Ameresco, Inc. (NYSE:AMRC) Q1 2024 Earnings Call Transcript

Ameresco, Inc. (NYSE:AMRC) Q1 2024 Earnings Call Transcript May 7, 2024

Ameresco, Inc. beats earnings expectations. Reported EPS is $-0.05617, expectations were $-0.11. Ameresco, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the First Quarter 2024 Ameresco Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I’ll now like to hand the conference over to your first speaker today Leila Dillon, Senior Vice President, Marketing. Please go ahead.

Leila Dillon: Thank you, 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 Mark Chiplock, Senior 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. 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 of our supplemental information 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 our supplemental information. I will now turn the call over to George. George?

George Sakellaris: Thank you, Leila, and good afternoon, everyone. We are pleased with our first quarter performance as the team’s focus on execution drove growth across our four business lines as well as significant results in our business development activities. The actions we have taken to optimize our organization are already driving a positive impact across our company and positioning Ameresco to capture the substantial opportunities in front of us. First quarter revenue exceeded our guidance, led by strong execution from our projects group, and complemented by growth in our other business lines. Additionally, the momentum of business development has continued to show strength, with new project wins and energy asset development activity laying the foundation for good profitable growth.

Our focus in cash generation is also yielding positive results as Doran will discuss later in this call. The current market demand for energy efficiency and renewable energy solutions remains robust across our technologies, geographies, and customer base. But this demand is continuing to stretch industry supply chains, create tight labor markets and generally lengthen overall timetables. I am pleased to say that these industry issues seem to be leveling out and we remain cautiously optimistic. And as we discussed last quarter, Ameresco is adapting to the new industry environment and the tremendous growth opportunities in front of us. We continue to refine our approach to drive increased win rates, expand project margins, and accelerate the speed of implementation.

We have reorganized our corporate structure to bring more uniformity and scalability across all of our geographies and business units. We have also focused our business development efforts on larger contracts in our core areas of expertise in our traditional customer base. This is already helping us to increase our project win rates, and we are seeing early signs of improving gross margins in our total project backlog. We have, however, anticipated the continuation of these industry challenges in our approach to forecasting and guidance. And with our solid start to the year, plus the visibility from our contracted backlog and our energy asset and O&M revenue streams, we are pleased to reaffirm our full year guidance. 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 information that was posted to our website after the market closed today. We are off to a good start this year with total revenues growing 10% to $298 million and with each of our four business lines experiencing growth. Our Projects business grew 11.5%, reflecting our focus on faster implementation and conversion of our backlog. While market challenges remain, we continue to take steps to succeed in today’s operating environment. Energy Asset revenue grew 6%, largely due to the greater number of operating assets compared to last year, improved production, as well as higher RIN prices.

We brought an additional 13 megawatts of assets into operation in the first quarter, adding to our large and growing operating base of 518 megawatts, which we expect to provide decades of profitable revenue to the company. Our O&M business had a very strong quarter, growing 14%, due to favorable timing on some of our long-term contracts. Our other line of business grew 3% as strong consulting revenues offset continued softness in our integrated PV business. Gross margin of approximately 16% dipped as higher than normal project cost adjustments during the quarter outweighed higher margins in the O&M business. Enhancing gross margins is a key priority for us, and as George mentioned we are seeing early signs of improved gross margins in our project backlog.

That said, we continue to emphasize driving incremental gross profit dollars and controlling operating expenses, in other words using our operating leverage to maximize EBITDA. We have been laser focused on increasing the efficiency of our business development process, a key controllable component of operating expenses. In the first quarter, our revenue growth as well as cost savings and operating leverage drove adjusted EBITDA growth of 13% to $30.8 million. As George noted, our business development activity on both the project and asset side was very healthy during the first quarter. The company’s total project backlog exceeded $4 billion for the first time in our history, growing 36% year-on-year and 4% sequentially. This growth was led by our contracted backlog which reached almost $1.5 billion and grew 45% year-on-year and 10% sequentially.

Our energy asset business also had a successful quarter of new development activity, ending the quarter with over 750 megawatts in net assets in development. We added over 50 megawatts during the quarter including the 40 megawatt biofuel facility in Maui mentioned in the press release. This asset represents our fourth award with HECO and is one of many projects and assets we are executing in the state of Hawaii. Turning to our balance sheet and cash flows, we ended the quarter with approximately $80 million in cash and corporate debt of approximately $280 million. Our debt to EBITDA leverage ratio under our senior secured credit facility was 3.0 times and remains below our bank covenant level of 3.5 times. Our energy asset debt advance rate, which you will remember is our total energy asset debt divided by our energy asset book value, remains at a very conservative level in the low 70% range.

