Ameresco, Inc. (NYSE:AMRC) Q1 2023 Earnings Call Transcript

Ameresco, Inc. (NYSE:AMRC) Q1 2023 Earnings Call Transcript May 1, 2023

Ameresco, Inc. reports earnings inline with expectations. Reported EPS is $0.03 EPS, expectations were $0.03.

Operator: Good day and thank you for standing by. Welcome to the First Quarter 2023 Ameresco, Inc. Earnings Conference Call. And be advised that today’s conference is being recorded. I would now like to hand the conference over to Leila Dillon, Senior Vice President of Marketing. The floor is yours.

Leila Dillon: Thank you, Carmen 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, Executive Vice President and Chief Financial Officer; and Josh Baribeau, Senior Vice President, Finance; and Mark Chiplock, who is traveling today. Before I turn the call over to George, I would like to make a brief statement regarding forward-looking remarks. Today’s earnings materials contain forward-looking statements, including statements regarding our expectations. All forward-looking statements are subject to risks and uncertainties. Please refer to today’s earnings materials, the Safe Harbor language on Slide 2 and our SEC filings for a discussion of the major risk factors that could cause our actual results to differ from those in our forward-looking statements.

In addition, we use several non-GAAP measures when presenting our financial results. We have included the reconciliations to these measures in one of our supplemental financial information. I will now turn the call over to George. George?

George Sakellaris: Thank you, Leila and good afternoon everyone. First quarter results represented a solid start for the year. We were pleased to make significant progress in key areas that support our 2023 guidance as well as our long-term financial targets. The Ameresco team, once again, executed well, delivering first quarter revenues higher than our expectations and adjusted EBITDA at the higher end of our guidance range. We also continue to lay the foundation for our ongoing success. As such, we were particularly pleased by the addition of new project awards or $472 million in this in the first quarter, which increased our total project backlog by 13% sequentially. We are executing on our contracted backlog and expect to convert a good portion of our awarded backlog to contracts throughout the year, giving us excellent visibility into our expected project revenue ramp in the second half of this year.

We are seeing very strong customer interest across all our business lines. In fact, in this year’s first quarter, the total value in the proposal we submitted was 50% higher compared with the same period last year. This reflects greater demand as well as a higher level of project complexity and scope. This increased activity is a function of our great value proposition, which addresses customer requirements for resiliency, cost savings and carbon reduction. We are excited by the recently enacted Inflation Reduction Act, which provides broad and meaningful financial incentives and benefits for the range of clean energy technologies. Ameresco’s technology-neutral business model is preferably suited to assist customers in finding the best solutions to fit their energy needs and optimize the IRA benefits.

While we have seen a slight uptick in awards directly attributable to IRA benefits in Q1, we expect to see a greater impact in the company quarters in the years to come. The Energy Asset team again made excellent progress in the quarter, bringing 34 megawatts online. The recurring revenue model of our Energy Asset and O&M businesses helps to mitigate some of the timing issues inherent in our project business. Included in the assets we brought online this quarter was the 27-megawatt solar facility into DePue Illinois. DePue is our largest operating solar asset today and is representative of the larger size solar, battery and RNG assets that we are pursuing. This year, we expect to add a total of 80 to 100 megawatts of Energy Assets into operation.

These asset additions along with continued strong performance in our O&M and other businesses, supports our confidence in our full year guidance. Doran will provide more detail on our visibility during the financial discussion. As we noted last quarter, Ameresco continues to expand into the European market, building on our successful operations in the United Kingdom and Ireland. We expect our expansion to take several forms, including organic growth, acquisitions, joint ventures and partnerships. This quarter, we entered the Italian market with our acquisition of Milan-based Enerqos. With a strong management team and market position, Enerqos has been offering energy efficiency and renewable energy solutions to the commercial and industrial markets for more than 15 years.

We also recently announced the expansion of our partnership with the Sunel Group in Athens-based international developer and EPC contractor for renewable energy projects. Ameresco and Sunel have established Ameresco Sunel Energy, which is currently proposing a project pipeline of 1.5 gigawatts with an estimated $500 million in potential contract value in the United Kingdom, Greece, Italy, Spain and Romania. The joint venture has already been selected as a contractor for a 100-megawatt solar photovoltaic project in Greece, currently in construction as well as various other smaller PV projects across commercial and industrial markets. Given the increasing importance of the European market to our future growth strategy and recognizing our large and growing European shareholder base, we are holding our Investor Day in London on May 11.

The event will primarily focus on our European strategy and the market and policy dynamics that we believe make this a very compelling opportunity for us. Ameresco’s European expansion plan will be selective and measured, maximizing potential shareholder value while minimizing execution risk. Given the importance of acquisitions and partners to this plan, we will hold a panel discussion with executives from both Enerqos and Sunel as well as members of our finance team. We are also pleased to be hosting Bristol City Councilor, Kye Dudd, who we will be discussing our transformational Bristol City project from the customer’s perspective. We believe our European expansion will be an increasingly important contributor to our revenue and EBITDA growth in the coming years.

