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Good day and thank you for standing by. Welcome to the First Quarter 2024 Ameresco's Earnings Conference Call. [Operator Instructions]. Please note that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Leila Dillon, Senior Vice President, Marketing. Please go ahead.
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 same 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?
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 4 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 companies and position in Ameresco to capture the substantial opportunities in France for gas. First quarter revenue exceeded our guidance, led by strong execution for 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 polite 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 a 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 try to organize 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?
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 4 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 is 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've 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 3.0x and remains below our bank covenant level of 3.5x. 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 with 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 the 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 continue to be strong with positive adjusted cash flow from operations of over $40 million during the quarter. Our 8-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 SoCal Ed battery projects. Speaking of SoCal Ed, we've completed performance testing and are working on the final checklist for substantial completion for 2 of the 3 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 KÅ«pono asset, United Power battery assets and 3 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.
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.
[Operator Instructions]. Our first question comes from the line of Noah Kaye of Oppenheimer & Co Inc.
I'll just try to do a couple of 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 sort of 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.
The conversion from the awarded contracts to the executed contracts, it's across the board, but we had a couple of good wins, I would say, conversion from on the federal sector, which is basically our bread and butter as well as couple street lights, a couple of school systems and so on. So it's in a couple of battery storage, smaller projects, but it's across the board on the conversion. And I think the fact that we reorganized the company and we focus more on converting moving projects from the award category into the executed, so we can build them out, it just helps. I think anytime you're focusing the organization on a particular task, think [indiscernible] and I think that has helped a lot. On the margin side, one of the goals this year, 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 of about 30 to 50 basis points. And been consistent now for the last couple of quarters, and that's where we started talking about it.
I don't know if Doran wanted to add any more to that, then I'll move to my next question.
The last thing I'll add is just simply that we in 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.
Just a quick question on the asset side. I think you called out the investments by Republic in the Roxana RNG plant. When we think about outside sources of capital for development and as well as the development cell 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 regimen how you're thinking about the asset profile.
I can start on the solar side. I think because the market is so fluid and liquid, it's a better strategy to develop and sell because our return on capital are the ones we want to give is a little bit higher what the strip will accept. So and 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. Other way, we're exploring various situations. In this particular case with Republic Roxana, they have the right; we have quite a few sites with them. They have the right to invest in any assets that they wanted. They pick this particular one that they wanted to invest. And we welcome it, and we hope they continue to invest in many more. You want to add something to that, Doran?
Yes. I really think, George's comment on the liquidity of the market in the solar space as well as the battery space, to be honest, those are the 2 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 and versus what we might be able to accomplish on our own.
Our next question comes from the line of Moses Sutton of BNP.
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 2 of those 3 of the projects that were already in that very advanced stage of commissioning, maybe some similar to like 2 months ago, which is pretty recent on the 4Q call. Any specific tasks completed that you can sort of check off or outline that moved those 2 further along? And then any shift in the timing on the third one? I know that was heavy rainfall, but that was already true for months ago. Just curious on anything more specific from either.
I'll start with the last question. No major shifts in the time line of the third one. On the first 2, the big difference is performance testing and duration. That's the big hurdle that we got through. And I think that really gives us a lot more confidence on how close we are to the finish line, Moses.
And then any updated thoughts on the storage energy assets that you were going to potentially some of them not build on balance sheet, if they don't hit your hurdle, you might sell the mid-stage and then time lines on any of that.
So we're 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 how we look at the way this converts into project business and O&M business for us.
Our next question comes from the line of Eric Stine of Craig-Hallum.
Just wondering if you 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.
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. 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 time lines 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.
They haven't been extended. For example, the transformers, they were about 18 months, they're 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 time lines, and that's what we meant by adopting to the new environment, we have not done and we have not taken into forecasting or the guidance an improvement. That's the availability and sticking to the schedule that we have seen so far. The year we had a hard time finding switches and so on. Lately, we've been finding them. But the time hasn't been a short of it.
As George said in the prepared comments, cautiously optimistic. We're continuing to forecast that we're going to keep seeing these pressures. We're not going to get too excited yet.
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 normal course of business? Or were there any items that were one-time that we should consider as we think about that?
Eric, this is Mark. I think you said it. It's part of normal course because we review these projects all the time. This just happened to be an unusual quarter where we had 4 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 are getting relatively close to completion, but we saw some true-ups, some write-offs some that were ones that was impacted by delays and just some unforeseen events and the timing of these projects and those adjustments all just happen to be in the quarter. So it's part of the normal course, but it was unusual in that they were larger than normal.