Importantly, our access to energy asset capital remains excellent with many financing options available. An example of our collaborative approach to financing was our partner Republic Services’ investment in our under-construction Roxana RNG plant, allowing them to take a strategic minority interest in addition to providing site access and gas supply. Our energy assets remain highly attractive to many financing parties interested in teaming with Ameresco given our proven capabilities. In addition, we continue to pursue our develop and sell business model for a portion of our energy assets in development. Under this model, once a transaction is executed, we would convert the assets into project and O&M revenue streams without the need for Ameresco to provide the permanent capital investment or to raise additional asset debt.

Our cash flows continued to be strong with positive adjusted cash flow from operations of over $40 million during the quarter. Our eight quarter rolling average, which best represents our implementation cycle, reached almost $30 million. In our supplemental slides we highlight the increased momentum we have seen in the rolling cash flows, and we expect both cash flow metrics to continue to improve, especially as we bill and collect on the SoCalEd battery projects. Speaking of SoCalEd, we’ve completed performance testing and are working on the final checklist for substantial completion for two of the three projects. The third project, which was more significantly impacted by the 2023 rainfall, is still expected to reach substantial completion this summer.

Solid start to our year together with our visibility from our project backlog and energy asset revenues supports our confidence that 2024 will be a year of strong growth for Ameresco. As George mentioned, we are reaffirming our full year guidance, which anticipates revenue and adjusted EBITDA growth of 20% and 38% at the midpoints of our ranges, respectively. We continue to expect to place approximately 200 megawatts of energy assets in service during 2024, including our large Kupono asset, United Power Battery assets and three RNG plants, one of which went COD already in January. You can find more details on our 2024 guidance in our press release. Now I’d like to turn the call back over to George for closing comments.

George Sakellaris: Thank you, Doran. Ameresco is off to a solid start with a commitment to profitable execution and growth. The company remains extremely well positioned to take advantage of the tremendous opportunities on the horizon in both our domestic markets and in Europe. Our top priority for 2024 remains execution and cash flow generation. 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.

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Q&A Session

Operator: Thank you. At this time, we will conduct the question-answer-session. [Operator Instructions] Our first question comes from the line of Noah Kaye of Oppenheimer & Co. Inc. Your line is now open.

Noah Kaye: Hey, good afternoon. Thanks for taking the questions. I’ll just try to do a couple quick ones here. First, talk about the improvement in conversion over to contracted, just the dynamics that you’re seeing in the market to support that where you saw the best pickup in conversion. And the related question is to talk about the margin profile of what’s going into backlog. Now, I think you mentioned in your prepared remarks visibility to just a better margin profile, but would love any dimensions around that.

George Sakellaris: Yes, the conversion from the awarded contracts to the executed contracts, it’s across the board, but we had couple of good wins, I would say, conversions on the federal sector, which is basically our bread and butter, as well as a couple of streetlights, couple of school systems and so on. So it’s in a couple of battery storage, smaller projects, but it’s across the board, the conversion. And I think the fact that we reorganize the company and we focus more on converting, moving projects from the awarded category to the executed it, so we can build them out, it just helps. I think anytime you focus on organization, on a particular task, things happen. And I think that has helped a lot. With the margin side, one of the goals this year, a, we choose or we target which projects we go after.

Like I said, they are around our core capabilities and the customers that we know best. And we have seen a little pickup on the contracted backlog, about 30 to 50 basis points. And that has been consistent now for the last couple quarters. And that’s why we started talking about it and…

Noah Kaye: That’s really helpful. Thanks. Sorry, I don’t know if Doran wanted to add any more to that. If not, I’ll move to my next question.

George Sakellaris: Go ahead, Doran.

Doran Hole: The last thing I’ll add is just simply that within the different business units, one thing that we’ve consistently seen is that when we do focus on business selection and the high probability wins, you actually tend to find that the margins are a little bit better in the projects. So there’s a little bit of a connectivity there to business selection and margins that adds to the benefit.

Noah Kaye: It makes sense. Just a quick question on the asset side, I think you called out the investment by Republic in the Roxana RNG plant. When we think about outside sources of capital for development as well as the develop and sell model. How do we think about kind of the types of assets that would go into develop and sell versus potentially attracting minority investments? Maybe you can kind of regiment how you’re thinking about the asset profile.