Finally, we are always honored when our company and the solutions we provide are recognized in the industry. We recently were awarded the 2023 North American Energy Services Company of the Year by the market research firm, Frost & Sullivan. And our expertise in LED street lighting projects was also once again recognized as our Chicago Smart Light Program was awarded the Inspiring Efficiency Impact Award by the Midwest Energy Efficiency Alliance. I will now turn the call over to Doran to comment on our financial performance and outlook. Doran?

Doran Hole: Thank you, George and good afternoon everyone. For additional financial information, please refer to the press release and supplemental slides that were posted to our website after the market closed today. Total first quarter revenue was $271 million, about $40 million above our guidance as we experienced faster execution on certain projects as well as some early contract conversions. Energy Asset revenue grew 6% with the increased number of operating assets and greater production from existing solar assets more than offsetting the weak RIN prices in the first quarter. Our O&M business delivered another solid quarter with 10% growth as we continue to win O&M contracts on our completed projects. And our other line of business had another strong quarter of double-digit growth, up 13%, driven by increased demand for our utility, SaaS and consulting business.

Gross margin increased to 18.3% as the lower margin SoCal Ed contract declined as a percentage of our total revenue. We generated adjusted EBITDA of $27 million in the quarter at the higher end of our guidance. This quarter, our working capital showed significant sequential improvement. We reduced our receivables and unbilled revenue during the quarter through payments from our SCE projects. The company generated cash flow from operations of $56.7 million and adjusted cash flow from operations of approximately $100 million, ending the quarter with approximately $176 million of unrestricted cash. We anticipate continued improvements in working capital during the coming quarters as the final SCE payments are invoiced and collected. Speaking of SCE, as disclosed in the press release, during Q1, we agreed on the reimbursement of additional costs incurred by Ameresco related to SCE’s request to move the project completions into 2023.

As part of this agreement, SCE made a $125 million advanced payment to us on future milestones, which is reflected in the improved working capital I just mentioned. Total project backlog was a healthy $3.0 billion, a 13% sequential increase as we added $472 million in new awards during the quarter, a Q1 record. Our energy asset visibility is approximately $2.3 billion. This metric includes both contracted energy asset revenue as well as uncontracted RNG revenues that we expect to generate over the life of these assets. And to reiterate from the last quarter, this is only from our operating assets. We have a line of sight to even more recurring revenue potential from our assets and development pipeline. In calculating the uncontracted part of this metric, we have used conservative assumptions for asset life and merchant market pricing for RINs as noted in our release.

Our energy asset visibility together with our project and O&M backlog gives Ameresco visibility on over $6.5 billion in future revenue. We are pleased to be reiterating our 2023 guidance which anticipates adjusted EBITDA growth of 5% at the midpoint, which is noteworthy considering the difficult year-on-year comparisons associated with the wind-down and completion of the large SCE projects. I’d now like to give some color around how we are looking at the 2023 Q1 to Q4 ramp with a focus on the pattern of revenue recognition. On the project side, we ended Q1 with a 12-month contracted backlog of $639 million, much of which we expect to be recognized as revenue throughout this year. In addition, we typically convert between 10% to 15% of our awarded project backlog into revenue in any given year.

Furthermore, approximately 5% to 10% of our total revenue in a typical year comes from aged proposals, which get awarded, contracted and converted into revenue in that same year. Our operating assets have a stable base of recurring revenue subject to weather-related seasonality on the solar side. With the commissioning of 34 megawatts of the new Q1 assets contributing for almost the full year, plus 22 megawatts of RNG and another 24 to 44 megawatts of solar and storage contributing partially later this year, we expect very healthy growth from our energy assets lines of business. Our O&M and other lines of business tend to be more linear, so the Q1 2023 run-rate is a good estimate for the remainder of the year. When you add those items to our already reported Q1 results, we have a clear path to our guidance levels, recognizing that this is a high-level overview of our near-term visibility we do plan to elaborate on this during our upcoming Investor Day.

Turning to Q2 guidance. Taking into account Q1 actual performance and considering the ramp described above, we expect second quarter revenue to be in the range of $280 million to $300 million, adjusted EBITDA of $30 million to $40 million, and non-GAAP EPS of $0.10 to $0.20. Now, I’d like to turn the call back over to George for closing comments.

George Sakellaris: Thank you, Doran. As we have discussed in detail during this call, we have continued to grow our long-term line of sight with now over $6.5 billion in revenue visibility and over 400 megawatts of assets in development and construction. We also maintained an excellent line of sight to both our 2023 guidance and 2024 target of $300 million in adjusted EBITDA. There is no better time to be in our business given the tremendous opportunities both in the U.S. and internationally as governments and institutions around the world invest in solutions addressing carbon and cost reduction, grid reliability and volatile energy prices. Again, we look forward to seeing investors in London and at upcoming conferences and events. And in closing, I would like to once again thank our employees, customers and stockholders for their continued support. Operator, we would like to open the call to questions.