Our next question comes from the line of Joseph Osha of Guggenheim.
On Slide 6 of your deck, 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 80% to 85% advance rate? And I had one other question, but I'm curious about that.
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 in 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.
And especially if you have long-term contracts or shorter than soon.
That's right.
And just on the back of that, I mean given what's 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?
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 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 are 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 the best of what's out there.
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 pricing either in regular tax equity? Are you guys out there actually transacting?
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 3. We haven't come out and provided guidance with respect to any. We've executed on 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.
Our next question comes from the line of Leanne Hayden of Canaccord Genuity.
Congrats on the progress made throughout the quarter. Just a few questions for me. George could you please educate us on how you plan to capitalize on the emerging data center opportunity?
Actually, we are working on several of them. And it's going to be a great, great market, no question about it. And we have several that we are working on. And actually, as you probably know, we have several bases, the United States government, where we have what we call the enhanced use leases, and we have some of the merger data center people or companies that they would like to team up with us and execute on that. So as probably everybody knows, it's a huge market. And with AI and so on, the energy needs and the resiliency that they will need or the energy, it's a perfect fit for what we have been doing. Basically, for the federal government on every base right now, which has the resiliency. That's why they have battery storage, combined heat and power, the solar and then, of course, the microgrid associated with it. So each data center basically have the same needs. And I think you hit the nail on the head is a market that we want to focus and expand further than what we have been doing so far.
I would just add back to the comments that we made about being selective in our business development. We've got a real strong hold in the federal government market when it comes to winning those enhanced used leases. We're going to take advantage of that as our way to really enter this market. We're not going to go shock on blast try to capture every data center in the world. We're going to be smart about where we're going and pick the profitable projects and projects where our expertise is strong. In addition to that, ensuring that we've got a real comfortable view of our counterparty, the developer have their creditworthiness who's on the other side of these contracts because we're cognizant of the fact that there are a lot of players in this space and a lot of new ones in this space, and we're being smart and selective about it, a great, great growth.
And just, gently to that, do you have any interest in nuclear power?
We haven't moved into any of the implementation phase of that. I think within the same group that kind of looks after the federal government and some of our large projects, we do occasionally get involved with NREL and others on certain pilot projects and things. And I think we've got our eyes on a few ideas, but nothing major to talk about yet. Not yet.
Our next question comes from the line of Pavel Molchanov of Raymond James & Associates.
It's been a year since you acquired Enerqos in Italy. Can we get an update on the European opportunity and how that business is tracking?
Actually, they are doing excellent, much better than we get forecasted. It's a great group. And I think with our help is growing. And I don't know if you know, but we have teamed up with a great, great contractor of solar projects in Greece and was very small. And right now, I think we have over 1 gigawatt to potential of solar projects that we're going to be building together. The market is very good and don't be surprised that we might have some more tacking acquisitions in Europe. The market over there is exploding. But on the other hand, we're going to be careful how we go about it. But the Enerqos acquisition, just worked out excellent for us. Actually, the Board of Directors, one of the people that probably gave me hardest time to buy that company he says that he loves Italy now.
Pavel, I think the joint venture methodology with the solar EPC is really, really good leverage for us. We're able to leverage off that organization, not just in Greece at the company is based in Greece, but we're also building projects in Italy and the U.K. through that joint venture. And that's a very good way for us to add incremental business and help them grow and in fact, help Inter coast grow because we're building projects in their own turf. So it's a pretty exciting jurisdiction, to be honest. I think the U.K. is continuing to grow and continuing to show strength. So we'll be continuing to invest our time there.
Let me follow up by asking about situation with Section 45Z. I know a lot of RNG developers have been surprised that the treasury has not unveiled the carbon intensity kind of calculation yet. What is your understanding of when that's going to come out?
Well, look, given the state of play in Washington currently, I think that irrespective of what you might hear from Washington, I think they're being very careful about what they decide to put out in terms of guidance because you're really inching up to that Congressional Review Act date. And I think that we've got to be quite careful about trying to estimate timing. Because these projects are critically important to the administration, I don't think that means the guidance isn't coming. The guidance is going to come However, given where we are with the CRA, my suspicion is you're getting second and third and fourth looks at the regs before they go out and they're going to be very thoughtful about them because I think the last thing they want to do is have the same thing happen with this is what happened with the renewable natural gas when they had to turn around and reverse course on one of the provisions with the cleaning and conditioning equipment, if you remember. So that's my thoughts.
Our next question comes from the line of Ben Kallo of Baird.
