Q3 2023 Ameresco Inc Earnings Call
Okay.
Good day, ladies and gentlemen, and thank you for standing by welcome to the M. A rescue incorporated third quarter 2023 earnings call. At this time, all participants are in a listen only mode.
The speaker's presentation, there will be a question and answer session to ask a question at that time. Please press star one one on your telephone keypad.
As a reminder, this conference call is being recorded I would now like to turn the conference over to your host Mrs. Leila Dillon Senior Vice President marketing and communications. Mr. Kneeland, you may begin.
Thank you Howard and good afternoon, everyone. We appreciate you joining us for today's call. Joining me here are George <unk>, <unk>, Chairman, President and Chief Executive Officer.
Sure and Hull Executive Vice President and Chief Financial Officer, and Chip Clark 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 state's Hartford 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 statements.
In addition, we use several non-GAAP measures when presenting our financial results. We have included reconciliations 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 ended the quarter with a record total project backlog of $3 $7 billion, which was up 14% sequentially and 41% versus last year.
We added an impressive $700 million in New project awards during the quarter.
In our year to day awards of one 7 billion.
More than double last year's level.
And we anticipate that our new awards will continue to grow given 35% increase in proposal activity as compared to last year's levels.
This backlog together with the asset and operation and maintenance visibility gives us over $7.2 billion in total multiyear visibility of profitable revenue supporting our confidence in <unk> global Tam growth.
We did however.
So.
Industry wide and company specific challenges, which impacted our third quarter results.
We are very disappointed.
We are pleased with the progress we've made in building our long term business momentum.
We also added over 50 megawatts of assets in developing in Q3.
And in the quarter with all more 600 megawatts of assets in development and construction.
This is a 30% increase from the 460 megawatts at the end of last year.
Well, our long term prospects have never been better I did want to comment on some of the recent industry challenges.
In our project business, we are seeing longer cycle, when converting our awarded projects into contracted backlog.
As contracts are being delayed and some customers are taking longer to proceed with the actual implementation of project work.
It's important to note that we have not experienced any cancellations just lengthening of the sales.
Sales cycle in movie awards to contracts.
And Lake.
This in the industry. We also continue to face supply chain delays on certain components as well as tightness in the labor market.
Our energy asset business has been challenged by both.
Downtime at some of our biogas plants as well as delays in the development and construction of some of our assets, especially our larger more complicated plan such as our energy.
We all assets always incur downtime levels, we have faced over the last few quarters have been considerably greater than budgeted.
Driven by several factors out of our control.
Adverse weather conditions and utility interruptions.
The asset protection timetables stretched as a result of industrywide component that labor shortages as well as administrative bottlenecks.
Again, while these delays are frustrating it's important to keep in mind that all of these profitable assets will be built.
It's just taken longer than originally anticipated.
As the company continues to grow we are optimizing the operational structure at that I'm going to ask her to bring more uniformity and scalability across all of our geographies and business units.
We are making these changes to increase our ability to react to changing market conditions more quickly.
To drive increased corporate efficiency.
And with our tremendous project backlog.
Increased our focus on project execution and cash flow generation.
Further in light of the continued industry challenges impacting conversion times and execution.
Revisiting some of our assumptions around guidance.
Darren will provide more details from the numbers.
His financial review.
However.
Even with these challenges.
Would it be more optimistic about our future.
<unk> is highly profitable and we continue to expect substantial growth in 'twenty four and beyond.
I will now turn the call over to Doron to comment on our financial performance and outlook Dara.
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.
Total second quarter revenue of $335 million was below our expectations as project delays and asset downtime impacted revenue.
Our project revenue was particularly impacted by a lengthening in the cycle converting awarded backlog to contracted backlog as well as continued industry wide supply chain issues that are extending our construction timelines.
Energy asset revenue grew 6% largely due to the greater number of operating assets compared to last year as well as higher RIN prices.
These benefits helped to offset greater than expected downtime at our biogas facilities as well as delays in bringing some new assets online.
Our O&M business delivered another consistent quarter with 4% growth.
Our other line of business experienced a slight decline in revenue driven by end market softness that our off grid solar business.
Gross margin expanded to 19%, but did not meet our expectations as the downtime I just mentioned and project mix impacted our results.