Q&A Session

Operator: Thank you. And it comes from the line of Noah Kaye with Oppenheimer & Company. Please proceed.

Noah Kaye: Good afternoon. Thanks for taking the questions.

George Sakellaris: Hi, Noah.

Noah Kaye: Hi, how are you? First of all, nice to see the milestone payment acceleration on SoCal Edison contract, I wanted to ask about other EPCM bid activity. I know you had a press release out around some of that activity not so long ago. I don’t know if that’s included in your comment, George, about the 50% higher dollar value on bid proposal yield to-date or if that was separate you are talking about the traditional project business and maybe you can clarify that?

George Sakellaris: Yes. No, that was included in the other 50% increase in the activity level that we have seen so far. And what I might add, the business is picking up and we wanted to make sure we point that out. Yes. When you are talking about the press release for Sunel though, no, that’s not in that 50%. That’s upcoming bidding activity that we have strategically worked with them to decide we are going after with an aggregate dollar and megawatt amount there for the market to see.

Noah Kaye: Okay, excellent. So the bid activity that you talked about is apart from that. Can you maybe characterize the $472 million you received in awards and some of what you are bidding on just in terms of mix or key trends, I think investors are going to be interested to get a flavor of what post-IRA has maybe more pull and more focus. But I would just love any comments you might have around mix?

George Sakellaris: Yes. On the $472 million, it’s across the board. Quite a few of the energy savings performance contract, I think there is one battery storage project there, couple of small micro grids. But – and then on the 50% increase is across the board. The activity level across the board has picked up. And I would say more on the battery storage and the micro grids, pretty good traction on the C&I and some of the federal as well.

Noah Kaye: Yes. Just in consideration of time, one more question, if I could. Maybe it doesn’t have any bearing on your near-term RNG development, I did see a report from Reuters today that EPA might split off the rule-making for eRINs so that it could basically wrap up the RVO rulemaking timely for 2023. It’s just any comment on how you are looking at that sort of the regulatory environment now and how you are approaching project development on landfill gas electricity versus RNG?

George Sakellaris: Yes. On the eRINs and I will comment it and Doran can add a little bit more color to it. But they are not in our plan, the 23 or the 24 for that matter. But on the other hand, we want to point out to everyone that we have over 75 megawatts landfill to electricity assets, which down the road, it could be an upside. But we have been negotiated the contracts see how EPA defines earrings and so on in the past to it. And on the other hand, if they adjust the EPA focuses on the RVO, it might help because we did provide them quite a bit of data showing to them that the analysis that they were using it wasn’t represented. It wasn’t current. And we are cautiously optimistic that they might increase the number that they come up with.

Noah Kaye: Yes. Thanks very much for the color.

Operator: Thank you. And it comes from the line of Stephen Gengaro with Stifel. Please proceed.

Stephen Gengaro: Thanks. Good afternoon, everybody. Excuse me, background noise from travelling. So two things for me, where I would start with this first when you’re talking to customers and looking at various projects, how has inflation impacted the discussions? I mean it feels like your order flow and your commentary, things look very strong. I’m just curious what you’re seeing on that front these days if you see it slowing down a bit as far as the inflationary impact.

George Sakellaris: Inflation works both ways. But what has helped the value proposition is that the energy prices have gone up as well at a faster pace than materials and so on and so forth. So the venue proposition is still very good. And the activity level, they want to reduce their costs. So they are more conscientious about the energy cost and the infrastructure upgrades and so on.

Doran Hole: Yes. I think it’s the same theme we’ve talked about before, Steve, and I don’t think we’ve seen a change in conversations about…

Stephen Gengaro: Okay. Great. Thank you. And the second one for me is when we think about the sort of the road map to 2024, and I’m sure you’re going to talk a little bit more about this in London, which I’m looking forward to. But can you give us some sense how much of that target would have to be driven by incremental acquisitions from where you’re sitting today and how much is sort of based on existing operations?

George Sakellaris: No, it’s most of – incremental acquisition is, yes, we never counted too much, even though at the original plan, we had a couple of small acquisitions that we had in the plan. But it’s – I would say, not very material at all.

Doran Hole: Yes. Not a material amount, Steve.

Stephen Gengaro: Okay. Great, thanks. I will get back in line.

Operator: Thank you. And it comes from the line of Tim Mulrooney with William Blair. Please proceed.

Tim Mulrooney: Yes. Hi, Doran, George. Thanks for taking my question.

George Sakellaris: Hi, Tim.

Tim Mulrooney: On the ‘23 guide, your guidance, I think, assumes $60 million to $65 million in EBITDA in the first half of the year, implying that you’ll need to generate about $150 million in the back half of the year. That’s a significant ramp over a short period of time. Can you just help bridge that a little bit for investors by segment? You were helpful in your prepared remarks, but how much of that EBITDA ramp do you expect to come from the project segment versus the energy asset side of the business for the second half of the year?

