Q1 2022 Ameresco Inc Earnings Call
Good day and welcome to the Q1 2022 Mris Co Inc. Earnings Conference call. At this time, all participants are in a listen only mode.
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As a reminder, this call is being recorded.
I'd like to turn the call over to Leila Dillon Senior Vice President of marketing you may begin.
Thank you Michelle and good afternoon, everyone. We appreciate you joining us for today's call. Joining me here are George Sacco Laris Amaretti Coast, Chairman, President and Chief Executive Officer, Doran Hole, Executive Vice President and Chief Financial Officer and.
Mark Chip block 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.
The 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 two 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.
Dan.
In addition, we use several non-GAAP measures when presenting our financial results. We have included the reconciliation to these measures in our supplemental financial information I will now turn the call over to George George Thank you Leila and good afternoon.
Everyone. We started 2022 with excellent quarterly performance as the team executed on our contracted backlog.
Also booking significant future opportunities across all of our lines of business.
This execution, but our own employees together with our customers was all the more impressive given the well publicized supply chain and inflationary challenges faced by our industry.
Now I want to take some time to talk about our southern California Edison project.
First as a reminder, the southern California Edison project is actually three separate contracts, which we are executing independently.
When it comes to individual budgets procurement items and completion schedules.
Second <unk> has a proven track record for completing some of the most complex energy project in our industry.
The actual engineering and construction of these battery projects.
Nowhere near as complex as what do we have successfully achieved.
In our other projects such as Savannah River biomass plant or our various green gas plants, which we have been constructing and operating since 2001.
I remain confident in our ability to deliver.
Free battery projects to our customer set.
Satisfactory and profitable manner.
Third when we signed the contract last year.
We knew who we were operating in a challenging global environment with a potential for supply chain disruptions.
And like in all of our project, we do risk MIT junior analysts in labor as much as possible before going to contract.
However.
Given the scale of the Southern California Edison Battery project.
Two extra questions, we negotiated on fraud protections for potential COVID-19 delays.
And in Florida, and appropriate contingency in our budget.
In terms of the battery supply, we've renegotiated firm battery supply terms with priority slots at the factory for our beat.
The majority of these custom batteries have been constructed.
Page four and the first shipment is already on the water as of this call.
Importantly, the poor weather delays that we are experienced unique China for the remainder and batteries are not related to the battery cells, all of which have already been manufactured for us.
Okay.
We are actively working with southern California artists note regarding the Covid the impact of the Covid related delays.
Our contract with them allow us financial and delayed relief for force majeure events just carpet.
And we are actually in discussions with.
Southern California Edison.
This together with a contingency is built into the projects, we do not expect our margin to be materially impacted by these delays.
As noted in the April 10th press release, and as shown in our quality guarantee results Manny.
Many significant milestones in the southern California Edison project progressed during the quarter.
Driving Q1 revenue ahead of our expectations.
Major equipment has been sourced and construction related activities are proceeding and all sites in preparation for battery delivered.
And <unk> continues to actively work with your suppliers and southern California, Edison to avoid or mitigate potential delays.
Working with the ports on the West coast on expedited ship and container handling.
Apart from the battery deliveries, we expect to complete all aspects of the three project construction by April by the original August 1st deadline.
The installation of the batteries that are currently in transit.
We expect up to 300 megawatts of capacity to be online in August 2022.
And the remainder to be online this year.
Well the recent events, Mike goes a shifting of our expected expected quarterly revenue cadence, we remain confident in our annual guidance.
Lastly, I would like to take a minute to recognize southern California Edison as a true partner.
They have been very helpful with the design and execution of the overall project.
We wish to thank lamp and the state of California for their cooperation.
Turning it back to our Q1 highlights the first quarter as strong revenue growth was led by our project business as we continue to execute on the southern California Edison contracts.
But.
Equally important we achieved good growth and profitability across all of our lines of business.
And we not only got the great quarterly results, but they also continued to build upon our strong multi year visibility.
We added 60 megawatts of energy assets in development.
<unk> and 50 megawatt battery asset.
And a new LNG opportunity well, our O&M business booked over $100 million additional multiyear contracts.