Congrats on the quarter. Just quickly, just the approach to the R&G credits RINs. I know in the past, you guys maybe had some or sold for just your post now. I have a follow-up.
So with respect to the RIN side of things, we've been pretty happy with where those have been trading and the levels. As you know, it's an illiquid over-the-counter market. But we've been relatively steady with going into the market and hedging a part of our rent exposure for 2024. At this point, we're over 70% hedged for 2024. So I think we're feeling good about where those prices have been. We obviously always try to keep a little bit in our back pocket for production. But nevertheless, we're continuing to watch that market. We feel good about that. The ITC on renewable natural gas, we're still waiting for the guidance to come out to really affirm where that's going to come through for 2024 projects that we're placing in service. And the truth of the battery is we've been underwriting those projects without it, and we're continuing to underwrite our projects.
Just quickly, I don't want to put the cart before the horse, but just as we think about 25%, 26% and what you've established with the recurring revenue. Any kind of color on how you think because it was lumpy in '22 and '23, but how we should think about going forward?
We continue to invest in the asset portfolio. There's not a fundamental change in the way we're thinking about the RNG off-take with the exception of the fact that we're seeing prices in the non-transportation market go up. So we're starting to look really closely. We've come close to hitting a couple of those contracts that might be longer term, certainly not related to the transportation market. And I think that we probably will see that increase as we bring more of these projects online over the next couple of years. The rest of the business, when we look at the growth rates for 2024, over '23 and beyond, I think that we're still feeling like it's a steady growth. We've got the CAGR chart in our supplemental slides, in 10% revenue on the EBITDA, and we think that, that's likely to be the direction that we go.
And just going back to the data center question, technologies that you guys would use is it batteries or fuel cells?
I would say we're going to continue to take an agnostic approach. Of course, we're going to be focusing on the carbon reducing technologies. So renewable generation, battery storage, the microgrid, et cetera. That's going to be the key.
And some fuel shells there.
Yes. Fuel cells are not off the table. And backup power is important. So we're going to have to think about what the customer is looking for, to be honest.
Our next question comes from the line of Luke Tilkens of Piper Sandler.
Most of our been asked, so just one for me. It looks like you brought on about 10 megawatts of projects in the quarter. Can you talk about your confidence on the 200 megawatts for the year?
I did provide a little bit of a laundry list in the comments. We've talked KÅ«pono. That's a big one. We've got all these United Power battery assets. Those are those are looking very good as far as completion here in the coming weeks and months. And then the other RNG plants and by the time you get through all of that, you're pretty much there. And then in addition to that, of course, we've got our typical granular solar assets scattered around the country that we're doing for customers. So we feel pretty good about that.
[Operator Instructions]. Our next question comes from the line of Craig Shere of Tuohy Brothers.
On Ben's question, did I hear correctly that you're looking at the discretionary institutional offtake market for RNG? And if that's correct, are you looking at upwards of 10-year terms and maybe in the ballpark of $20 an end? Could you provide any color if that's the case?
So probably because all the negotiations are private, we can't really give you any color on where the prices are ending up. I would say that there was a long time when levels like you described, were thing that with the way that we're looking at our returns, what we're getting from using the 50-50 strategy, those weren't horribly attractive. I think that we've seen the rates come up, come up that a lot of these the voluntary parties are looking to pay. And there are some that are really still in the 5-year, but non-transportation, there's a number that are in the 10- or even 20-year range. So I think that market is still trying to find itself and we're trying to find it. And as long as we feel comfortable with the credit of the counterparty and the nature and the actual risks in the contract, I wouldn't be surprised if we go ahead and hit something because the prices are definitely looking better.
And the awarded project backlog was flattish sequentially. But as you mentioned, the actual contracted backlog rose a proportion of firm. So going forward, given your focus should we anticipate maybe a focus on both quality and margin and converting the contracts, should we anticipate maybe a slower awarded growth but steady to improving conversion rates?
I wouldn't say necessarily. I would say that one of the things that drives those differences are probably a little bit circumstantial and potentially related to larger projects that might be awarded and contracted intra-quarter, some of the design build stuff that goes through the design phase more quickly. So that's how I would think about it. I wouldn't necessarily view that as a particular trend.
I think again, conversion is important. The pace of conversion is very important. But as far as the long-term kind of view of the company, the way I look at it, it's total backlog.
Correct. And don't forget, there is some lumpiness. The one that we can control more is getting be awarded to the executed contracts. It depends on the customer, of course, and as well as the awards many times is lumpy. And don't be surprised that we see that picking up later on during the year around primarily the third quarter, second quarter.
This concludes the question-and-answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.