Doran Hole: Tim, I think you logically moving the question from my discussion about revenue ramp into the EBITDA ramp. And I think we’re going to save that for the Investor Day. We’re planning to give some more color about the ramp.

Tim Mulrooney: Okay. Alright. Well, we will leave it for the Investor Day, Doran. Thank you.

Doran Hole: I mean I think, yes, when you look at the breakdown on the revenue side, I think we’ve talked about, generally speaking, what our margins look like in those segments. So I think that you can probably do a little math to get some clarity on it. But I think we will hold that for now.

George Sakellaris: Yes. The one thing on my head though, on the ramp that the anticipated that you see the ramp there, even though it looks a little bit ambitious, we have done it for both.

Tim Mulrooney: Yes. Okay, thanks, George. And then just sticking on the energy side, the three RNG plants you expect to be completed this year. Can you just help us out with our models by outlining the expected timetables for the mechanical completion of these three plants?

George Sakellaris: Yes. One of them, it’s actually – it’s already mechanically complete. And we are in the commissioning stage right now. It’s just direct in the commission space, so it should be fully operational in the next couple of months. The second one, we anticipate to grow in mechanically complete early third quarter. And on that particular one, we saw a little bit of a delay, a slight delay on some delivery of some equipment. So it’s about a month or two. And so you would be in commission mechanical early and comps during the third quarter. And the other plan will be a mechanical completion early in the fourth quarter and then fully commissioned before the end of the year. And on that particular – that’s in the California plant, that was impacted by the unprecedented weather down there.

The floods and so on. So we had about 3 months delay on that particular project. But the point we want to point out here is that Ameresco have a very diversified business. So if we lose, let’s say, three quarters of production on a particular plant is not as impactful as it would be. We have other levers which are pulled in the company and project construction and so on or the solar plants that the ones we put in service, a couple of them they were ahead of schedule. So it gives us a little bit more flexibility rather than rely on any one or two individual plant.

Tim Mulrooney: Got it, thanks. And if I could just sneak one more in real quick on the RNG. After the three this year and the four to five you have slated for next year, how many RNG plants do you have in the backlog guide from those?

Doran Hole: We still at total 20 in total.

George Sakellaris: 20. Yes.

Tim Mulrooney: Okay. Thank you.

Operator: Thank you. And it comes from the line of Julien Dumoulin-Smith with Bank of America. Please go ahead.

Julien Dumoulin-Smith: Hey, good afternoon, team. Thanks for the time. Appreciate it.

George Sakellaris: Good afternoon.

Julien Dumoulin-Smith: In fact, if I can just – Hey, afternoon, guys. Listen, if I can, just a follow-up on the last question quickly. Look, obviously, you’ve announced some incremental larger-scale renewable opportunities in Europe. You’re scaling up Europe nicely. RNG is what it is on time line with eRINs but how much latitude are you effectively creating here against your ‘24 guidance? I mean folks have tried to prod you in a couple of different ways on this. But just curious if you could talk about how much incremental latitude this is versus solving for the ‘24 plan with the incremental European announcements principally.

Josh Baribeau: Julien, this is Josh. Maybe I want to make sure I’m understanding your question. Were you talking about – when you say incremental European announcement, did you mean the Senal announcement?

Julien Dumoulin-Smith: Yes, sorry, indeed. And the suggestion that there was more to come.

Josh Baribeau: Yes. So when we gave the ‘23 target, it was a reflection of the earnings power of our business for 2024. And we are constantly proposing activities, some of which we knew about at the time, some of which we had a feeling would come and some haven’t come yet. But at the end of the day, it’s not like that number you started from March of 2022 and started adding every press release we add on top of that. A lot of that was either built into the target because we knew we’d be coming out with them or we had a feeling for where the business development would be focused over those next 2, 2.5 years. So I think in short, a it’s proposal, they haven’t been awarded yet. We think we have a great shot at a lot of them, but the timing is a little uncertain. And b, not fully incremental. A lot of that was kind of built into the plan.

Julien Dumoulin-Smith: Got it. And then maybe if I can talk about extending the plan and perhaps as part of the rate case, how do you think about the time line here where eRINs or just frankly, executing against the 20-odd projects you have in flight giving a longer-dated target? Obviously, 24% is around the corner here. What kind of duration can we look to? Can the updated plan include kind of the plurality of projects already in flight here when you think about getting some degree of certainty on your RNG program more holistically?

Doran Hole: I think for the quarter, certainly, we’re focusing on the ‘23 ramp, the ‘24 guide that we’ve given before. We – to the extent we get to a point where we’re ready to talk about what things look like beyond that, apart from what we put in our kind of traditional slides about our overall revenue and EBITDA growth over time, then we will do so. But we’re not talking about it today.

Julien Dumoulin-Smith: Got it. At Analyst data, though, right?

George Sakellaris: So I didn’t get the question.

Doran Hole: We will let you know.

Julien Dumoulin-Smith: Alright. Fair enough. We will stay tuned. Thank you, guys.

George Sakellaris: Thank you.