During the quarter, we also added over $400 million in New project Awards.
As customers continue to seek solutions to address their increasing energy cost.
Z Nancy needs and carbon reduction goals.
One of these awards that I wanted to highlight is our kenzie announced partnership with a serial Bristol in the UK.
This project is actually the second largest award of Nomura, specifically wanting behind the southern California Edison contract.
Once constructed their unique dog ear partnership will encompass.
Full range of advanced technologies energy efficiency, and renewable solutions involving project work O&M as well as energy asset ownership.
The Bridgestone sued me live project.
Getting an ambitious dawn pizza theory carbon neutrality goal and is designed to attract.
Similarly, 1 billion pounds of inward investment that could be shared between us and our partner partner Vattenfall.
We anticipate that this project will serve as a blueprint for other series campuses and corporations of course that you asked in Europe as they develop their own net zero and cost savings initiatives.
We are particularly excited about other similar opportunities for Europe , given the elevated energy prices are ongoing geopolitical risks.
The drive to net zero.
As one of the largest energy services companies in the U K.
<unk> is very well positioned to continue winning and executing on such transformative projects.
I will now turn over the call to Doran to provide some comments on our financial performance data.
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 closed today.
As George noted the Mris co team overcame continued industry wide supply chain and inflationary pressures to deliver excellent results.
And while our project business led the very impressive top line growth. It is important to note that all four of our lines of business grew nicely during the quarter.
Just as important our continued robust new business activity allowed us to grow our total project backlog, even while converting a record amount of backlog to revenue during the quarter.
Our total project backlog, along with the expected future revenues from our energy assets and O&M businesses.
<unk> us over $5 $3 billion in revenue visibility.
The impressive growth in our Q1 total revenue was led by our project business.
Aspects of the Socal, Ed project custom procurement and construction milestones progress more quickly than anticipated driving stronger revenue during the quarter.
Adjusted cash from operations was impacted by the working capital needs of the Socal It project.
Subsequent to quarter end, we collected $99 million that we had previously invoiced.
Overall, we had anticipated these temporary uses of cash from the onset of the contract and I'm pleased to announce that during the quarter, we amended our senior credit facility to improve our short term liquidity needs and provide more financial flexibility to continue to scale our business.
The amendment resulted in a $262 million increase bringing mris goes credit facility total to $495 million.
Not unlike recent quarters.
The year over year increase in revenue from our energy asset business was driven by improved performance of our existing operating assets the growth of new assets placed in service and strength in RIN prices.
Despite lower overall gross margins due to the Socal Ed project, we still achieved impressive year over year adjusted EBITDA growth.
This contract is a prime example of our strong operating leverage in practice.
Construction of our ability to add gross profit dollars without adding direct incremental operating expenses.
Now I'll move to our project backlog, we're very pleased to have increased our total project backlog to a record $3 $1 billion, increasing 1% sequentially and 34% year over year.
Customer interest in bidding activity remains strong and we are pursuing and winning many large complex projects, including our recently announced Bristol Bristol City collaboration in the U K.
During the quarter, we placed 10 megawatts of assets into operation, while also back filling our assets in development, which now stands at 464 megawatts.
I'd like to provide some commentary around the high profile industry wide supply chain and inflation issues and the ways that <unk> has been able to overcome many of these challenges.
First and foremost is the tremendous flexibility inherent in our diversified business model.
As our investors know amoruso leverages, the most advanced technologies across all suppliers to meet the unique needs of each customer.
This reduces our exposure to any one manufacturer or technology.
Our projects are also comprehensive incorporating dozens or more different technologies in any given installation.
So if there is a delay in receiving one type of product work can generally continue on other aspects of the project.
Likewise, because we were working on so many projects around the country, plus Europe and Canada every quarter, we were able to also opportunistically move products and human capital around to maximize execution efficiency.
And finally, our contracts generally provide force majeure type protections, if we face disruptions like the delivery days delays caused by the Covid related shutdowns in Shanghai.
<unk> proactively protects itself by securing and contracting a significant portion of the products and labor needed for any given project well in advance of moving from an award into a contract helping us to mitigate unanticipated cost overruns.
