Ameresco, Inc. (NYSE:AMRC) Q3 2023 Earnings Call Transcript

Ameresco, Inc. (NYSE:AMRC) Q3 2023 Earnings Call Transcript November 6, 2023

Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Ameresco Incorporated Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mrs. Leila Dillon, Senior Vice President, Marketing and Communications. Ms. Dillon, you may begin.

Leila Dillon : Thank you, Howard, 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 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 financial information. I will now turn the call over to George. George?

George Sakellaris : Thank you, Leila, and good afternoon, everyone. We ended the quarter with a record total project backlog of $3.7 billion, which was up 14% sequentially and 41% versus last year. We added an impressive $700 million in new project awards during the quarter bringing our year-to-date awards of $1.7 billion, more than double last year’s level. And we anticipate that our new awards will continue to grow given the 35% increase in proposal activity as compared to last year’s levels. This backlog, together with our energy asset and operation remained visibility gives us over $7.2 billion in total multiyear visibility of profitable revenue supporting our confidence in Ameresco’s long-term growth. We did, however, face another wide and company-specific challenges, which impacted our third quarter results.

We are very disappointed. We are pleased with the progress we’ve made in building our long-term business momentum. We also added over 50 megawatts of assets in development in Q3 ending the quarter with almost 600 megawatts of assets in development and construction. This is a 30% increase from the 460 megawatts at the end of last year. While our long-term prospects have never been better, I did want to comment on some of the recent industry challenges. In our Projects business, we are seeing longer cycles when converting our awarded projects into contracted backlog. These contracts are being delayed as some customers are taking longer to proceed with the actual implementation of project work. It’s important to note that we have not experienced any cancellations, just a lengthening of the sales cycle in moving awards to contracts.

And like others in the industry, we also continue to face supply chain delays on certain components as well as tightness in the labor market. Our energy asset business has been challenged by both, downtime at some of our biogas plants as well as delays in the development and construction of some of our assets, especially our larger, more complicated plants such as RNG. Where assets always incurred downtime and the levels we have faced over the last few quarters have been considerably greater than budgeted. Driven by several factors out of our control, including adverse weather conditions and utility interruptions. The asset for structure timetables have stretched as a result of industry-wide component labor shortages as well as administrative bottlenecks.

Again, well, these delays are frustrating, it’s important to keep in mind that all of these profitable assets will be built. It’s just taking longer than originally anticipated. As the company continues to grow, we are optimizing the operational structure at more as good to bring more uniformity and scalability across all of our geographies and business units. We are making these changes to increase our ability to react to changing market conditions more quickly and to drive increased corporate efficiency. And with our tremendous project backlog, we have increased our focus on project execution and cash flow generation. Further, in light of the continued industry challenges impacting conversion times and execution, we are revisiting some of our assumptions around guidance.

Doran will provide more details on the numbers during his financial review. However, even with these challenges, we wouldn’t be more optimistic about our future. Ameresco is highly profitable, and we continue to expand substantial growth in ’24 and beyond. 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 the supplemental slides that were posted to our site after the market closed today. Total second quarter revenue of $335 million was below our expectations, as project delays and asset downtime impacted revenue. Our project revenue was particularly impacted by a lengthening in the cycle of converting awarded backlog to contracted backlog as well as continued industry-wide supply chain issues that are extending our construction time lines. Energy asset revenue grew 6%, largely due to the greater number of operating assets compared to last year as well as higher RIN prices. These benefits helped to offset greater-than-expected downtime at our biogas facilities as well as delays in bringing some new assets online.

Our O&M business delivered another consistent quarter with 4% growth, while our other line of business experienced a slight decline in revenue driven by end market softness at our off-grid solar business. Gross margin expanded to 19%, but did not meet our expectations as the downtime I just mentioned and project mix impacted our results. I want to emphasize that we have not seen any fundamental change in our overall project gross margins as the expected margin within our backlog has been quite stable for at least 2 years. We generated adjusted EBITDA of $43.3 million in the quarter. Our GAAP results for the quarter include a discrete tax benefit of $7.2 million related to a prior year Section 179 tax deduction allocated from a customer. To maximize our earnings, we’ll continue to take advantage of all of the benefits available to us and our customers as part of the IRA and other favorable legislation.

Our long-term revenue visibility remains strong as ever. As George mentioned, we ended the quarter with a record total project backlog of $3.7 billion. This is an impressive increase of 41% versus last year and a sequential increase of 14%, driven by winning over $700 million in new project awards during this quarter alone. Our operating energy asset visibility is approximately $2.3 billion, representing both contracted revenue as well as a conservative estimate of lifetime uncontracted R&G revenues. These metrics, together with our O&M backlog give Ameresco visibility to over $7.2 billion of future revenue. Importantly, this does not include any revenue contribution from the 596 megawatts of energy assets in development and construction. The timing of placing these assets into operation can be anywhere from under a year for small, more simple assets to 4-plus years for more complex assets such as RNG facilities.