Operator: Thank you. And it comes from the line of Eric Stine with Craig-Hallum. Please go ahead.

Eric Stine: Hi, everyone. Thanks for taking the questions.

George Sakellaris: Hi, Eric.

Eric Stine: So revisiting the joint venture with Sunel, Just curious on the 1.5 gigawatts of bids that you’re participating in, how that breaks down small, medium, large, and I guess I’m trying to get at, I would assume that the large ones may move slower and be chunky and the others might be a little quicker. Just any thoughts on how we might see that play out.

Doran Hole: So I’ll just speak to this for a second. The – for example, the one that we’re executing on in Greece currently with them probably around a 12-month implementation for a 100-megawatt project. So I think a lot of what we’re seeing and what we’re going to propose with them is in a similar size range, some bigger, some a little bit smaller. And so they are a little bit more granular. Clearly, we focus a lot on execution risk there. And I think also, we’re pleased to see those spread out amongst the jurisdictions mentioned in the in the press release, George, I don’t know if you want to add anything.

George Sakellaris: It’s across the board. And most of them is with customers as we know that they are on the other side. That as those projects will build with people that we have relationships with – but they still have to go to the competitive prices and may the best person win.

Eric Stine: Got it. And maybe just on the follow-up, and I’ll keep it to two. But what is the competitive environment like it sounds like you’re being selective as to the bids that you’re participating in? Just curious if there are any differences in the European market versus what you’ve seen in the U.S., I guess, still early days.

Doran Hole: Well, it is – there are some differences, obviously, jurisdictionally speaking that, however, Sunel’s got a good track record of executing in there. And then in addition to that, these are customers that Ameresco is a known quantity. So we – that’s what gives us the confidence. And I think we’re really focusing in on the ones that we feel really good about winning, right? I mean, we’re not going to just go out there and just do a shock on the last as many as we can see in a bunch of jurisdictions where we haven’t operated before. We’re really focusing on these areas where we feel a high likelihood of success is at hand. So the customers over there, though, do tend to be some of the larger asset owner developers there, right? So it’s not traditional kind of government customers like we see here in the U.S. But it’s not like there is no competition. So we still have to come in with some strength.

Eric Stine: Okay. Thanks.

Doran Hole: Thank you.

Operator: Thank you. And it comes from the line of George Gianarikas with Canaccord Genuity. Please go ahead.

George Gianarikas: Hey, good afternoon, everyone. Thanks for taking my questions.

George Sakellaris: Good afternoon, George.

George Gianarikas: So can you just talk about any impacts you’ve seen from the financial system stresses that we saw over the last 90 days on your business? And any projects?

Doran Hole: Yes, sure. So on any projects? No. We’ve seen no kind of direct impact, no direct exposure across any banks that have been talked about by name in the with the FDIC taking control. So that’s kind of step one, right? Lenders are starting to get a little bit more careful, but we have disclosed that we’ve actually increased one of the covenants in our credit facility. We closed a very large construction loan we’ve closed multiple sale leasebacks. And I think it’s – kind of the strength of our history and our profile is continuing to carry us we – the last thing I would say is that our lenders on the non-recourse side for our projects or the assets that are actually going on to our balance sheet are not just banks. We’ve got a diversified funding pool. We’ve got insurance companies in there. We do have banks. We’ve got non-bank lenders involved. And so that is the impact of what is facing kind of just the banking industry specifically.

George Gianarikas: Thanks. And may – you alluded to this a little earlier, but are you seeing any supply chain impacts? Any equipment delays, any permitting issues that you had referenced over the last 6 months? Are they continuing? Or has there been any improvement in the availability of transformers. Is there any electrical equipment that you’ve seen in short supply?

George Sakellaris: I would say some elements, we’ve seen a little bit of improvement. Other elements are remaining relatively stable as manufacturing capacity keeps trying to keep up with demand. Not going to go into specific types of equipment necessarily. But broadly speaking, I think there is been a mild improvement with some others just remaining kind of exactly where they were before. We’re watching it very closely, as you can imagine. And we manage those time frames very closely.

George Gianarikas: Thank you.

Operator: Thank you. And it comes from the line of Kashy Harrison with Piper Sandler. Please proceed.

Kashy Harrison: Hi, good evening everyone. And thanks for taking the question. So last quarter, you highlighted that it was taking a little bit longer for projects to convert from award to contract just due to interest rate volatility. But in the press release, you indicated that you expect to convert a substantial dollar amount of awarded to contract during 2Q. Can you speak to the drivers of that confidence? Are these – have these projects already converted? Or what’s driving the confidence that we’re going to see a big change in Q2?

Doran Hole: Yes. These weren’t projects that converted in Q1. I think the ones we talked about at the end of Q4, we had mentioned that it was likely end of Q1, beginning of Q2 through early Q2. So we’re expecting to see those come through as well as kind of just the ordinary pace of award to contract conversions.

George Sakellaris: And our confidence comes because we see talking to the customers, which stage of the process are we – how many more approvals do we need and so on. And good number of good-sized contracts what I would call advanced stage of execution.