George Sakellaris: I can start on the solar side, I think because the market is so fluids and liquid, it’s a better strategy to develop and sell, because our return on capital, the ones we want to keep, is a little bit higher than what the Street will accept. So then on the RNG side, though, we have started looking to developing more partnerships where we will be a majority partner or there will be a minority. Otherwise we explore in various situations. In this particular case with Republic, Roxana, they have the right, we have quite a few sides with them. They have the right to invest in any assets that they wanted. They picked this particular one that they wanted to invest. We welcome it and we hope they continue to invest in that many more. Want to add something to that, Doran?

Doran Hole: Yes. I really think George has commented on the liquidity of the market in the solar space as well as the battery space, to be honest, those are the two categories of assets I think that really fill our develop and sell portfolio. And then we, of course, will opportunistically look at these potential partnerships, whether they be in the RNG or in the other asset classes, provided we feel like they’re accretive to our shareholders versus what we might be able to accomplish on our own.

Noah Kaye: Thanks for all the color. Nice quarter.

George Sakellaris: Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Moses Sutton of BNP. Your line is now open.

Moses Sutton: Hi, thanks for taking my question and congrats on great execution here. First, on SoCal Edison project, maybe it’s just some of the language of the update. It sounds almost like the two of those three of the projects that were already in that very advanced stage of commissioning, maybe some similar to like two months ago, which is pretty recent of the 4Q call. Any specific tasks completed that you can sort of check off or outline that moved those two further along. And then any shift in the timing on the third one. I know there was heavy rainfall, but that was already true from months ago. Just curious on anything more specific from either.

Doran Hole: I’ll start with the last question. No major shifts in the timeline of the third one. On the first two, the big difference is performance testing and duration. That’s kind of the big hurdle that we got through, and I think that’s really gives us a lot more confidence on how close we are to the finish line, Moses.

Moses Sutton: Excellent, excellent. Thanks. And then any updated thoughts on the storage energy assets that you are going to potentially, some of them not build on balance sheet. If they don’t hit your hurdle, you might sell them mid-stage and then timelines on any of that.

Doran Hole: So we’re kind of regularly running sales processes. We do those internally. I think as far as categories are concerned, we like to keep the ones that have really solid economics with long-term capacity contracts. We’re not big merchant battery players, but we do know how to develop those assets. So anything that we throw into the asset development metric that looks like, that is likely to fall into the develop and sell. And we’ve effectively built in our expectations for the timing of these transactions into our guidance. So that’s kind of how we look at the way this converts into project business and O&M business for us.

Moses Sutton: Excellent. Thanks again.

Doran Hole: Thank you, Moses.

George Sakellaris: Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Eric Stine of Craig Hallum. Your line is now open.

Eric Stine: Hi, everyone. Thanks for taking the questions. Hey, just wondering if I could clarify, so talking about the award conversion sluggishness that has started to pick up. Just unclear, it sounds like you believe that’s more based on steps that you are taking rather than the market improving. Maybe thoughts on that, whether that’s the correct read and how much more is there to go if in fact the market really hasn’t improved all that much?

George Sakellaris: Go ahead, Doran.

Doran Hole: I mean, it’s a combination of both, to be honest, with you. I don’t see that it’s necessarily. Certainly, we’re taking steps, right. We’re trying to be more aggressive in terms of getting our conversions across the line, but the market has also been a little bit more cooperative. In terms of supply chain delivery timelines on the execution of the implementation cycle, we haven’t seen those. Well, we’ve seen them be a little bit more predictable now, and I think that’s been helpful to us. I don’t know that much more to add.

George Sakellaris: They haven’t been extended. For example, the transformers, they were about 18 months. They were 18 months. And you can get them now, where before they will say 18 months and they turn out to be longer and you couldn’t get them, because I know sourcing various pieces of equipment lately. We can do it. They tell you a certain schedule and it seems to be holding. But as far as shortening any of the timelines, that’s what we meant by adopting to the new environment, which have not done and we have not taken into forecasting or the guidance, any improvement. That’s the availability and sticking to the schedule that we have seen so far. We had a hard time finding switches and so on. Lately, we’ve been finding them [indiscernible]

Doran Hole: As George said in the prepared comments, cautiously optimistic, continuing to forecast that we’re going to keep seeing these pressures. We’re not going to get too excited yet.

