Ameresco, Inc. (NYSE:AMRC) Q4 2022 Earnings Call Transcript

Ameresco, Inc. (NYSE:AMRC) Q4 2022 Earnings Call Transcript February 27, 2023

Operator: Good day, and thank you for standing by. Welcome to the Q4 2022 Ameresco, Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. And I would now like to hand the conference over to your speaker today, Ms. Leila Dillon, Senior Vice President of Marketing. Ms. Dillon, please go ahead.

Leila Dillon: Thank you, Chris, 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. I’m pleased to report on Ameresco’s great performance for 2022. We just completed our fifth consecutive year of record revenue and profits. We achieved revenue growth of 50% and adjusted EBITDA growth of 34%. This robust performance reflected how well our advanced technology portfolio and capabilities are aligned with market demand. The Ameresco team delivered this impressive full year results, while navigating challenging global issues. The fourth quarter was impacted by the push outs related to scheduling changes in implementation, supply chain issues and unplanned maintenance at two of our RNG facilities. Some of these timing related issues will likely continue into the first and second quarter of 2023.

But we believe that they are short-term and that business will normalize in the second half of the year. Even in light of this push outs and the very difficult comparisons, we will face this year from the unusually large Southern California Edison contracts. We are very pleased to be guided to growth in our 2023 adjusted EBITDA. This expected year-over-year growth is a true validation of our diversified clean tech business model. Market activity and demand conditions remain very healthy with high net proposal activity. Our customers continue to evaluate the recently enacted Inflation Reduction Act, and they are working to prioritize the type and timing of their projects. Their support for a very broad range of technologies provided by the IRA greatly favors comprehensive solution providers, such as Ameresco.

We believe this is a more transformational legislation affecting our industry providing a long-term runway for advanced clean technology deployments for years to come. 2022 marked the year of major accomplishments in Europe, including our decarbonization award with the City of Bristol in the U.K. In addition to being selected for this transformational net zero municipal project, our Greek joint venture was also selected as the contractor for the 100 megawatt PV project in Northern Greece. Both of these projects not only represent very large contracts for Ameresco, but also some of the largest in the respective geographies, and thus, significantly raising our regional profile. In the fourth quarter, we announced the acquisition of a 5 megawatt wind farm in Ireland.

And today, we are excited to announce an agreement to acquire ENERQOS, an Italian based energy services company. This acquisition further strengthens Ameresco’s European footprint by adding local resources, customers and a new pipeline of work throughout Italy. This also supports our growth strategy for the C&I markets as ENERQOS get a strong portfolio of commercial and industrial customers. They have a history of profitability. And we expect this acquisition to be immediately accretive. Our merger and acquisition strategy generally to acquire highly regarded companies with great management teams, and a strong plan for organic growth in order to create long-term value for our shareholders while minimizing risk. Now, I would like to talk about renewable natural gas.

With over 20 years of vertically integrated experience in self developing biogas plants. We are one of the leading players in the RNG space. Federal incentives in the transportation market plus the push by large institutions, utilities, universities and corporate customers should make this very attractive market for many years to come. We believe we have significant competitive advantages in developing, constructing and operating these plans, and navigating the many authorities permitting agencies and equipment suppliers. With 20 biogas plants in our assets in development pipeline, we believe our RNG fifth franchise will contribute continue to be a significant driver in shareholder value. Now I would like to provide a quick update for the Southern California Arizona project.

As we noted in the third quarter of 2022, Southern California, Arizona distracted as we adjust the project schedules into 2023. We’re also continuing discussions regarding COVID-19 and weather-related force majeure relief. We anticipate the projects to be in service prior to the summer of 2023. Our relationship with Southern California, Arizona continues to be very cooperative. The knowledge and expertise we have gained from this and other large berries, stories, and microbial projects make us one of the go to companies in the industry. We look forward to announcing additional wins in these areas in the future. Finally, our environmental, social and governance programs and goals remain a top corporate focus. We were very pleased to be named a silver winner in the best place to work at worried by the best in biz awards.

I am very proud of our company’s culture of caring for the communities in which we serve, as well as our employees, customers and stockholders. I will now turn the call over to Doran to comment on our financial performance and outlook. Doran?