Kashy Harrison: That’s helpful. Thank you. And then just maybe a quick follow-up, just a housekeeping item, it looked like your net assets in development declined to 432 megawatts from 470 last quarter. What – did you sell some projects? Or did you cancel some projects? What was the driver of the sequential decline in net assets and development megawatts?

Doran Hole: Well, Kashy, the biggest change, of course, is we placed 34 megawatts into service. I want to make sure that you’re comparing apples-to-apples because we kind of have a gross number and a net number that being taking out our partner – joint venture partner share. And so the quarter end last – or at the end of Q4, I think we were at 460 and we ended this quarter with 431. So we had – if you take 460-minus 34, and we added a couple – that’s how that math works.

Kashy Harrison: Got it. Thank you.

Operator: Thank you. And it comes from the line of Joseph Osha with Guggenheim. Please proceed.

Joseph Osha: Hello, everybody. Thank you for taking my question. I have two. First, you all had indicated to me recently that you felt like particularly in your asset portfolio that the solar plus storage portion of the mix was is going way up. I’m wondering if you’re continuing to see that. And also just on the sold projects, are you seeing the storage attach rate go up there as well? And does it kind of compare it to the rate for your asset portfolio, thanks. And I have a follow-up.

Doran Hole: Okay, Joe. I might just check on the statistic on the attachment rate of storage to projects that are solar plus storage. But as far as the rest of it, if I’m looking forward through the remainder of the year, I do actually expect to continue to see that mix of solar and storage increase versus the overall mix for certain George and I both have been directly involved in a number of things that are out there and that we look forward to talking about. But I think that we will see that mix continue to increase, yes. That’s – it’s – as you know, we have very narrow standards for what we will put on the balance sheet in terms of return hurdles, in terms of risk, risk-adjusted returns, but we are still seeing some really attractive stuff.

Joseph Osha: Okay. And then – alright go ahead.

George Sakellaris: Yes. I was just going to give you a quick statistic on the storage. So, we have about 68 megawatts of batteries attached to solar systems and then about 57 megawatts of just standalone storage.

Joseph Osha: Well, and that gets to my second question, right? Obviously, as people are continuing to sort of digest this, the storage only ITC and whatever adders might come out of it and all that kind of stuff. How do you think about your solar cash versus storage-only mix?

Doran Hole: I don’t know that I could put the kind of predictive analytics out there, Joe, because again, we are looking at the opportunities on investment-by-investment basis. So, the development is continuing across the board without question. Plenty of solar in development, standalone solar as well as solar plus storage and the storage standalone business, I mean it’s coming from across the board, really comes down to what are we going to devote our resources too.

George Sakellaris: Yes. And the only thing I might add is that the storage portion is growing in relation to the solar and our – doing the large project in Southern California and gaining our reputation out there, it helped us to get good traction and even just better storage alone projects.

Joseph Osha: Alright. Can I sneak one more in here, I am sorry. Obviously, you flipped to positive cash flow from ops from negative and obviously, kind of SCE has been swinging it both ways. But I am curious, given this outcome, I mean do we feel like we have line of sight towards sustainable positive cash flow from operations, say, towards the end of this year coming into next year?

Doran Hole: Look, I mean the short answer is yes because of the adjusted cash flow from operations in general, when you take that before allocating how much we are going to invest in new assets, which as you know, we do invest our excess cash flows in those new assets, we have a small maintenance CapEx piece as the SCE projects go on through to their full completion than what we have been seeing for the last several quarters is going to reverse itself, and we feel quite comfortable about that.

Joseph Osha: Okay. Thank you very much.

George Sakellaris: Thank you, Joe.

Operator: Thank you. Alright. And our next question comes from Pavel Molchanov with Raymond James. Please go ahead.

Pavel Molchanov: Thanks for taking my question. Back to the partnership with Sunel in Europe, when you talk about 1.5 gigawatts, is there a timetable for that? In other words, is it going to be 50 megs a year, 100 megs a year, or what kind of run rate are you anticipating?

George Sakellaris: I would say, about a couple of years, it may be 3 years at most. A couple of them, I know that to be shorter time horizon within the next 18 months or so. But generally, these large institutions, even though they are in the same business – we are in the same business. They take time and value the RFPs and then go into construction, which takes a year to 2 years anyway. So, I would say, 2-year to 3-year horizon. But some of the smaller ones, that’s why I wanted to do my commentary. Some of the smaller ones projects for some industrial and commercial customers, and we are doing with that particular partnership, which feels very good. They will be completed within the next year or so.

Doran Hole: Yes. Those potentially could be faster, the smaller ones. I mean you have got a little bit of time for proposal converting to award and signing contracts, but since you are dealing with more like private and commercial customers and not government customers, that cycle is shorter. And we move into construction. And then it’s all about timelines to construct, which I think takes us to that 2-year to 3-year period.

