Ameresco, Inc. (AMRC) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Ameresco, Inc. Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Suzanne Messere, Director of Investor Relations. You may proceed.

Thank you, Frances, and good morning, everyone. Thank you for joining us for today's -- for Ameresco's Fourth Quarter and Full Year 2012 Earnings Conference Call. I'm joined today by George Sakellaris, Ameresco's Chairman, President and Chief Executive Officer; and Andrew Spence, the company's Chief Financial Officer. On today's call, management will share brief highlights from the prepared remarks we published this morning, and then take questions from the audience. Before I turn the call over to George and Andrew, I would like to make a brief statement regarding the forward-looking remarks. Today's call contains forward-looking information regarding future events and the future financial performance of the company. Ameresco cautions you that such statements are just predictions, and actual results may differ materially as a result of risks and uncertainties that pertain to our business. Ameresco refers you to the company's press release issued this morning and its annual report on Form 10-K filed with the SEC today, which discusses important factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. Ameresco assumes no obligation to revise any forward-looking statements made on today's call. In addition, the company will be referring to non-GAAP financial measures during this call. These non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles. A GAAP to non-GAAP reconciliation, as well as an explanation behind the use of non-GAAP financial measures, is available in our press release as well as our prepared remarks. I will now turn the call over to George Sakellaris, Ameresco's President and CEO. George?

Thank you, Suzanne, and good morning, everyone. 2012 financial results were below our expectations, and we are -- we were very disappointed by the unprecedented and substantial market disruption. Historically, we have benefited from customer diversification for energy efficiency projects from customer type to geography. Because of this, we did not anticipate the level of influence that federal fiscal uncertainty would have on nonfederal customers. We underestimated the level of dependency that state and local governments now have on federal programs and how this would influence our ability to get projects signed. As a result, 2012 was the first year that we experienced sustained market disruption that was consistent among all customer segments and regions. While we were very disappointed by the market disruption caused by this fiscal uncertainty, we were encouraged by the progress we have made towards influencing longer-term trends. For example, we experienced continued double-digit growth in revenue from our all other offerings. Awarded projects at year end increased by 50%, and we reached a new record level of total construction backlog of approximately $1.5 billion. We believe that backlog activity, driven by the increase in awarded projects, indicates that demand for performance contract remains strong and that we are gaining market share. This leads us to remain confident about the long-term fundamentals of our business. We now believe though that current market conditions will persist into the future, which affects our backlog conversion timing assumption we make for 2013. The long sales cycles do not lend themselves to a lot of flexibility in terms of influencing customer behavior in the near term. However, we are working on fine-tuning our offerings as well as our approach. We expect this fine tuning to enhance our market position over the medium to long term so that we can continue to pursue our long-term goal of 15% to 20% net revenue and earnings growth. And now I do like to turn the call over to Andrew, our Chief Financial Officer, to provide more details about our financial results.