We also leverage our scale and balance sheet to volume purchase critical components for our projects and assets for example, and morisco proactively purchased a large supply of solar panels in previous years, and we still have a supply of these panels in the U S to meet our near term needs.
Lastly, as a reminder, approximately 60% to 70% of our EBITDA generally comes from contracted recurring revenue business lines, demonstrating the overall resiliency inherent in our business model.
As George discussed above.
The delays arising from Covid restrictions in China are impacting the delivery of certain batteries to the Socal Ed sites.
To be clear the issue at hand this time.
And we have contractual protections for force majeure events, such as Covid, which we believe apply here.
Importantly, the widely observed recent increase in the prices of raw materials used in battery cells have not impacted the pricing of the batteries for the Socal Ed project and we again do not anticipate any material impact on our margin on these projects.
So while we certainly see and even experience some of these global issues. The diversified business model that we have created the processes, we have in place and our excellent team of professionals helped to minimize the impact on the company's results.
I'm, therefore pleased to reaffirm our 2020 to annual guidance and can provide our current outlook for the remaining quarterly cadence.
We now expect Q2 revenue to be about 10% to 15% higher than Q1 with gross margin is still expected to be approximately 14%.
Q3 revenue is expected to be slightly greater than Q4 and.
And we expect gross margins to be approximately 18% for both quarters.
Now I'd like to turn the call back over to George for closing comments. Thank.
Thank you Dora.
I want to again take a moment to thank the entire <unk> team when they add Jerry Ketchum and outstanding execution.
We also want to recognize the ongoing support.
Our customers and long term stockholders.
As we discussed during our recent Investor day, we continued to benefit from a large and growing addressable market.
Our portfolio of innovative solutions matched with our technical and financial expertise makes it more ethical and preferred partner for the most complex and comprehensive.
Cleantech solutions operations.
Now I'd like to open the call to questions.
As a reminder to ask a question. Please press Star then one if your question has been answered and you'd like to remove yourself from the queue press. The pound key please limit yourself to one question and then you may rejoin the queue.
Our first question comes from Joseph ASO with Guggenheim Partners. Your line is open.
Hello, and thank you for taking my question.
Just wanted to refer to the line in your press release that.
Talks about continuing discussions with FTE.
When might we get some clarity on FTE position with regards to these force majeure issues. Thank you.
Yes.
Well, it's very hard.
To say exactly when we will get.
Completely resolve the situation are there, but we.
We are in discussions with them, we do believe we have a governance situations.
And the contract provides for relief.
If I want a bed demand I would say most likely the third quarter.
We will get to know you have a clear yes.
The cash and where we stand.
Our next question comes from Noah Kaye with Oppenheimer. Your line is open.
Thank you.
One related to the FTE contract and then.
Not related and its.
Really just around puts and takes of the guide so with some of the.
Associated battery storage project revenue shifting into two H well.
But keeping the gross margin guide at 14% is there anything else, we should be attentive to for the second quarter in terms of mix or different revenue streams coming online in seasonality to be aware of.
No. This is mark no I don't think so.
Q2 will still have we'll still be substantially impacted by the by the Socal Ed project, but nothing outside of that that would.
Yes, that's notable that would impact margins. So that's why we felt pretty good about kind.
Kind of given that that.
Guidance back out again.
Our next question comes from Stephen Chin Garrow with Stifel. Your line is open.
Thanks, Good afternoon everybody.
But doesn't it.
I'm curious you talked a little bit about this in the prepared remarks, but I'm curious if you could if you could add a little bit of color.
And help us understand is the city of Bristol contract and agreement and sort of how your how that relationship will play out and also is that reflected in the backlog and if so just curious by what amount at this point.
Yeah, I would say about half.
<unk>.
The awards that we mentioned in our.
Press release in our script count from that contract.
It's basically a concession agreement and we have vattenfall as our partners and.
They are very expert expert they have great expertise in.
This deemed distribution system. So I would most likely see a good part of the work comes through them.
Yeah.
The project that we have identified today and we reported there's a war as project we identified.