Unfortunately, this time frame has recently been increasing due to labor and equipment availability, along with permitting delays. However, we continued our high rate of conversion with approximately 90% plus of our energy assets, either success placed into service on our balance sheet or monetized through a sale to a third party. We continue to field many questions on how higher interest rates will impact Ameresco, especially as it relates to our energy asset business. Compared to many in our industry, the inherent diversity of our business model gives us the flexibility to adjust to changes in the business environment. We have the optionality to develop profitable assets and then either hold them on our balance sheet as an operating energy asset or to sell to a third party and recognize project revenue if the assets do not hit our risk-adjusted levered IRR hurdle rates.

While some assets may not hit our own hurdle rates, they’re well within the return profile of many energy asset buyers and aggregators ready to add assets to their portfolios. And such a sale would often come with an attached O&M contract. This strategy is not new for Ameresco as recycling our cash flow through asset sales has been part of our business model for several years. In the end, we believe that our flexible corporate model with project, O&M and asset business lines allows us to continue to benefit from the rapid growth in the deployment of clean technologies even in a high interest rate environment. Our ability to finance our growth remains excellent. During the quarter, we secured over $0.5 billion in financing commitments bringing our year-to-date total to over $1 billion.

While the clinic industry at large has experienced credit tightening and expansion of spreads, we are particularly pleased that in our recent financing, credit spreads for Ameresco’s high-quality asset portfolio continue to be stable. We have a number of attractive options for financing our growth including nonrecourse project level debt, tax equity and the recycling of capital through asset sales. We are adjusting our 2023 guidance in response to the items which we described earlier. We now anticipate full year 2023 revenue, adjusted EBITDA and EPS to be approximately $1.35 billion, $165 million and $1.20 at the midpoints as detailed in our press release. We now expect to place between 120 and 130 megawatts of energy assets in service for all of 2023, including the recently acquired Los Alamitos microgrid project and our second 5-megawatt RNG plant.

A third RNG plant is expected to be at mechanical completion by the end of the year and fully commissioned in early 2024. And while we will be providing detailed full year 2024 guidance when we report our fourth quarter and full year results, we want to take this opportunity to comment on our 2024 adjusted EBITDA target of $300 million, which we originally provided in early 2022. Given the lengthening in the sales and construction cycles in our project and energy asset businesses, we now expect the 2024 adjusted EBITDA could be approximately $250 million. I want to make it clear that none of this adjusted EBITDA opportunity has been lost. It is just being delayed. And this new adjusted EBITDA level still represents impressive growth compared to our expected 2023 results and still fits in the framework of our long-term 20% plus adjusted EBITDA growth target.

Operating leverage remains top of mind as we remain diligent on OpEx further bolstered by our internal optimizations. 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, while we continue to face some headwinds, our long-term growth opportunities have never been bet. The company is redoubling its focus on profitable execution and cash flow generation. And we look forward to detail in our success in future quarters. 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 now.

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Q&A Session

Operator: [Operator Instructions] Our first question or comment comes from the line of Noah Kaye from Oppenheimer & Co.

Noah Kaye : I was wondering if I could start off — just trying to get a sense of the bridge between the prior and revised guidance. When we look at the — essentially the $50 million difference in EBITDA. Can you kind of walk us through — what were the main components as quantitatively as you can? Obviously, you commented to both projects and energy assets. But if you could help us get a sense of the bridge, that would be really helpful.

Doran Hole: Sorry, to clarify, no, you’re talking about 2024?

Noah Kaye : No, 2023, actually. Thanks for clarifying.

Doran Hole: So just — first and foremost, I think the point is that the ramp in 2023 really relied on some solid execution and conversions of awards to contracts happening in Q3. That didn’t materialize the way we expected it to. And so as a result of that, we’ve kind of adjusted this guidance to push things to the right as you might expect. And as you’ve probably seen us do before. So through Q2, we’re executing on our contracted backlog as you saw higher-than-expected revenue performance. But then we also had a relatively high amount of second half ’23 guidance there in the awarded and contracted backlog. And I think with the conversions being delayed several large projects, I think that was one of the things that just kind of resulted in the push out. I don’t know that we want to go into any more detail beyond that?

George Sakellaris: Well, the operation of the assets contributed to that as well.

Doran Hole: That’s at operation.

George Sakellaris: Yes.