Thank you very much, George, and good morning. The financial results from the quarter are as follows. Fourth quarter revenue declined 17% year-over-year. The decline was driven by a 19% decrease in energy efficiency revenue and a 12% decrease in renewable energy revenue. We had anticipated the decline in energy efficiency revenue related to the continued effects of lengthening conversion times in the U.S. federal, all other U.S. regions and Canada segments. We had also expected fourth quarter renewable energy to be up slightly. However, we did not expect results to be impacted by a year-over-year revenue decrease in our integrated PV offering nor weather-related delays at 4 renewable energy facilities. Full year revenue declined 13%. Full year energy efficiency revenue decreased 19% for the same reasons already mentioned. Full year renewable energy revenue increased 3%. We experienced increases related to renewable energy projects for customers and small scale infrastructure, which more than offset a decline in revenue related to the completion of the Savannah River Project in late 2011. Gross margin for the fourth quarter increased to 21.1% in 2012. Full year gross margin increased to 20.3%. The energy efficiency gross margin for the fourth quarter improved to 26% and to 21% for the full year. The margin improvement was driven by higher-margin projects across a number of U.S. regions, project closeouts and an improved mix from our higher-margin offerings. Renewable energy gross margin for the quarter was 10.3%. Strong margin contributions from energy -- renewable energy projects and renewable energy plants were partially offset by a downward margin pressure from the U.S. federal segment. In the U.S. federal segment, we made operational improvements to the Savannah River site during the quarter to make the plant more efficient over the long term. Full year renewable energy gross margin increased to 18.7%. The improvement was attributable to strong margin contributions from renewable energy projects, small-scale infrastructure, O&M and integrated PV, which more than offset downward margin pressure from the U.S. federal segment. Operating expenses increased 19% in the quarter and 18% for the year. Salary and benefit expenses increased 12% in the quarter and 26% for the year. Higher salary and benefit expenses reflect strategic investments in acquisitions and new offices made in 2011. Project development costs increased 25% in the quarter. This increase reflects our continued efforts to secure awarded projects. Project development costs decreased 9% for the year. The decrease reflects capitalization of more development costs as proposals have continued to transition to awarded projects. General, administrative expenses increased 13% for the quarter and 21% for the year. Higher G&A reflects acquisition expenses including amortization of intangible assets, as well as increased expenses related to being a public company. During the fourth quarter, we recorded a noncash goodwill impairment charge of $1 million, which is included in operating expenses and relates to an acquisition in Canada during 2009. The full year effective tax rate for 2012 was 25.4%. The amount of the 179D deduction is higher as a percentage of pretax income, which causes the effective tax rate to decline. We expect the effective tax rate in 2013 also to be lower than what we have experienced historically as we continue to take deductions permitted under Section 179D. Operating cash flow remained strong. We generated $88 million in operating cash flow for 2012, which in part was related to the final receipt of the Savannah River holdback in the amount of $20 million during the first quarter. We invested $15.9 million in renewable energy project assets that we will own and operate during the fourth quarter and $47.2 million for the full year. Cash provided by our financing activities totaled $5.7 million in the fourth quarter. This was primarily due to proceeds of $37.7 million from the renewable energy project financing entered into in October. Our balance sheet remains strong. At year end, total corporate debt on our balance sheet not related to project assets was approximately $33 million, and there was a 0 balance on our revolver. With that, I will turn the discussion back to George.

Thank you, Andrew. Revenue from our other offerings increased by 34% year-over-year. We expect revenue from our other offerings to increase more than 10% in 2013. Revenue from small-scale infrastructure increased by more than 10% year-over-year. The new LFG plant went into operation during the third quarter. We are in the process of designing, permitting and constructing 5 more renewable energy plants, which we expect to begin generating meaningful revenue in late 2013. As a result, we expect small-scale infrastructure revenues to increase by approximately 10% in 2013. Integrated PV revenue was flat in 2012. We had modest year-over-year revenue growth during the third quarter, and it declined in the fourth quarter, which offset strong growth through the first half of 2012. We believe that revenue during the second half of 2012 was subject to the same fiscal concerns as it universally affected corporate spending within the U.S. economy through year end. Early indications in 2013 lead us to believe that market conditions are showing signs of stabilizing. Assuming current trends continue, we expect integrated PV revenue to increase by 5% to 10% in 2013. Operation and maintenance and other revenues increased by more than 50% year-over-year in 2012 due to Savannah River, as well as strong contributions from the non-O&M offerings. We expect O&M and other revenues to increase by more than 10% in 2013, driven primarily by increases in the non-O&M offerings. Our pipeline increased by 25% year-over-year to $3.3 billion. Our total construction backlog increased 22% year-over-year to approximately $1.5 billion, driven, as I pointed out earlier, by 50% increase in awarded projects. Long-term backlog turn -- trends have continued to remain encouraging. However, awarded projects are converting to signed contracts at a much slower pace than what we have experienced in the past. While we had been optimistic last fall that 2013 would see a return to normal market conversion timing, we are now operating under the assumption that the current market disruption will continue for the foreseeable future, especially now that the sequestration has gone into effect. Based on this, our 2013 guidance is as follows. We expect revenues to be in the range of $620 million to $670 million and net income in the range of $18 million to $22 million. In closing, we remain confident about the long-term fundamentals for energy efficiency. Energy efficiency continues to be the most cost-effective source of energy. We believe that the need for our customers to upgrade their energy infrastructure using budget-neutral solutions will continue to drive demand. Further, the encouraging signs that we have experienced within pipeline development indicates strong future demand. For example, awarded projects increased throughout 2012, and total construction backlog reached new record levels. Also, more than 90% of the current awarded projects are expected to convert to signed contracts. In addition, we believe that the investments that we have made in our business, combined with fine-tuning to enhance our offerings, should position us well to take advantage of future opportunities. Now we'd like to answer your questions, and I will turn the call back to our coordinator, Frances.