With them that there would be done and that's what we would be doing that work that we would be doing associated that we reported.
We have basically a 10 year plan, where we will get them to carbon neutrality.
Our next question comes from Eric Stine with Craig Hallum. Your line is open.
Hi, everyone.
Hi.
Hey, maybe just sticking with city of Bristol just curious if you could comment on whether that was a competitive win and then.
As you think about this potentially expanding to other areas in Europe , maybe if you could just.
Think about that.
Just talking about what the pipeline might look like.
Sure. It was a very very very competitive.
Competition that we it took us two years.
They did a superb job.
Iron consultants and evaluating the various proposals that they had.
I think the fact that we've been.
We have established.
<unk> is a UK as one of the top energy services companies, we rate does not.
One or two or three depending on.
What the analysis you look it at it helped us tremendously and the fact that we have developed the company to be able to do what I call. The holistic approach.
<unk> solutions, whether it is here.
University or a particular industrial customer not do any of the energy efficiency, but all the renewables associate with nor the advanced technologies that helps us a lot in order to be able to do when this particular project and like I said in my commentary I think this is only the beginning.
What's going on in the industry I think this will become a blueprint for.
Med your series.
And I will say this much.
After the win we mentioned it a couple of mirrors in the United States. They said they love the concept, but it takes time for institutional momentum for those people do move it will take some time, but then the hands is going to happen in Europe because of the energy prices the way they are right now.
I don't know if it's exactly the same form but you will see more.
Projects coming out of Europe , and we are focusing quite a bit.
And that is part of the world.
As a reminder.
May reenter the queue. If you have any follow up questions. Our next question comes from Greg lots of Koski with Webber Research. Your line is open.
Yeah, Hey, guys. Thanks.
Can you clarify that breakout of the 300 megawatts expected to be in service in August is that going to be one full site or is it going to be like partial completion for all three.
Sure.
At the end of the day it depends what the customer wants it we've been working very very closely with the southern California, absolutely. We did ask them that question and they Havent decided exactly how they will.
Allocate the particular kantar.
Container for the battery storage, which sites, but as I pointed in my.
My my remarks, all sites will be ready to receive as May do better is that we have in development.
Our next question comes from Tim Mulrooney with William Blair. Your line is open.
Hey, this is Sam password filling in for Tim Thanks for taking our question here.
With component parts for many projects rising.
Whether they be batteries or solar panels for instance, I was wondering if you could comment on how sensitive your customers might be to rising prices are most of the projects you work on such a critical nature that customers are willing to just bite the bullet or would they consider delaying projects further into the future. Thanks.
Sure I'll take that one so.
I'd be remiss to say that customers are not price sensitive.
The ones that are not in a.
Huge rush may kind of.
Slow walk projects, but just generally speaking the nature of our business and public procurements Theres a lot of time element built in to the award and contracting process.
And as I talked about we tend to Derisk before we signed up before we sign a contract and so as we approach that contract date.
We work with our customers so that they completely understand what the pricing is looking like.
And that's.
I think equally across the project business as well as the energy asset business with energy prices going up like they are.
Of course, you would imagine theres multiple adjustments to those pro forma as you get closer to contract.
<unk>.
We are.
But we feel good about about our cadence for for handling those those price increases that you mentioned.
Our next question comes from Chris Souther with B Riley Your line is open.
And then just to touch on the Ot FTE, a little bit more assuming they didn't take issue with the forced mature.
Can you give us a sense of the timeline you'd need to hit to avoid penalties on the project and what would that look like and I assume you can get.
Can we assume that the gross margin profile you guys are reiterating doesn't have.
Any penalties on 103 projects not being done is that kind of a good way to think about it now and then.
Maybe just kind of a follow up on that is are you seeing any slowdown in your pipeline of new opportunities based on the delay here or our customers.
Im pretty understanding of the fact that this is out of your control. Thanks.
So I'll just address SDE upfront.
But I don't think we can provide any further details beyond what we've got in the press release and what are in the prepared remarks. So.
I think we're going to have to leave it at that in terms of slowdowns in I'm sure George will Echo. This we're not seeing anything like that.