To emphasize that we have not seen any fundamental change in our overall project gross margins as the expected margin within our backlog has been quite stable for at least two years.
We generated adjusted EBITDA of $43 $3 million in the quarter.
Our GAAP results for the quarter include a discrete tax benefit of $7 $2 million related to a prior year's section 179 D tax deduction allocated from our customer.
To maximize our earnings will continue to take advantage of all of the benefits available to us and our customers as part of the IRA and other favorable legislation.
Our long term revenue visibility remains strong as ever as George mentioned, we ended the quarter with a record total project backlog of $3 7 billion.
This is an impressive increase of 41% versus last year, and a sequential increase of 14% driven by winning over $700 million in New project Awards during this quarter alone.
Our operating energy asset visibility is approximately $2 3 billion.
Representing both contracted revenue as well as a conservative estimate of lifetime uncontrolled it R&D revenues.
These metrics together with our O&M backlog <unk> visibility to over $7 2 billion.
Future revenue.
Importantly, this does not include any revenue contribution from the 596 megawatts of energy assets in development and construction.
The timing of placing these assets into operation can be anywhere from under a year for small more simple assets to four plus years for more complex assets such as R&D facilities.
Unfortunately, this timeframe has recently been increasing due to labor and equipment availability along with permitting delays.
However, we continued our high rate of conversion with approximately 90% plus of our energy assets either successfully placed into service on our balance sheet or monetize through a sale to a third party.
We continue to field many questions on how higher interest rates will impact the MRO scope, especially as it relates to our energy asset business.
Paired with many in our industry the inherent diversity of our business model gives us the flexibility to adjust to changes in the business environment.
Have the optionality to develop profitable assets and then either hold them on our balance sheet as an operating energy assets.
Or to sell to a third party and recognize project revenue if the assets did not hit our risk adjusted Levered IRR hurdle rates.
Some assets may not hit our own hurdle rates.
Well within the return profile of many energy asset buyers and aggregators ready to add assets to their portfolios.
And such a sale would often come with an attached O&M contract.
This strategy is not new for MRI <unk> as.
<unk> or cash flow through asset sales has been part of our business model for several years.
And the yen, we believe that our flexible corporate bottle with project O&M and asset business lines allows us to continue to benefit from the rapid growth in the deployment of clean technologies, even in a high interest rate environment.
Our ability to finance our growth remains excellent.
During the quarter, we secured over half a billion dollars in financing commitments, bringing our year to date total to over $1 billion.
While the Cleantech industry at large has experienced credit tightening and expansion of spreads.
We are particularly pleased that in our recent financing credit spreads for <unk> high quality asset portfolio continue to be stable.
We have a number of attractive options for financing our growth, including nonrecourse project level debt tax equity and the recycling of capital through asset sales.
We are adjusting our 2023 guidance in response to the items, which we described earlier.
We now anticipate full year 2023 revenue adjusted EBITDA and EPS to be approximately $135 billion.
$165 million and $1 20 at.
At the mid points as detailed in our press release.
We now expect to place between $120 and 130 megawatts of energy assets in service for all of 2023, including the recently acquired Los Alamitos Micro grid project.
And our second five megawatt RMG plant.
A third RMG plant is expected to be at the mechanical completion by the end of the year and fully commissioned in early 2024.
And while we will be providing detailed full year 2024 guidance. When we report our fourth quarter and full year results. We wanted to take this opportunity to comment on our 2024 adjusted EBITDA target of 300 million, which we originally provided in early 2022.
Given the lengthening in the sales and construction cycles, and our project and energy asset businesses. We now expect the 2024 adjusted EBITDA could be approximately $250 million.
I want to make it clear that none of this adjusted EBITDA opportunity has been lost it is just being delayed.
And this new adjusted EBITDA level still represents impressive growth compared to our expected 2023 results and still fits in the framework of our long term, 20% plus adjusted EBITDA growth target.
Operating leverage remains top of mind as.
As we remain diligent on Opex further bolstered by our internal optimizations.
Now I'd like to turn the call back over to George for closing comments. Thank you Doron.
As we have discussed in detail during this call while we continue to face some headwinds our long term growth opportunities have never been better.
The company is redoubling, our focus on profitable execution and cash flow generation.
We'll look forward to detailing our success in future quarters.
In closing I would like to once again, thank our employees customers and stockholders for their continued support.