[Operator Instructions] Your first question is from the line of John Quealy from Canaccord Genuity.

So a couple of questions. First, George, when you talk about gaining share, can you talk about how you quantify that? I know in the prepared remarks, you talked about fine-tuning your offerings or approach. So we're all trying to get a feeling of is this the bottom of the backlog, and will it start growing from here from a contracted basis? So if you could touch upon how do you feel like you're gaining share, how are you going to fine-tune your approach as much as you're willing to say on this call? And then thirdly, should we expect contracted backlog -- how should we expect that to move throughout 2013.

Yes. First, on the market share, looking at the various regions, and we know how many proposals we respond to and who the competitors are. In several of our regions, we see that we win the percentage of the proposal than some of our key competitors. And a couple of the announcements that we have seen recently on some of our largest competitors, we have seen that their awarded projects are down in comparison to ours where our -- as you saw, our awarded projects are up. As far as the fine-tuning that we have done in the organization, first, we have what I would say realigned some of the resources. Otherwise, maybe we did some rightsizing in some of the groups or areas that they were not -- did not have as much activity as, for example, some other groups as we strengthen the groups that they have more of the activity. We've been very proactive in driving the process all the way from the customer through the process in-house. We're going to move projects from the awarded category to the executed category and along with that, maybe a little bit of realignment of some of the goals of the various key individuals, as well as some of the incentives that we provide to some of the sales force that we have in the marketplace. And the other thing that we have found out in our company, as we move, especially in the other offerings which we have been having pretty good success, try to do much more cross-selling than what we have been doing in the past. Otherwise, we have over 120 account executives that they pretty much concentrate in the energy efficiency projects, try to get them to sell more projects by other offerings. And that, we think, is going to help the overall operation expenditures, as well as driving some of the other parts that they are not as dependent on the customer taking additional debt. And the other thing that we're doing a little bit, we talked about that before, try to get more traction in the commercial and industrial customers and using some of the tools that we have developed in the past and the acquisitions that we made, we're beginning to get some traction in that particular market.

Okay. And then -- and from a contracted backlog perspective, how should we think about that metric moving forward in '13?

Yes. Based on where we are today, and that's why we gave the guidance that we gave, we think we're in for a couple challenging quarters of 2013. Originally, if you recall back, we said, well, if after the financial cliff, we will see what happens, and we will guide accordingly. The financial cliff, of course, were resolved, but now we have the sequestration and still the budget issues in the federal government, they continue. And that, of course, spills down to the state government. So what we could see in some of our projects, we have seen continued delay in moving from the awarded to the executed contracts. So a couple of quarters will be challenging. But I will say that at the third and fourth quarter, we will start seeing the pickup of this year. We have much better visibility in the awarded contracts now than what we did early last year, the beginning of last year. Otherwise, they've been -- we've been developing them for more than a year now. So we have much better handle as to where we are. And if you recall, I mentioned last quarter that we have gotten into more analytics as to the state of each and every project that we have in the awarded category and much more analysis about the local market conditions rather than the overall market conditions. Otherwise, where the project is and who has to move in order for that particular project to move and what's happened into that state or that local government. But I can give you examples with projects that we thought they will be signed, let's say, last quarter but something happened to that particular local government and they said, "No. We're not going to move right now with the project. We will do it later."

Okay. And just the last question. So given that we're looking for, I don't know, maybe a couple of quarters of really quiet results or somewhat of a static environment, does that do anything to your M&A outlook? Could you not do any deals in that time? Or is that a time to accelerate deals?