That's why we wanted to 50 megawatt battery acid.
Several of the other ones that are in the pipeline.
Important to note that until the end of March when we got the notification from capital that there would be delayed.
On the batteries, we were ahead of schedule.
On the particular projects in southern California. So.
And as we pointed out we will be on schedule with the exception of some better it has not been there.
Okay.
Yes.
Our next question comes from Chip Moore with Es Heighten your line is open.
Hi, Thanks, I guess first just really nice execution not the easiest of environments.
I Wonder maybe you can update us on the R&D development pipeline, where those project stand I think one of them crossed into the development megawatts. Thanks.
Sure.
We still.
As we pointed out before we will have three RMG plants mechanically complete by the end of the year.
And then our.
Our business plan the way we are planning right now.
Five to six per year thereafter.
As we stand right now however, we plan to work hard to increase those capability going down the road the road because as you've.
<unk> seen some of our.
Other comments, we have about 18 of them.
Right now in the development.
Uh huh.
Asset pipeline.
Our next question comes from Ben <unk> with Baird. Your line is open.
Great. Thank you guys. Two quick questions. One on Europe can you talk Georgia about scaling Mary I know you have operations here in the U K Continental Europe , how do we get comfortable with you guys being able to scale.
Do all the good things you do here in the United States. There and then the second one is outside of batteries.
Or do you say you feel comfortable with that what about new technologies, maybe fuel cells or anything else that we should pay attention to.
Yes.
The first question.
No.
I think we have very very good shape scale and at least in three countries, which I will reserve for the time being and those are the ones, where we would be targeting and we are looking at some potential acquisitions small ones.
And we will leverage a lot of local partners there.
That's in for that.
We teamed up with some excellent excellent company and they complement a lot what we are doing and couple of other locations.
We're not in a position to announce them yet but.
We came in with couple of other companies.
I think you'll see some things coming down the pike pretty soon associated with it.
Our next question comes from Pavel <unk> with Raymond James Your line is open.
Thanks for taking the question on the M&A front, yes, there are some solar developers in this country.
That are running into trouble because of 80, CVD and lack of module supply.
Would you look opportunistically at these situations from in.
M&A perspective.
Yes, no question about it.
And I think I answered that before.
A few months ago, let's.
Let's say a year what some of those people who will look at it was very very high prices and that's the way we did it.
And I always tell our group.
Wait the prices might change.
They might go down and we have some and so we are looking at some no question about it in the door and is following up a lot of it is that you might be able to give us that won't prevail I mean, we're opportunistic in general about M&A inside and outside of solar.
And as George mentioned.
If the pricing or the valuations cool off because of this.
Investigation than maybe some of those maybe there's some of those opportunities seem more attractive to us.
Our next question comes from Kashi Harrison with Piper Sandler Your line is open.
Hi, good afternoon, everyone and thanks for taking the question. This is Luke tokens filling in for Kashi.
Our question is about your solar panel sourcing strategy and any color you can give on availability and pricing that you're seeing in the market. Thank you.
Yes, I don't think we can go too much into detail about availability and pricing for.
For competitive reasons of course, we do tend to focus on what we consider to be highly reliable and high quality suppliers.
When it comes to sourcing of modules as I mentioned in my script, we did pull in some inventory in prior years.
Continuing to work for and we worked through and we've got that advantage working for US I guess in addition to the fact that we're not a solar only company. So the impact on <unk> isn't what it might be on some of our competitors in that space.
Our next question comes from Julien Dumoulin Smith with Bank of America. Your line is open.
Hi, guys. Thanks for taking my question. This is actually on your stepping in for Julien.
I wanted to ask about one I was wondering if you could provide an update on your R&D hedging strategy.
What are your expectations for a decrease in prices. If you can talk about that need over the next year.
Okay.
Well as I said.
We're going to place three planes in service and mechanical completed this year and then five to six thereafter.
I think the.
And the approach generally speaking as we've talked about in the past as we contract about 50% of the output from the projects as they are put in put in place and then we hedge over the course of the year.
The remaining RIN and L CFS.
Credits that are generated from there.