Operator.
To open the call to questions.
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Our first question or comment comes from a lot of nor K from Oppenheimer <unk> company. Mr. <unk>. Your line is open.
Alright, thanks for taking the questions.
I was wondering if I could start off by just trying to get a sense of the bridge.
Between the prior and revised guidance when we look at the essentially the $50 million difference.
In in EBITDA can you kind of walk us through what were the main components quantitatively as you can obviously you commented to both.
<unk> energy assets, but if you could help us get a sense of the bridge that would be really helpful.
Sorry to clarify I know you were talking about 2024.
No 2023 actually thanks for clarifying.
Okay. Thanks.
So.
First and foremost I think the point is that the.
The ramp in 2023 really relied on some solid execution and conversions of awards to contracts happening in Q3.
That didn't materialize the way, we expected it to and so as a result of that.
We've kind of adjusted this guidance to push things to the right as you as you might expect and as you've probably seen us seen us do before so.
Through Q2.
Executing on our contracted backlog as you saw higher than expected revenue performance, but then we also had relatively high.
Amount of.
Second half 'twenty three guidance there in the awarded and contracted backlog and.
I think with the conversion is being delayed.
Several large projects.
I think that that was one of the things that just kind of resulted in a push out I don't know that we want to go into any more detail.
And that.
Okay.
Well.
I don't know the assets contributed to that as well.
<unk> operation.
Right right right.
Possible to sort of say, whether it was going to happen to have projects and assets.
Youre not going to be able to provide that detail.
I don't think thats firms.
Understood understood.
You mentioned earlier one of the benefits the model is the ability to be flexible around capital can you talk a little bit about your plans for.
Capital recycling here and how youre thinking about.
Leverage and financing you mentioned securing a good amount of capital already this quarter, but just wanted to understand how you're thinking about capital recycling levels.
And how soon that might occur.
So I think that was really designed as a reminder, that this is part of the business model that we will look to sell assets.
I think as I talked about last quarter with higher interest rates were starting to see a little bit of.
A little bit of challenge in the Levered IRR targets that we have and as you know some of these assets take a while to sort of make their way through.
The assets in development metric and into something Thats, an operation. So we experienced some pressure on the interest rate.
What we found is that market still exist for those assets.
Our return hurdles that are lower than ours.
We will regularly.
Work on kind of turning around.
Entering into sales agreements with those assets pre construction.
So while there is still in development.
Such that it effectively converts it into project business for us.
As opposed to looking at it as a distinct kind of business line.
I would say, it's fair to say, it's going to be consistently.
NAMIC, if thats a good oxy moron.
As we go forward.
Sure.
Maybe one last question.
Sorry go ahead Josh.
Yes.
We have so many projects in development assets in development. So this gives us an opportunity to monetize assets in development and still maintain our targets.
Once we hold about at least 20% growth once Leopold.
And.
The interest rate environment, and I think it's a winter presented it to recycle some of that cash.
Cash and Thats why I want my comments to the project business.
Backlog is so.
So large.
Refocus to generate to build more of the projects out as we go down the road to generate more cash in general are needed rather than looking at it from the outside I mean, it allows us to maintain the growth rate, we're expecting and hold onto our mid teens IRR target.
And at the same time, but stay in front of our customers.
Ed.
We are.
We're continuing to find the right financing on a nonrecourse basis for the assets that we want to keep it.
If the returns out there we at least were staying in the market. We're staying in front of our customers were still developing a good amount of assets in that.
The way, we don't overstress, our balance sheet.
Right.
I know you have a lot of other questions, but I'll take them offline you've got a lot of analysts to get to say. Thank you. Thank you.
Thank you. Our next question or comment comes from the line of Stephen <unk> from Stifel. Mr. <unk>. Your line is now open.
Hi, Good afternoon can you hear me okay.
Yes yesterday.
Great. Thank you.
So.
I guess my biggest my Big picture questions.
Think about the quarter and obviously you've laid out.
The challenges you've seen and you kind of gave this preliminary look into 2024.
We think about your.
Handle on the issues.
And what.
What kind of gives you confidence that you start to get.
<unk> momentum traction 24, which makes those targets realistic.
Well.
We took into consideration what happened to us for this particular quarter.
Basically we extrapolated as we assume that these conditions will continue.
Sure.
For the seeable future.