Thank you. What I have learned in the past that you take advantage of the opportunities as they arise. We will continue to look for acquisitions as long as they are accretive and they make good strategic sense of what we are trying to accomplish. And a good example of that is the recent acquisition that we did, Ennovate, and it's a very, very small acquisition with 13 people that came over with that particular acquisition, but it strengthened our presence in the Colorado area. I can tell you examples that after we made that acquisition, we had some good successes in winning projects and of course, it gives us a better way of executing on those projects once we have them in our books. So we will continue to look at acquisitions as long as they make good sense and...

Your next question is from the line of Chris Godby from Stephens.

Thinking about your guidance, you just mentioned that you expect you could have a couple of challenging quarters ahead. So thinking about that, how should we think about revenue seasonality during the year?

Yes, I would go back to what we have used as a normal seasonality in our quarter revenues. And if you look our guidance and generally, the first quarter was around 18% to 19% or whatever you forecast your guidance for the year to be. And then I think the second quarter, it used to be around 20% to 22%. Otherwise, Chris, primarily we used to say under normal conditions about 40% of our revenues for the year come in the first 2 quarters and breaks down as I described them and about 60% comes from the last 2 quarters. And this year, it seems to be following that particular trend.

Okay. Great. That's good color. And then we've touched on this to an extent, but can you give some further details on how sequestration is affecting your business?

I mean, we had -- now have excellent example. We have a couple of contracts that we thought they were excised, and then after the sequestration went into effect, people then wanted to renegotiate the scope and reduce some of the scope because they were contemplating to get some capital dollars or allocation through the federal government programs. And the same goes in some local governments that they were counting to get some federal dollars. We have an excellent example. We have at least 2 projects and that we suspect there will be at least 3, 4 other projects that will be impacted by those kinds of [indiscernible].

I think it's important to add that in one circumstance it -- it's important to add that these projects aren't going to go away. In one circumstance, the customer paused and considered downsizing the scope of the project. And then after evaluating their financial circumstances, then decided to go ahead and proceed with the contract under the original size. But that whole exercise cost us a couple of months in timing and could potentially affect revenue for the full year. So it affects us a couple of different ways as they go back and analyze the project and hopefully, they don't de-scope, but there's usually the analysis creates a little bit of delay.

Your next question comes from the line of Jim Giannakouros from Oppenheimer & Co. James Giannakouros - Oppenheimer & Co. Inc., Research Division: A question on U.S. federal. Can you give us your take on where things stand regarding Obama's memorandum from last year? How much you're seeing still in RFP? And has Ameresco had any wins that are worthy of note?

I think I mentioned in the last call there's a very, very high activity and quite a lot of that is actually at President Obama's initiative. But -- and they are very slow in moving the projects from the selected, the winners of the RFPs then moving through the execution. Ameresco, we have won 2, 3 significant projects, and we have some other smaller ones that, again, I think we'll probably see one of them going to execution before the September deadline and maybe a couple. But the activity is very, very good. But the process, and we were thinking maybe approaching the President and discussing it how may be we can move some of these projects forward, because we were invited to the White House a couple of years back and trying to find out, the President has asked us, what can he do to move this market from being a $5 billion market to a $20 billion market, and we gave him some ideas. But we haven't seen the good ideas move to the execution level. But the activity is very high, and we win in our share of projects in short. But it takes time to get them to the execution level. James Giannakouros - Oppenheimer & Co. Inc., Research Division: Okay. That's helpful, and I guess marrying that with what you're seeing in MUSH markets, where do you expect to see projectivity resume sooner? Would you say on maybe on the federal side to move the needle in your results? I know that they tend to be, obviously, larger projects. Or do you anticipate certain areas of the country, certain municipalities?

I think certain areas of the country we will move faster, and one of the strategies that we are trying to implement is not to have so many eggs in the federal market and try to diverse more in other customers. And it looks like right now, some of the regions where they're contributing considerably more than the federal market would. So I see the pickup will be other than the federal market. James Giannakouros - Oppenheimer & Co. Inc., Research Division: Understood. Okay. And one last if I may. On your operating expenses, I know you mentioned that you did some rightsizing in some groups, et cetera. Just looking at your 4Q run rate or just how you trended in 2012 and knowing that '13 is going to be somewhat of a challenging revenue environment, how should we be thinking about those line items: salaries and benefits, project development, G&A? I mean, are these good run rates for '13? Or are there opportunities there that we should expect you can flex down?