Noah Kaye : Right, right, right. So not possible to sort of say whether it was going to half and half projects and assets that you’re not going to be able to provide that detail. I think that’s a firm, okay. Understood. Understood. You mentioned earlier, one of the benefits of the model is the ability to be in flexible around capital. Can you talk a little bit about your plans for capital recycling here and how you’re thinking about leverage and financing? You mentioned securing a good amount of capital already this quarter. But just wanted to understand how you’re thinking about capital recycling levels? And how soon that might occur?

Doran Hole: So look, I think that was really designed as a reminder that this is part of the business model that we will look to sell assets. I think as I talked about last quarter, with higher interest rates, we’re starting to see a little bit of challenge in the levered IRR targets that we have. And as you know, some of these assets take a while to sort of make their way through the asset and development metric into something that’s in operation. So we experienced some pressure on the interest rate. What we found is that the market still exists for those assets as return hurdles that are lower than ours. And we will regularly work on kind of turning around and entering into sales agreements with those assets preconstruction.

So while they’re still in development, such that it effectively converts it into project business for us as opposed to looking at it as a distinct kind of business line. I would say it’s fair to say it’s going to be consistently kind of dynamic if that’s a good obviously more on for you as we go forward.

Noah Kaye : Sure. Maybe one last question. Sorry, go ahead, George.

George Sakellaris: No, that’s still — we have so many projects in development, assets and development. So it gives an opportunity to monetize the assets in development. And still maintain our target of the ones we hold about at least 20% growth per year in the ones we hold. And this interest rate environment, I think it’s a good opportunity to recycle some of that cash. And that’s why on my quest. The project business — the backlog is growing so big, so large, we will refocus to generate — to build a the projects out as we go down the road to generate more cash internal rather than looking at from the outside.

Doran Hole: Yes. I mean it allows us to maintain that growth rate we’re expecting and hold on to our mid-teens IRR target. And at the same time, stay in front of our customers, right? We’re continuing to find the right financing on a non-recourse basis for the assets that we want to keep. And if the returns aren’t there, we — at least we’re staying in the market, we’re staying in front of our customers. We’re still developing a good amount of assets.

George Sakellaris: And that’s the way we don’t overstress our balance sheet.

Noah Kaye : I know you — I have a lot of other questions, but I’ll take them offline. You got a lot of analysts to get to.

Operator: Our next question or comment comes from the line of Stephen Gengaro from Stifel.

Stephen Gengaro : So I guess my big picture question is, when we think about the quarter and obviously, you’ve laid out the challenges you’ve seen and you kind of gave this preliminary look into 2024. When we think about your handle on the issues and what kind of gives you confidence that you start to get kind of additional momentum traction to ’24, which makes those targets realistic?

George Sakellaris: Well, we took into consideration what happened to us for this particular quarter. And basically, we operate, we assume that these conditions will continue for the foreseeable future. And between all of us, that’s not the mistakes that we had made. I think we let our guard down a little bad by overperforming the first two quarters, even though we start realizing that a couple of the awards were not moving to the contracts as first, and we had contemplated. And — but then it became across many, many projects, not just the ones that we can see. And then the other thing that surprised us a lot is the extension of the implementation schedules. We got stuck in quite a few of the projects in executing because we couldn’t get some materials.

On a couple of them, we couldn’t get the right labor in a timely fashion. And when I said the administrative challenges that we face, you don’t believe it’s some of the permitting. It used to take a couple of weeks. It takes more than 3, 4 months because nobody shows up to review the applications. And we feel very good that’s why the project business and the project backlog now because it’s going — it’s getting to a point that we feel that we can execute on 2024 and especially on the level that we afford our customer at this point in time. And that’s why I think — and we will give more detail when we talk about the ’24 numbers after the end of the year, and give a little bit more color and details to it. But right now, we feel pretty good where we are that we have taken into account what’s happening in the marketplace.

Stephen Gengaro : And though it sounds like this, but — so you feel like those expectations are accounting for things that kind of you can control versus what you kind of can’t control going into next year. Is that a reasonable way to think about it?

George Sakellaris: That is correct, yes. And my comment, I said we feel very, very good about the future where we are in the trend of the business. It’s very good. It just, is taking a little bit longer to execute that what we — we’ve been in this business a long time, and we had the metrics we thought that on pack. And to be honest with you guys, I thought that this supply chain issue will be done by now. But what is happening, I think, and that’s why we get stuck on the electrical side, especially on the equipment with obviously — everything going to be electric, it as bottlenecks of not only the capability of the various manufacturers and built in transformers or control panels and so on. And then the beauty, one of our projects have been lost. They’re all there, and we’re just moving at a little bit slower pace.