Between all of US that's another interesting.
I think we will let our guard down little bet by all of the performing the first two quarters, even though we still realize it.
But it was not.
Moving to the contracts that we had contemplated.
But then.
<unk>.
Of course, many many projects not just the ones that we can see and then the other thing that surprised us that loss is.
The extension on the implementation schedules.
We get second quarter view of the projects and execute them because when it gets it gets up materials on couple of them. We can then get the right labor in a timely fashion.
When I said that administrative challenges, we faced we delivered solid it permanent.
To take a couple of weeks it takes more than three or four months because nobody shows up to review the application.
And we feel very good and Thats why the project business in the project backlog now because it's growing it's getting to the point.
We feel that we can execute on.
2024.
And especially on the level of that.
We have for that estimate at this point in time.
And that's the way I think and we will give more detail when we.
Talk about don't report numbers after the year.
We ended the year.
Give a little bit more color.
But right now we feel pretty good we take.
Taken into account.
What's happening in the marketplace.
Thanks George.
It sounds like this but so you feel like those expectations are.
Our accounting for things that kind of you can control versus what you kind of can't control going into next year is that a reasonable way to think about.
That is correct yes.
Okay.
Hello, Matt.
Very very good about the future of where we are in the trend of the business is very good.
Is taking a little bit longer to execute that work.
We've been in a.
For a long time, and we get that metric than we thought down Pat.
We honestly you guys I thought that this supply chain issue will be done by now, but what is happening I think and thats. The way, we get stuck on the electrical side, especially on the equipment.
Everything is going to be electric it gives a bottleneck.
Not only that.
The capability of the various manufacturers and built in transformers or control panels as Helen.
And then in London.
The beauty.
One of our projects has been lost.
They are all there.
Just moving at a slower pace.
And Steve this is the importance of controlling opex here.
Because we are focusing on earnings generation, you are going to control Opex and <unk>.
Continue to generate the EBITDA that we expect to generate and frankly, we're still working to execute.
Contracts with our vendors and our suppliers prior to executing our customer contract to Derisk margin, we're still working towards that.
Just that we've had a few of these.
Adjustments come with some of the projects that have been in the backlog for a bit.
With the kind of lengthening of the cycle.
Understood. Thank you that's helpful.
Thank you.
Okay.
Thank you. Our next question or comment comes from the line of Eric Stine from Craig Hallum. Mr. Stein. Your line is now open.
Hey, everyone.
So I just wanted to dig in here a little bit more just to try to understand the sil.
I mean, I know supply chain issues and labor, it's been a pretty consistent challenge I mean is this something where you saw that intensify or is it where you just had a number of larger projects things you were counting on contributing to the back half of the year that it was just a greater impact from those.
Headwinds.
Great Great question, especially that's exactly what happened as business out of the larger projects.
The origin schedule of when you say in this particular contract and now it's going to do X Y Z and all of a sudden that contract whether there or and this is a key you couldnt get the.
The qualified work has to show up at the Worksite and decide.
And some of them.
But we can still go out with an artifice of 12 to 16.
And sometimes it will get to one or two responses.
And you will find out that one of them, it's not even qualify it so.
A neighbor.
A huge.
Sure.
Got it and then I mean, <unk> had great growth in your project business.
The you mentioned permitting and that sort of thing, but I mean is this theory your business, where you can safely say interest rate higher interest rates that that is having a tangible impact negative impact.
Not really no.
No no we haven't really seen that on the project business.
Okay.
And then I think that is.
Yes go ahead, no I was just going to say so the $2 50 that youre talking about for the early look at 2024, just to confirm youre not really expecting.
Shirley improvement in these areas right youre kind of expecting status quo from where things stand now playing that out through 2024, rather than anticipating that there is that there is improvement in a lot of these areas.
That's what we did.
And Mark did a great due diligence you can make a comment but that's.
That's exactly what we've tried to do in <unk>.
And we think we have represented.
Very accurately.
Okay. Thank you.
Thank you. Our next question or comment comes from the line of Tim Mulrooney from William Blair and company. Mr. Rooney. Your line is now open.
Okay.
My question is on your 2023 guide the midpoint of your guide.
Suggesting I think still a nice ramp up in fourth quarter revenue up more than 20.