Eric Stine: Got it. And then maybe just on the gross margins you mentioned the project cost adjustments. I mean, can you provide a little more clarity there? I mean, it sounds like that’s just kind of normal course of business. Or were there any items that were one time that we should consider as we think about that?

Mark Chiplock: Yes. Eric, this is Mark. And I think you said part of normal course, because we review these projects all the time. This just happened to be an unusual quarter where we had four projects that as part of that normal course review, we identified some additional costs where we made some adjustments to the cost budgets. In any particular quarter, these adjustments, which can go both ways aren’t really material to the results. They’re standing out a little bit more, because we had some larger than normal adjustments and these have been some legacy projects that have been around for a while and they’re getting relatively close to completion. But we saw some true ups, some write offs, some that were impacted by – one that was impacted by delays and just some unforeseen events that and the timing of these projects and those adjustments all just happened to be in the quarter.

So it’s part of the normal course. But it was unusual in that they were larger than normal.

Eric Stine: Okay, thank you.

Doran Hole: Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Joseph Osha of Guggenheim. Your line is now open.

Joseph Osha: Hi there, guys. Thanks for taking my question. Can you hear me?

George Sakellaris: Hi, Joe.

Joseph Osha: Yes, sorry, can’t work my phone. And I apologize if you touched on this, I may have missed it on Slide 6 of your deck with the – thanks for putting those advance rates in. It’s really interesting. Is the implication that as these assets go from development to operating, that you think you can probably take them to kind of 85% advance rate. And I had one other question, but I’m curious about that.

Doran Hole: I think that’s right, Joe. I think that certainly as we’ve talked about in the past, some categories of the assets can carry higher advance rates than others. So depending on the mix of what’s in that pool of energy assets and development and construction, the advance rate may move around a bit. But once you get up to the operating on average, I think we are at that kind of 80% to 85%. And it is a little bit of a jump from where the construction lines and the construction lenders will advance.

George Sakellaris: Yes. And especially if they have long-term contracts or short end and so on.

Doran Hole: That’s right.

Joseph Osha: Right. And that makes sense. And just on the back of that, I mean, given what’s kind of been happening in bank world, I’m curious. I mean, have you guys ever thought about trying to securitize some of this stuff or are you happy with the options that you have?

Doran Hole: We’re always looking for new options, Joe, as far as decreasing spread. But when I take a look at spreads on the securitization market, I think that the granularity and diversity of the portfolio probably isn’t there in the similar asset type with the standardized documentation in order to really fit the securitization criteria that would draw the kind of spreads that you see in the market from some of the other companies that are asset focused, that use securitization as a tool. The assets just get a little bit too lumpy. So what we have is a number of financing facilities, when you go through our debt footnote, you can kind of see all of those. Many of them are dedicated to certain types of solar or battery assets, some are the sale leaseback facilities, which are usually done one at a time, extremely efficient financing vehicle for us.

And others are used when we’re going to use the tax credit ourselves or sell it. And I think we do feel good about where our spreads have been versus the market. And so we’re pretty happy with what we’re looking at. We think through competitive processes when we go to borrow funds against assets. We are seeing kind of the best of what’s out there.

Joseph Osha: Okay, thanks. And then you actually just raised an interesting point. I wasn’t going to ask, but since you raised, I’m going to ask, how much of the credit volume that you guys are creating. Are you retaining versus placing either in regular tax equity or are you guys out there actually transacting. I’m curious what you’re doing.

Doran Hole: Well, we haven’t disclosed the proportions, if you just break down entering into a tax equity transaction like a sale leaseback versus taking the credit ourselves for our own effective tax rate versus selling credits. We do all three. We haven’t come out and provided guidance with respect to any. We’ve executed one tax credit transfer this year so far. We’ve got another one underway. I expect that we will have more. It all depends on the volume and what we expect our tax liability to look like as well. As you dig into our effective tax rate, you see the impact of ITC and 179D, and given the transferability provisions, we love the flexibility of that tool. So yes, for sure.

Joseph Osha: All right. Thank you.

Doran Hole: Certainly.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Leanne Hayden of Canaccord Genuity. Your line is now open.

Leanne Hayden: Good evening, everyone. Thanks so much for taking my question and congrats on the progress made throughout the quarter. Just a few questions from me. George, could you please educate us on how you plan to capitalize on the emerging data center opportunity?