco, Inc. (AMRC) Q1 2020 Earnings Call Transcript

Thank you for standing by, and welcome to the Ameresco, Incorporated First Quarter Earnings 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. As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Mrs. Leila Dillon, Vice President, Marketing and Communications. Mrs. Dillon, you may begin.

Thank you, Robert, and good afternoon, everyone. We appreciate you joining us for today's call. Joining me here are George Sakellaris, Ameresco's Chairman, President and Chief Executive Officer; Doran Hole, Senior Vice President and Chief Financial Officer; and Mark Chiplock, Vice President and Chief Accounting 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 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 afternoon 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. 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 and in the appendix of the slides, which can be downloaded from our website. I will now turn the call over to George.

Thank you, Leila, and good afternoon, everyone. 2020 marks not only the 50th anniversary of Earth Day, but also the 20th anniversary of the founding of Ameresco. Since our inception in 2000, we have seen tremendous technology advancements across our industry. When we started this business, we entered into an addressable ESCO market of about $2 billion to $3 billion annually, which grew to $7 billion to $8 billion in recent years. And with our investments in distributed generation, energy infrastructure, battery storage, microgrids and smart technologies, we have evolved our business and now participate in a combined market opportunity of $20 billion to $30 billion annually. We have witnessed a heightened awareness of the importance of energy savings and renewables. During this time, we have been consistently profitable. We have built over $7 billion of projects and our customers have been able to annually realize approximately $1 billion of energy savings. In the past 10 years alone, we have helped reduce over 55 million metric tons of CO2 from the atmosphere. We are very proud of the accomplishments and grateful to our customers and our employees. Unfortunately, this 20-year anniversary is also marked by one of the largest health crises to face the world in many years. Much like the energy solutions we provide, Ameresco, as a company is resilient. In the phase of the COVID-19 pandemic, we prioritize the health and welfare of our employees and the communities in which we operate. The company quickly established risk prevention policies consistent with current CDC guidelines and state, province, and local health agencies. These policies are being monitored and updated as new information comes to light. Our geographic footprint of over 70 offices allows us maximum flexibility in our operations, more efficient execution on our projects, and greatly reduces the risks associated with having all employees in a single location. Our employees transitioned to the work-from-home environment seamlessly as we already had the required technologies in place. We are also using this time and our technology platform to invest in our people with a number of employee training initiatives underway. Our work in the field continues with few disruptions and added protections at the site. Ameresco's work qualifies as an essential service in most jurisdictions where we operate, which has enabled us to continue to execute on both project contracts and the build-out of our energy assets. Early in the crisis, we worked closely with many of our customers to move ahead of schedule on some projects to avoid potential delays. This is a good example of how Ameresco is working hand-in-hand with our customers to ensure the development, design, deployment, and operation of their critical infrastructure. We have also built a tremendous amount of resiliency into Ameresco's business model. As many of you know, we have purposely continued to build out our energy assets portfolio in the operation and maintenance business, specifically to add a greater level of visibility and predictability through higher margin recurring revenues. We also entered this year with record levels of contracted backlog in our project business, providing further visibility for this year and beyond. 2020 is off to an excellent start with strong first-quarter results. We'll go into our first-quarter financials in more detail. I do want to touch upon some key highlights of the quarter. Revenue of $212 million represents the highest first-quarter revenue in the company's 20-year history, growing 42% compared to last year's first-quarter results. We gained significant operating leverage from this increased revenue level, growing our net income by 50% to $6.2 million, adjusted EBITDA by 50% to $21.2 million, and non-GAAP EPS to $0.15 from $0.02 one year ago. We continue to execute smartly and safely to minimize disruptions from both our contracted project backlog and energy assets in development. Our customers remain as committed as ever, although many of them have had to shift near-term focus, resulting in a slower than normal pace of pipeline activity, as they prioritize the COVID-19 crisis. We do, however, expect the pace of new business activity to resume later in the third and fourth quarters. We have also shifted our focus to executing on our existing work in progress on both projects and assets, given our great existing project backlog and assets in development. Given these dynamics, we expect our project backlog and assets in development metrics to remain relatively stable in the near term. Before handing the call over to Doran, I want to point out the potential business opportunities we anticipate post-COVID-19. Many companies, institutions, and government entities will exit this crisis in a challenged financial position with a need to reduce their operating budgets. At the same time, many of these organizations are facing declines in revenue opportunities and a history of deferred spending on vital infrastructure. In this environment, we believe that Ameresco's guaranteed cost savings from energy efficiency and distributed energy assets will be in greater demand. As this demand increases, we are able to offer our customers flexible financial solutions that do not require any upfront capital. Even before COVID-19, an interesting funding model called public-private partnerships, or P3s, has been finding increased interest across the industry. Public-private partnerships are long-term contractual arrangements between a public entity and a private partner that deliver and fund needed infrastructure and services. The higher education sector has demonstrated considerable interest in the P3 model with a few high-profile contract awards that will outsource their entire energy and water infrastructure. Ameresco is aggressively pursuing such opportunities with strategic focus on small and medium-sized colleges and universities where we have significant relationships and a competitive advantage. We entered 2020 with an outstanding backlog, multiple recurring revenue streams, and a great competitive position and platform, allowing us to achieve impressive results even in a challenging environment. While the COVID-19 crisis presents near-term challenges, we expect to look back on 2020 as yet another year of strong growth and important company milestones. And as we look beyond the COVID-19 crisis, we believe we will experience an even greater demand for energy savings contracts, providing critical infrastructure upgrades while returning meaningful savings to our customers. We are well prepared for these expanding market opportunities in front of us. I will now turn the call over to Doran to review the financials.