I will let Andrew address that, but one key though that we are trying to do point to the operating expenditures, and we did took some measures. So I think you will see them flat to lower range in 2013.

Yes, I think fourth quarter is higher than what we're thinking the run rate for the full year should be in 2013. There are some things that we have underway, and I would say that the results of what we saw in Q4 are running a little bit ahead of where we want to be going forward. So we'll see some improvement there. We'll see a part -- yes, I think that's -- at this point, I think we'd like to see that number come down.

[Operator Instructions] Your next question is from the line of Craig Irwin from Wedbush.

So all of us that followed the Ameresco story pay very close attention to your total backlog and your contracted backlog. In this quarter, we saw a $48 million sequential uptick in contracted backlog versus the third quarter, similar to the increase we saw in the fourth quarter of last year. Can you talk to us a little bit about maybe whether or not there are end of season awards or end of year awards that might be pushing that up? Or is this potentially an indication that we might be looking at something closer to a bottom in the overall construction backlog, your contracted backlog for the next couple of quarters?

I would say that we are seeing pretty much the bottom of the contracted backlog. And like I said earlier, we will probably see a pickup some time beginning in the second quarter and the third quarter. Add anything to that, Andrew?

No, I think -- yes, I think we're very focused on the increases in awards. There were some projects that did move into fully contracted during the quarter, and we hope that this will be the beginning of some improved market conditions.

Okay. And then housekeeping item that you've shared with us on prior calls, so sort of the gross backlog additions during the quarter. Is that something you have handy you might be able to share with us?

Gross additions to the backlog in Q4 were around $135 million.

Okay. And then just looking at the balance sheet. When we take a look at your ESPC contract holdbacks, so it's basically netting your receivables versus your receivables financing, looks like the fourth quarter was the first time in many years, if I may model back to 2008, where you had a positive cash position on your federal ESPC projects. I was wondering if this reflects a change in contract terms or a change in contract character, and whether or not you expect this to remain volatile over the next couple of quarters or if this is potentially something positive we can look at as more of these projects are accepting terms that are more favorable for the contractors out there.

No, I don't think it reflects any major change in terms of -- we've been affected Savannah River over the past couple of years. There were big holdbacks involved with that. There's been a -- the activity has really been winding down on the federal side. This is something that obviously part of going forward we want to change, and that's why there's so much focus on the development of new business. But no, I don't think there's been a fundamental change that we can talk to or point to other than Savannah River, which from a cash flow perspective, was perhaps a little more burdensome than the other projects, than the other federal-type projects because of the significant holdbacks connected to that project, which I should emphasize was very unique. We typically don't work with those kinds of terms.

Great. And then last question if I may, margin progress throughout the year. So margins, I guess, this past year probably saw some pretty nice tailwinds from the 30% plus growth in your higher-margin offerings. But it sounds like we're going to see sort of more historic growth rates in that line of business. Can you talk about whether or not margins are likely to improve in '13 over '12? And if we might see elevated seasonality in margin progression throughout the year?

Well, you pointed to it by saying that the other -- the all other revenues, which typically carry higher margins, became a bigger part of the story in 2012. As we see improvements in or increases in construction revenue, margins in the construction phase are generally lower, so that would put a little bit of pressure on margins going in the other direction. And of course, part of what we'd like to see is a significant increase in revenue driven by increased installation and construction revenue. So I think that will put some pressure on where the margins go in the near future. We'd like to see the mix, obviously, continue to improve with respect to other margin offerings, but we'd like that to improve because that business is growing and not because we're seeing the decline in construction activity.

At this time, we have no further questions in the queue. I'd like to turn the call back over to Mr. George Sakellaris for your closing remarks.

Thank you very much, everyone. And with that, I do like to thank you again for joining us today, and we will talk to you guys next call. Thank you.

And ladies and gentlemen, this concludes your presentation. You may now disconnect. Have a great day.