Pavel Molchanov: Okay. About a month ago, you announced that you will be buying batteries from Redflow in Australia. And I think that’s the first time you purchased non-lithium ion batteries. Are you confident that commercial institutional end users will be comfortable with what is after all kind of a novel battery chemistry?

Doran Hole: So, the short answer is with Redflow specifically, actually, we had a customer who had to analyze the technology and requested that we do it, because they wanted to use it. Interestingly, I will correct one thing that you said. This was not the first non-lithium battery that we purchased. This was the second manufacturer. So, we have got experience with it before we do look very, very closely, as you can imagine, at the data, at the ability for these batteries to be deployed commercially before agreeing to do so. And I think as I have kind of commented on, I think in an article recently, what we would like to do is get ourselves into a position where if we feel good about the product, then our expanded demand for the product will actually kind of trace the expanded manufacturing capacity of a lot of these battery suppliers because they tend to be a little bit smaller, right.

And so they are gaining traction as we are gaining traction, but we do feel we do feel comfortable. I was recently on an internal expert call with some of our folks talking about those technologies. And yes, we have done a lot of learning and we are quite aware of what these batteries are good for, what they are not good for, what the right case study is. We know what the right use cases are. And it’s all about deploying them in the right place, right, at the right cost for the right customer situation.

George Sakellaris: And this particular customer has done so much research on them. And that’s what they wanted, like what we said to customer, we will do what the customer wants us. But on the other hand, we are going to make sure that what we are doing, it stands, it performs well.

Pavel Molchanov: Understood. Thank you again.

George Sakellaris: Thanks.

Operator: Thank you. And it comes from Christopher Souther with B. Riley. Please go ahead.

Christopher Souther: Hey guys. Thanks for taking my questions here. It’s nice to see an accelerated payment from SCE. Can you give us a sense as to what has been paid to-date or what is remaining from SoCal Ed? And it sounds like they are green for some of the cost stuff you have talked about previously, potentially being an option. And any sense of the overall margin profile those projects and where we think we should be penciling that in at this point would be helpful?

Doran Hole: Yes. I mean the expectation is we will end up with completion kind of this summer, right. You kind of follow the cash from there. I would expect our unbilled to come back down to a normalized level sometime in Q3 there for. That’s probably the best pattern I can give to you, not stating specific dollar amounts, of course, but you would have seen the increase in unbilled as we got close to the end of 2022, when we have stated in our Q that we – in our K that we have recognized the majority of the revenue from that contract in 2022. And so therefore, that should give you a fairly solid unbilled number to compare against.

Christopher Souther: Got it. Okay. No, that’s really helpful. And then on Europe, I imagine a lot of this to be covered next week, but could you just frame what the revenue contribution is expected to be for 2023 there? It sounds like there are still a lot of moving pieces that could impact 2024, but I wanted to get a sense of how you think the European investments are going to shake out for this year. And then you called out Europe as one of the drivers of increased OpEx. I am curious what the magnitude is there and how much we are spending in Europe?

George Sakellaris: Our numbers guy there. So, Europe is currently about 5% of our sales. And I think that will – the growth there, at least in the near-term will largely be driven by the Bristol City Leap project. So that may go to something like 10% in the next year or 2 years. The acquisition of ENERQOS is a nice acquisition, very excited about it, but it isn’t quite as material as Bristol, for instance.

Christopher Souther: Got it. Okay. That’s helpful. I will hop back into the queue. Thanks guys.

Operator: Thank you. And it comes from the line of Chip Moore with EF Hutton. Please go ahead.

Chip Moore: Hey everybody. So, wanted to ask one – let me ask about that increase in dollar value for proposal activity you are seeing, great to see that up nicely. But around this trend in growing project complexity, I guess more or so around your confidence in the ramp for the back half of the year and then perhaps that $300 million EBITDA target next year.

George Sakellaris: I mean the proposal activity, it’s helping us a lot. But as you would probably know, it takes 6 months to 18 months to get from the proposal to actual execute it. First, you got to win the contract, go to the award. And then six months or a year later, we get the actual contract where we can build it out. It’s a good indicator that our team, and that’s why we get a little bit of pickup on the development expense going out there and developing these projects and winning a good share of the projects. So basically, give us even more confidence for that particular number for the $300 million EBITDA number.

Doran Hole: I think a good part of the proposal activity came out of Federal as well where it had been a little bit slower for a period of time following COVID. So, you are starting to see that bounce back pretty strong.

Chip Moore: Yes. And you think you have pretty good line of sight in the back half of the year for those projects that you typically have awarded convert in a year or that’s well embedded in your outlook? Thanks.

George Sakellaris: As far as aside from the awarded to the contracted, we have very good visibility, and that’s why we feel pretty good about the number in 2023. And where we think we are going to end up for the end of the year on contracted backlog that’s going to help us a lot for the next year. Yes. I mean that’s a very granular exercise for us – when looking at what the conversion rate is going to look like a contracted for the remainder of this year. That is not a general feeling, that is really based on some hard data on the – for our awarded backlog, which projects, where do they stand, how far along are they, how close are we to converting new contracts. We look very closely to that. And that’s what gives us the confidence in that kind of cadence of conversions that I talked about in the ramp.