Thank you, George, and good afternoon, everyone. As I review the company's first quarter 2020 financial highlights, I ask that you please refer to our press release and supplemental slides for more complete financial information. Our strategy of creating a more predictable and resilient business model paid off once again this quarter, as we generated impressive results and have the visibility to maintain our guidance even in the face of the COVID-19 crisis. Execution on our contracted project backlog, along with the recurring revenue streams produced by our company-owned assets and O&M business, led to financial results that are strong and well-diversified from a geographic and client perspective. First quarter revenue of $212 million increased 42% from the previous year, driven by much higher projects business in a quarter that is usually impacted by seasonality. As noted, the company, along with our customers, worked tirelessly to proactively deploy more resources on projects in anticipation of potential COVID-19 related slowdowns. We estimate that we were able to pull forward approximately $20 million of revenue from these efforts. With a large percentage of project revenues, gross margin of 18.1% was impacted by our mix during the quarter. That said, gross profit dollars exceeded our expectations for the quarter, while controlled OpEx growth provided strong operating leverage for the company. Also benefiting our bottom line during the quarter was a $2 million discrete tax benefit from the CARES Act. Our liquidity remains strong, giving us the ability to fund our growth strategy. The company ended the quarter with $40 million of cash on the balance sheet. During the quarter, we also amended our senior credit facility to provide additional availability under our revolving credit line. We have not seen a material change in the market for nonrecourse project financing. Furthermore, we believe that we continue to have the ability to monetize our asset pipeline and recycle the proceeds into additional opportunities. Project backlog saw a small decrease sequentially as we executed on a significant amount of contracted backlog during the quarter. Although award activity slightly slowed during the quarter, our total project backlog remains strong at $2.2 billion, representing growth of 7% from the same quarter last year. We made a calculated shift to focus on our backlog. Since we are considered to be an essential business, we have been able to deliver on most of our contracted projects. While we may face minor delays with travel and logistical challenges, we are confident in our ability to continue to execute throughout the remainder of the year. Our Ameresco assets business faced similar dynamics during the quarter. Operating energy assets ended the quarter at 255 megawatts with 298 megawatts of assets in development and construction. Similar to our projects business, our focus during the COVID-19 crisis has been and will continue to be on execution of this strong backlog of assets in development. Given our strong first quarter results and visibility into the remainder of the year, Ameresco is maintaining the guidance we provided with our fourth quarter results. While we normally do not provide quarterly guidance, given the unusual circumstances, we will provide some color on the second quarter. We anticipate second quarter revenue to be down sequentially due to the proactive pull forward of $20 million of project revenue that contributed to our strong first quarter revenue results. We also expect an additional $10 million of revenue will be pushed out of the second quarter to the second half of the year as a result of project delays. The combination of the revenue shifts, along with incremental remobilization costs will reduce second quarter operating income by approximately $6 million. Full year 2020 results should be another year of solid revenue and earnings growth. We are confirming our guidance from earlier in the year, specifically with 2020 total revenue to be in the range of $910 million to $980 million, adjusted EBITDA to be between $102 million and $112 million, and non-GAAP EPS in the range of $0.86 to $0.96. To provide some additional detail, we anticipate gross margin to range from 18.5% to 19.5% with interest and other expense at approximately $17 million to $19 million. This guidance excludes the impact of any non-controlling interest activity and any additional charges related to the company’s restructuring activities, as well as any related tax impact. Our guidance is predicated on current COVID-19 restrictions and disruptions not worsening, and with a slow return to a more normal operating environment starting by mid-year. Now I’d like to turn the call back over to George for closing comments.