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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 closes today. The Ameresco team delivered another year of record financial results as all four of our business lines experienced solid growth and profitability. Full year revenue growth of 50% was led by our projects business as we continue to execute on the SoCal that projects. This growth was complemented by the strong performance of our other three business lines, energy assets, O&M and other leading to adjusted EBITDA growth of 34% to a record $204.5 million. We started to face difficult year-over-year comparisons in our projects business during the fourth quarter of 2022.

Given that our work on the largest e-projects commenced during Q4 of 2021. We expect this to continue through the third quarter of 2023. These difficult quarterly comparisons together with the challenges that George mentioned previously, resulted in year over year declines in project revenue. Energy asset revenue was down year-on-year by 6% due to unplanned maintenance issues at two of our RNG facilities in Q4. But these plants are now operating at their expected output. On the other hand, our O&M business line delivered another solid quarter of 5% growth as we continue to attach O&M contracts to our projects, especially those with the federal government. And our other revenue line had another quarter of double-digit growth up 16%. As we expected, our gross margin increased to 18.6%, 150 basis points ahead of the prior year as the lower margin SoCal led contract declined as a percent of our total revenue mix.

We generated adjusted EBITDA of $41.3 million in the quarter. It is important to note that the quarter was impacted by higher-than-expected interest expense as the extension of SE projects required us to carry substantial working capital. Our contract allows for costs release. And we have included this additional interest expense in the proposed cost recovery that we have been discussing with SoCal in. Total project backlog was a healthy $2.6 billion at the end of the quarter. Even in light of the substantial conversion of SCE projects backlog to revenue. Of note, our awarded backlog grew 6% compared to last year, continuing to build momentum for future project revenue. Ameresco expanded its portfolio of operating energy assets to 389 megawatts and our owned assets and development was 470 megawatts at the end of the year.

As a reminder, we’re disclosing in our supplemental slides both the total assets in development as well as a pro forma of net megawatt total after adjusting for our partners equity interest. Our nationwide Greenfield solar and storage development group continues to build up its pipeline of early stage front of the meter opportunities. We expect volume of these opportunities to grow driven by the numerous IRA incentives related to these assets. Our ability to finance these energy assets remained strong, as we secured $137 million in additional project financing during the quarter, bringing our total financing for the year, up to $468 million. We believe Ameresco’s unique business model affords us substantial forward visibility, given the combination of project backlog, O&M backlog, and the estimated contracted and market pricing revenue from our energy assets.

Together, these lines of business provide a path to over $6 billion in future revenues. In previous quarters, we have only reported estimated contracted revenue and incentives for our operating energy assets. As George noted earlier, we believe that our RNG franchise is a significant driver of value to our stockholders. To help show a more complete picture of our RNG asset value proposition, we’ve started providing an estimate for the uncontracted RNG revenues that we expect to generate over the life of these assets. Using conservative assumptions for asset life and merchant market pricing for RIMs. We estimate these revenues again, just from our operating RNG assets to be an additional $1.2 billion on top of the over $1 billion of contracted revenues from all of our operating assets.

This projected RNG revenue is based on RIN prices of $1.50 per gallon, brown gas at $3.50 per MMBtu and LCFs revenue where applicable at $3 per MMBtu. We’ve assumed an average asset life of 20 years. Of course, we still have the option to enter into longer term uptake contracts. If we feel we are creating additional value by doing so. I’ll reiterate that the $2.3 million in revenue visibility only relates to our assets that are currently operating and does not include any expected revenue from our 470 megawatts of energy assets in development and construction. As those assets begin operating, we in turn expect to add significantly more revenue visibility to our profile. Turning to Guidance. 2023 guidance anticipates adjusted EBITDA growth of 5% at the midpoint.

We’re very pleased to be guiding to this growth, even as we face difficult comparisons due to the large SCE projects. We anticipate placing between 80 and 100 megawatts of energy assets and service during 2023. The three RNG plants we had expected to be mechanically complete by the end of 2022 continue to progress, as their schedules were impacted by permitting delays, and longer lead times on certain types of equipment. Looking forward, we expect these three plants to be operational this year. And we also have several additional RNG assets in late stages of development. We expected four or five of those will come online during 2024. Our expected asset CapEx for 2023 is $325 million to $375 million. The majority of which we expect to fund with non-recourse debt.