Chip Moore: Perfect. Yes. Understood. Thanks very much.

George Sakellaris: Okay.

Operator: Thank you. One moment for our next question, please. And it comes from Craig Shere with Tuohy Brothers. Please proceed.

Craig Shere: Good afternoon. Thanks for taking the question. Really want to do a bit of a follow-up to Chip and Tim’s earlier questions and it’s three-part, but really quick, so I will just word it out. So first, can you opine on the level of confidence in that updated 2023 RNG rollout. Second, are there any assumptions around improving RINs into the second half built into guidance? And third, if you meet the guidance implied second half of this year, given that’s a run rate already meeting your 24% guide doesn’t ongoing growth suggest you will beat your ‘24 guide?

Doran Hole: We are going to start – I wouldn’t say that yet. Confidence, we will start with confidence in the construction schedule. I think confidence is very high with schedule. With respect to RINs, so we don’t really talk about specifics on the RIN numbers. I would say that what we are using is following what we believe is our expectation for what we see the outcome for 2023 RINs to look like. Everyone knows we are kind of circling mid-June for the final rules, but that’s kind of where we are with that. And I think that with respect to the 2024, look, we feel very good about that 2024 number. We – if we felt like there was some sort of material adjustment that needs to be made, we would make it. Based on what’s going on, we feel like there is a lot of contributors there that we feel like we are going to kind of be bringing to bear to deliver that number. I don’t know that I am going to jump into any adjustments to that at this time.

George Sakellaris: No. Actually what we think, the positive thing that we have been seeing in the marketplace, it reinforces that number.

Craig Shere: Right. I guess my point is you are implying a second half ‘23, that is basically a 2024 full year run rate, and you are saying that business continues to grow?

George Sakellaris: No, because the third quarter and the fourth quarter are the strongest quarters that we have because many live construction of schools, colleges, universities and so on and so forth. And then the first couple of quarters of next year, they would be considerably slower than the fourth – than the third quarter and the fourth quarter of this year, so you do not have that run rate.

Doran Hole: Yes. If you look back over the years, we have – this has always been the cycle, slower Q1, Q2 versus Q3, Q4.

George Sakellaris: But you cannot extrapolate the Q3 and Q4 into the following year. No, I can’t.

Craig Shere: Understood.

Operator: Thank you. One moment for our next question, please. And it comes from the line of Ben Kallo with Baird. Please proceed.

Ben Kallo: Hey guys. Maybe could you talk about the move internationally, and what’s driving it, because it seems like in the U.S. with the IRA, we have some of the biggest tailwinds here. And so what’s the emphasis to move internationally? Is that returns? Is it less competitors or what? And then just going back to the previous question where we talked about seasonality of the business. One of the things that you all emphasize is as your asset ownership increases that we should have better visibility every year because the EBITDA comes from those assets. So, why wouldn’t it go from a run rate in the second half to next year, if we get 75% EBITDA or something like that coming from the assets? Thank you.

George Sakellaris: Okay. So, I will start with Europe. So, Europe is really exciting. There is a lot of areas of Europe where we actually do believe we can compete very, very well. It is and has been primarily on the project side, right. I think the asset side will come – but the project side of the business it’s – there is a significant amount of incentives and funding pushed around by the EU. They have got extraordinarily aggressive targets corporates, industrials and governments alike looking to go to net zero, just like the Bristol situation has led to multiple conversations with other municipalities around the region. So, we do see it as an opportunity for a volume game with up, again, significantly increasing our operating base.

We are not talking about going out and hiring hundreds of people that will just put on the ground to go chase stuff in Europe, right. We are using our high operating leverage, organic business growth model, the exception of the acquisition of ENERQOS, which of course was opportunistic, but we feel great about. That’s the approach we are taking to expanding in Europe. I agree that the U.S. has a tremendous amount of incentives that is going to increase business volume in the United States as well, right. And again, that too is a volume gain, more funding for our customers, so they would like to do more work. And however, we are not taking away from the U.S. to expand in Europe. It’s not a zero-sum game. It’s all a little bit of a magnifier on the expansion capabilities that we have as a company given the way that we operate.

So, then moving on to your second question, which I have already forgot.

Doran Hole: Yes. I think I can answer it. So, I think you are asking kind of why wouldn’t that be the run rate given the energy assets. So, I think you have to break our business up into our four lines of business. The energy assets would be the run rate. But the project business, as George has talked about with the previous caller has some pretty significant seasonality to it. So, the energy assets that would be the run rate, so when you see that, that’s a reasonable run rate. There is a little bit of solar seasonality around the winter months – but it’s then – and then that’s the project business seasonality to Q1 and Q2 of 2024.

Operator: And thank you, ladies and gentlemen. With that, we conclude our Q&A session and program for today. Thank you for participating and you may now disconnect.