Thank you, Doran. To conclude the call, I would like to leave you with three key takeaways. First, despite this challenging time, our recurring revenue streams and great contracted backlog give us stability and good visibility for 2020 and beyond. Second, we have the cash and access to funding that allow us to execute on our strong asset development pipeline. And third, once the COVID-19 crisis subsides, we believe that customer needs will drive even greater energy savings and distributed energy generation opportunities. Before we take your questions, I would like to, again, thank our employees, our customers, and our partners for making Ameresco a great success story and for their extra hard work during these challenging times. The entire team hopes that you and your families stay safe. Operator, I would now like to open the call to questions.

Thank you. We will start our first question with Noah Kaye from Oppenheimer. Your line is now open.

All right. Good afternoon, thanks for taking the question. And first, it’s good to hear your voices and hope that you and your family and most of your employees’ community are all doing well. So let me just convey that upfront. Maybe can you comment on the cadence of 2Q so far on the project side, just anticipating just $10 million of revenue delays, that’s – it’s really not much at all and we can change of lost revenue. So just help us understand what you’ve seen so far to give you confidence there. Did delays really present at the beginning of, say, in the month and start to ease up over time? Just kind of help us understand how you’re getting to this $10 million expectation.

Yes. First, $20 million we pulled forward because we had more people, more resources, allocate them into the various job sites, and that helped a lot. Of course, in order to change that schedule, we worked with our customers in order to be able to accelerate that construction, and it worked out very well. What we have experienced in some of our jobs, what we call project delays, is a particular job, there might be a shutdown for a week or two, and then we have to secure the site and then come back and remobilize again and get going again. During the month of April, there were various states that were closing. Most of the jobs, especially in hospitals, encountered a couple of situations, a couple of school systems, and so on. And the other thing that’s happened in some of the sites is, let’s say, one of the subcontractors tested positive, then we have to stop construction, clean the site and then probably take another week to remobilize the resources for that particular site. But we did shut down in Ontario and the UK. However, we continued to work there to do design and development work and so on, and we anticipate that they will come back by June 15. That’s all the indications right now. So that’s why we feel confident; I know it’s a small number, but it's been shifted to the next quarter.

Understood.

The same where we have seen more delays is what I would call in the delays in going out with new RFPs as well as moving contracts from awarded to executed contracts. That’s why I made the statement. The customers, though they remain committed and engaged, our people ensure that we stay in close contact with them. They say to us, 'You guys wait. Once we get over this crisis, we will be with you.' Again, we feel very comfortable that we will see the pickup later on the awards as well as moving contracts from awarded to be executed. I’m sorry. Go ahead.

That makes sense. Just so I understand the first part of what you said, what kind of screening have you had to put in place? Are you implementing broadly to make sure that your contractors and your subcontractors are kind of following all appropriate health protocols?

Yes, I don’t know if I understood the question right. We’ve been following the CDC guidelines. All of our employees, when we start up in the office, had to have their temperature taken. Everybody has to wear a mask on the particular sites and maintain distance and so on. So we’ve been following all those guidelines.

Okay. That’s very helpful. And then just quickly on the energy assets. Any change in expectations on the timeline for deploying, say, 50 megawatts of renewable assets this year? And are you still comfortable that McCarty Road will come online by year-end?

Yes. The schedule is that McCarty Road will come online by the end of the year, scheduled for late November, beginning of December. We still maintain the target of 50 megawatts of total capacity installed by year-end. There are a couple of projects that are quite large. If, for any reason, the utilities delay the interconnection, that might slip into early next year. However, regarding our construction delivery, we don’t expect to encounter any problems.

Understood. Well, thank you and good luck and good health to you all.

Thank you very much. Same to you.

Our next question will come from Chris Van Horn. Your line is now open.

Good afternoon. Thanks for taking my call and congrats on the solid execution in the quarter.

Thanks, Chris.

So just want to talk about the puts and takes on your adjusted EBITDA guidance. Is some of that due from mix? Is some of that from cost controls? Is any one of those weighted more than the other?

Yes. Actually, Mark did the actual calculation; I’ll let him answer that.

Yes. I mean, Chris, as you know, it’s a function of all that. It’s certainly going to be impacted by mix, and we’ve got some good visibility there in terms of the projects that will drive revenue for the remainder of the year for the revenue that we’re expecting for the next nine months. About 80% of that is going to come from contracted backlog based on the project revenue side. We’ve got another 16% that we expect to come from awards that will convert to contracts and then just a little bit of book and burn. Yes, we’re certainly going to expect to maintain some discipline with OpEx. We feel pretty comfortable with the EBITDA ranges holding steady for the rest of the year.