As we look to the first quarter, we estimate revenue to be in the range of $220 million to $240 million and adjusted EBITDA of $20 million to $30 million$. We expect non GAAP EPS to be slightly positive. As George noted, we expect Q1 to be impacted by push outs on a couple of large projects on top of our normal energy asset and project seasonality. Furthermore, net income will be impacted by the continued carrying costs of SCE related working capital. We expect the remainder of 2023 to follow our normal case with progressive improvement throughout the year. So I’d like to turn the call back over to George for closing comments.

George Sakellaris: Thank you, Dillon. We maintain an excellent light line outside to our 2024 target of $300 million in adjusted EBITDA, As governments, institutions around the world invest in solutions, addressing climate, geopolitical and budgetary challenges. Ameresco continues to enhance our expertise to provide the solutions, positioning us for robust, profitable long-term growth. Finally, we look forward to welcoming analysts and institutional investors to our European Investor Day being held in London on May 11. This event will feature presentations and panels by key executives. From our leadership team discussions focus on our expanding growth opportunities, including our plans for continued expansion in Europe. Operator, we would like to open the call to questions now.

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Q&A Session

Operator: Our first question will come from Noah Kaye of Oppenheimer & Co. Your line is open.

Noah Kaye: Good afternoon. Thanks for taking the questions. Wonder if — hey thank you. Wonder if you could start by giving us a little bit more color on some of the timing and scheduling challenges around the RNG development. Obviously, you mentioned permitting supply chain. I don’t know the degree to which can get granular but just your line of sight to those challenges being resolved here in the first half of the year. Anything that we should consider top of mind in terms of key milestones that you have to hit to bring those projects online.

George Sakellaris: I guess we started though — we had some difficult permitting issues. And even though in some cases, we got the environmental permits, we got stuck in the building permits and things like that would take these normally weeks, they took several months. And in one case, as much as 6 months, there was a delay. The other thing that’s happened a lot, for example, a couple of sides, we’re expecting the major equipment delivery last July and August. And it turned out we got the delivery in late December and early February for the other one this year, for example. So what we did going forward, we scrub the schedule very, very, very carefully. And that’s why we said that we will have three plants completed this year.

Actually, they are all mechanically completed by the middle of the year. And then the other four to five plants, a good part of them, they’re in the construction or permitting advanced development stages right now. So we build it by about the bottoms up. And we never anticipated the supply chain issues with the way . Another example, the rainstorms in California, one of the sites we have built, we’ve done all kinds of excavations and so on, and so forth. Everything got wiped out into some . So I don’t know if Doran want to add any more colors to it, but we have scrubbed the numbers very carefully in the schedule, and we can’t factor it in our guidance, not only for this year, and for the next year as well.

Noah Kaye: That’s very helpful. Sticking with the theme of RNG development. You talked about having, I think you said 20 biogas projects in development. You said biogas rather than RNG. I’m just wondering with all of the policy developments that are supportive of biogas assets, some perhaps more for RNG, some perhaps more beneficial to landfill gas to electricity. Just how are you thinking now about planning an optionality for your bureau biogas assets? I think it’s pretty clear what you’re expecting to bring online this year for RNG, yes.

George Sakellaris: Actually when last year we had said that five to six plants. We think one of two sites, actually one site that was electric, we’re going to convert it to renewable natural gas. We stopped that because we think the optionality now to hearing subject to what comes through EPA. We did it with another plan and we’re going to expand it and go to renewable natural gas. Now we are in the preliminary stages most likely will go electric. So economics will be the ones that we have right now that we have already put in the four that we talked four to five, there will be renewable natural gas as we go down the road. I think some other ones they might turn out to be a landfill electricity.

Noah Kaye: Okay, great. I’ll — many more, but 1’ll turn it over. Thank you.

George Sakellaris: Thank you.

Operator: Thank you. Our next question will come from Stephen Gengaro of Stifel. Your line is open.