We are.
Constantly monitoring where those RIN prices sit and we consider that a little bit dynamically over the course of the year based on the RIN pricing.
I don't think we want to sit here and provide any predictions of where we think that will go.
Except to say that when we evaluate projects and when we're developing projects.
We take relatively conservative approaches to RIN pricing for purposes of not only establishing our 2022 guidance for example, but also for.
For the target returns that a certain project will be able to meet when we when we evaluate risk adjusted returns we tend to be relatively conservative I think.
But all I can say there.
Again, if he would like to ask a follow up question you may reenter the queue.
Our next question comes from Joseph <unk> with Guggenheim Partners. Your line is open.
Hello, I'm back again.
Ask a little bit about.
So pricing and how you're thinking about that relative to your customers or are you able at this point.
Right. It contract that for example allows you to pass through any volatility and stay with them carbonate pricing or cobalt pricing or something like that.
How are you coming at insulating yourself from the volatility that that.
That job.
Existing inputs for those for those products.
So Joe I think we are flexible with respect to the way we approach contracting with our customers. That's a risk our customers are looking to absorb because they believe that perhaps it will change in their favor we're willing to.
We're willing to entertain that approach.
I think for competitive reasons I won't necessarily talk about exactly what we do and what proportion fit it fits what what model, but I would say that we.
We.
As like any.
Type of project, we tend to.
Pre negotiate that pricing and lock things in before we sign a customer contract. So that we don't put ourselves at risk for pricing moves, especially when it comes to raw materials and batteries.
And the other thing that we have to remember this will now value proposition on a lot of contracts and it just happened.
Couple of examples right now because energy prices are going up much faster than.
On.
The materials menu.
Many of the project pencil exited one of them an excellent example of the contract group once we input did the new.
Energy supply energy prices versus the cost of the project has gone up too, but the simple payback was lower than it was before.
That's you have to deal with the same with the interest rates go up.
If energy prices go up faster.
The project spends a lot better.
Our next question comes from Stephens, Inc. Garrow with Stifel. Your line is open.
Thanks, gentlemen, quick quick follow up.
I was just sort of thinking about longer term modeling.
Project when does that start to to hit the income statement and is it does it accelerate or how should we think about that impact.
That's one.
To start showing up next year.
And.
I don't think we'll have adding it back to the numbers this year, but next year definitely we will have.
And actually that $200 million.
Plus or minus couple of whats booked right now I think there's another four five years.
Let's deploy the project we have identified to date.
The next stage, we actually get a contract and then we do more detail and as you are into that actually developed the plan and thereby all those numbers in.
The schedule will be fine tuned so we'd be able to gives you bennet colored by the end of the year as to what that project would look like.
Yes.
It's over 1 billion pounds of potential.
Project value you might call. It how much of that will be funded by a third party. How much is funded by them as the first phase by the way that the funding is already third party funding and has already identified by them.
Our next question comes from Greg lots of Koski with Webber Research. Your line is open.
Hey, guys. Thanks for the follow up.
Given the.
Socal Edison delay fall at the Analyst day are you still thinking about the $300 million 2024, adjusted EBITDA guidance, the same way and could you comment on roughly how much of that $300 million is coming from forecasted larger scale more traditional EPC type contracts like the Socal Edison project.
Yes, the 300.
No question about it that we're still on track.
We feel pretty good about where we are in this I think Cal project held for this year, but that's about it.
As far as.
About that particular target.
As to how much.
Comes from project how much comes from.
The asset business, where the recurring line of business I would say this much.
60 to 70, and sometimes maybe a 75% will come from the <unk> business or the recurring business lines and the balance will be from the projects.
And the other hand, we have great visibility on the projects.
Yeah.
Because we have the $3 billion total backlog that.
To date and as.
I pointed out in Dora pointed out is.
Our remarks, the activity level is picking up and the fact that we have just begun to get face to face mid teens.
It's helping the company and of course energy prices being what they are and continue to go up it's very very good for our business.
Thank you. This concludes our question and answer session. Thank you for participating in today's conference. You May now disconnect everyone have a great day.
Okay.
Okay.
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