Okay. Got it. And then when I think about your backlog, do I – do you use the sales mix that you provided on Slide 5 as a template of what backlog might look like? Or is backlog going to shift more towards that recurring and less project work? Any clarity there?

I mean, Q1 is generally heavier recurring just because seasonality-wise, the projects can be a little bit lower. That should start to even itself out, and you expect a heavier mix of the projects at the back-end of the year. From our project backlog progression, we’d expect that to pick up by the end of the year, and we start to see the percentage from assets and recurring start to level out a little bit.

Okay. Got it. And then just last one for me. There’s a lot of chatter around municipal and government budgets and the pressure that they’re seeing. We’re hearing that the cost savings and the value-add that some of the projects you do are – those projects are going to be maintained, if not added to the help kind of weather the storm. Is that a fair assessment? Is that what you’re seeing in the marketplace?

Yes. And that’s why I say because there will be budgetary constraints and they will need to do many of these upgrades and save money on their budgets. That’s why we think that the business will pick up at the other end of COVID-19. Our business model offers third-party financing, so they don’t have to come up with the upfront capital. We help them reduce their operating expenditures. It’s budget-neutral, you may say; that’s why the federal government loves it so much.

Got it, makes sense. Well, thank you so much for the time and stay safe everyone.

Thank you.

Our next question will come from the line of an unidentified caller. Your line is now open.

Thanks. Congratulations on a solid quarter.

Thank you very much.

I was wondering if you could just comment on the debt markets. And specifically, while I recognize one of the benefits to your business model is the fact that you’re not taking on the direct risk, your customers, you’re still reliant on a liquid and sound lending market. What we’re seeing, aside from the injection of liquidity from the Fed, is somewhat concerning. I’m just wondering how you think about sort of an optimistic rebound post-COVID and juxtapose that against what you’re seeing in the debt markets?

Yes. I will let Doran handle that. But my overall comment, I will say that we see an opportunity; I will let Doran explain it.

Yes, sure. I think there is – I've just got to split this into two pieces. One is the market for the lenders who participated in the energy financing on the energy efficiency side, which is the project side of our business. We certainly haven't seen a pullback on that side. These are companies financing the guaranteed savings from the energy savings contracts. When we move into the kind of Ameresco asset side of things, we have not seen a slowdown in project financing. We are engaged in a number of lending relationships, and our indications thus far have been that, each and every one of those institutions is still willing to step up and make new loans, do refinancings, whatever it might be. Spread activity while rumored to be pretty heavy, I don't think we're necessarily seeing it when the rubber hits the road, at the end of the day when we negotiate terms. So we haven't really seen the impact of that. Furthermore, what you've probably seen is the capital markets start to open up a little bit. Again, obviously the spreads are not back anywhere where we'd be interested in presenting things. But we're not seeing the pullback thus far.

That's helpful. Thanks. Then I have a two-part follow-up if you would. And one is kind of internal as well as external. I guess for the internal question, the work-from-home environment has provided many of the other companies that I cover with data points that are suggestive that productivity is actually increasing from some of the sales force, that the forcing function of virtual meetings has allowed for sales folks to increase the closing ratio or the number of sales calls. So one, are you seeing any of that kind of play out? And then the flip side to that would be that potential contagion into C&I starts; obviously if you're seeing virtualization as a benefit that may have negative implications on starts. I’m wondering, what your thoughts are on both of those?

If I – first, speaking for myself, I've been very pleasantly surprised by how well working from home has worked. When I think about the reasoning of how we do some things, I think we may ultimately reduce operating costs in the company because we learn different things. Regarding virtual meetings with particular customers, when it comes to initial meetings and contact, I will say yes. However, we have run into delays when needing the Board to meet and approve projects or school committee or college trustees meetings. This is where we've seen some delays. In the last week, two of those meetings are going to happen, and we will be bugging them to have it virtual. Some Boards and trustees might see the efficiency of this method and may continue using it. We save a lot on travel and expenditures.

Great. And so if you see that play out, any thoughts on a C&I start because that would be the consequence of sort of positives.

We have seen quite a bit of C&I starts, and I mentioned previously that a substantial amount of the work we do on design build is from C&I customers. Sometimes we approach them and say, 'We want to develop a solar plan for your facility.' They respond positively. However, as we get further into discussions, they realize they can finance it at a lower capital cost than we can. They often ask us to design and build it for them, and we’re seeing that quite a bit; that part of the business is picking up. We’re making more efforts in that space. The customers are getting involved with distributed generation because it is economically beneficial for them. The environmental benefits associated with it are also attractive. Maybe virtual meetings will accelerate that business, but we are paying attention to it.

Great. Well, thank you very much.

You're welcome.

Good evening. I hope you're all well and thanks for taking my questions. First thing, I wanted to ask is your EBITDA in this quarter was really impressive. Can you maybe clarify for us whether or not there were any individual project closeouts or one-time items that contributed to strengths there? Or is this sort of a new stair at the bottom of the annual steps that we're looking at as Ameresco is building this really impressive assets business?

I can take that real quick, Craig. This is Mark. There really weren't many closeouts in Q1; there was very minimal impact. So no, not a whole lot; it was really just the contribution from the projects themselves, which is generally based on timing. We typically don’t plan for those anyway, but in Q1, I can tell you that really had no impact at all.

So was – can you give us a little bit more detail, maybe Doran on the mix contribution on the asset side? Was there anything that outperformed, particularly, have the RIN issues maybe left you behind at this point? Are you seeing seasonality help you a little bit with PV? Was there anything particular that we can call out for the strength? Or is this really the new annual beginning, as we do climb these stairs?

Yes, a couple of things. As we talk about the acceleration of some of the pull forward of revenue, some of that is in design build where we got a lot of gross profit, not much additional OpEx going on to that mix issue. With respect to energy assets, we did see performance, especially on the solar side, looking really good. In terms of weather-adjusted performance, our projections were exceeded due to favorable weather. So solar certainly did well within the portfolio. I wouldn’t say this is a paradigm shift, though.

Okay, understood. So then big picture question, right. Stimulus, particularly infrastructures on a lot of people's minds. Looking down the runway, a lot of people are thinking maybe this is something that goes more to municipal and state governments than roads and bridges. But either way, it's something that could be additive and incremental. Can you maybe describe for us what you're hearing on the infrastructure side? Everybody knows Trump is a builder; he comes from construction. He didn't script the performance contracting program when he came in and his presidency, like his predecessor. Can you maybe describe for us what gives you confidence that he's not going to do something counterproductive like Obama did when he introduced the competing funding for performance contracting? Can you maybe shed a little bit of light on your discussions with DC?

One of the things that Ameresco has done very well is executing projects. We are great at executing various projects, and most of our work is infrastructure-based, including upgrades to boiler plants, chiller plants, and combined heat and power. The government has executed the largest energy savings performance contracts over the past year because they leverage third-party financing for infrastructure upgrades without upfront costs. If a stimulus package addresses more infrastructure upgrades, we can apply those dollars to do more upgrades at state facilities, municipalities, and federal government facilities. I don't see us going into building roads and bridges, but other infrastructure improvements, even outside of performance contracts, can be done through design-build methods. This has benefitted the company, especially on gross margins; they are lower margins but add gross margin dollars. That's how we leverage the company. Many RFPs have lead to contracts and our speed in execution has been greatly increased. If a stimulus program comes to pass, we will take advantage of it and I believe it could be a contributor.

Great. Thank you for that. So another big picture question, right. So California, the low carbon fuel standard is obviously a big benefit to the green gas market; cellulosic gas and green gas in general. Something like 180 projects, most of them tiny, but in process there. I know you guys are going to participate; Canada in summer is going to be filing its clean fuels program, which will be the point that starts the clock for people to actually be able to start construction on new facilities. Can you talk to us a little bit about your project development in Canada historically? Have you seen the Canadian market as attractive? How well prepared are you to maybe go in and share the Canadian green gas opportunity if we see this heat up the way it has in California?

Yes. We are currently engaging with several parties in Canada to develop some green gas sites. As you probably know, we have a strong presence in Canada with five offices, concentrated in Toronto. We are leveraging our U.S. group to develop some sites in Canada. So we have a great pipeline of potential green gas plants, including ones expected to be operational by the end of this year, and two more set for completion by the end of next year. We also anticipate three more plants in the year after that. We think the market continues to develop positively and we are looking for long-term contracts. Our negotiations have slowed somewhat due to the COVID-19 crisis, but we believe this will turn into a great opportunity and a catalyst for growth.

Excellent. That's great to hear. Stay well everyone and thanks for taking my questions.

You're welcome.

Thank you.

And we have no further questions. Presenter, please continue.

I guess none. So thank you very much, all. I am looking forward to our next call. Thanks.

And this concludes today's conference call. Thank you everyone for your participation, and you may now disconnect.