20% sequentially I think from the third quarter at the midpoint can you just talk about the primary factors contributing to that acceleration is a collection of unbilled revenue at SCE or other things.
Yes.
Tim This is mark it's mostly.
It's contracted.
It's assuming.
Good execution on our contracted backlog it assumes very little.
Awarded awarded revenue and then we took a look at that and we have to take into consideration the slippage that we're seeing.
But with the active projects that we currently are working on we feel like.
The contracted revenue is the number that we can deliver on in Q4.
Okay. Thank you Mark my follow up I, just wanted to ask about the administrative part.
<unk> you listed as being a factor impacting third quarter results can you just talk a little more detail about what those were.
If they were specific to one or two projects or if it's.
A broader issue that Youll expect will carry into the fourth quarter and beyond.
Well.
The couple of the assets that were delayed because of the whether it's the solar plants that they were not connected because of the utility.
We didn't get that was there to connect the project or.
Some of the renewable gas plants that were built into we got delayed because.
I think it was three months before somebody went to review the.
Applications.
So that delay that particular projects in about three months.
I think the administrative delays really that are impacting the timing of awards converting tech contract.
Something that we really started to see a little bit towards the end of Q2 with some awards. We expect it to convert we really felt the impact in Q3 and so to your question. Yes, we do expect that to continue in through through Q4.
These are all really just kind of pushing out to the right so but.
We've taken that into account in our revised guidance.
Hey, what happened and the fact that everybody has in turn back to work.
In fact.
Implementation of our work and I think many other people.
Got it thank you.
Thank you. Our next question or comment comes from the line of Josh Joseph Osha from Guggenheim. Mr. <unk>. Your line is now open.
Hi, there everybody.
Hi.
We might shift gears.
A little bit here.
When I look at where we stand in the current quarter and in your deck you point out that our water business is nonrecourse, but yes.
If you annualize Q3, we're now standing at about eight three times debt to EBITDA and then on your New guide it's about eight times.
<unk> debt to EBITDA for 2024.
The business hasn't generated even wrapping in.
Yes.
He hasnt.
It hasn't generated any free cash flow.
Since 2020, and it generated $80 million since the beginning of 2019, So I guess I'm just asking yeah, we can talk about the growth in.
Energy asset business here, but at what point.
Does this business begin to generate cash and how are you thinking about that as we go into 2024.
Okay.
Yeah.
Joe.
The first thing I would point out is that the.
Adjusted cash from operations was positive.
As we've talked about we have the discretion to.
Work on the <unk>.
Cadence of asset investment as necessary, if we need to effectively match up with our operating cash flow.
Understand that the higher leverage numbers that you're talking about you pointed out yourself.
That EBITDA multiples as not a metric that you used when determining advance rates under non recourse debt alright, I think we can all kind of.
Agree on that on that point and therefore, those figures will end up looking higher than what you would think about from a normal corporate credit facility.
As far as cash flow is concerned.
I think that that is something we've discussed this.
We are going to be looking at.
We can start to talk about.
The companys history of generating cash and what that looks like versus how much is being invested into the assets.
However, broadly speaking the only other thing I would say about.
The leverage overall is that it does remain a bit inflated on the basis of.
The delayed kind of Socal, Ed projects wrapping those up getting that cash in.
We've actually used quite a bit of our own operating cash flow to pay down.
The corporate debt and so we've got quite a bit of unbilled, there that youll see kind of a turnaround.
Call It Q1 ish.
To kind of show the cash coming out of the SCE projects. So that will help us in terms of Delevering the corporate facility.
At this stage I don't know how much more can.
Sorry to address your question sure and I guess kind of just to follow on the second part of the same question.
And look this debate has been going on award and some companies are kind of comparable to you like some of these residential solar businesses.
Yes. It is a question of how you balance growth and cash flow generation. So I guess I'll, just ask you or Georgia whoever.
Is there a point when is the $2 billion company or a $3 billion company or whatever you say, okay. We're going to maybe take a slightly different view of how we think about growth.
Versus gen.
<unk> cash flow and maybe ultimately return of capital to shareholders I'm, just trying to get a sense as to the the philosophy here.
Underpins, how youre, making.
Yes.
Well that's why.
Especially in this higher interest environment, that's why we wanted to.
<unk> is a good part of the assets, we develop and then focus more in the projects business, which generates very good cash flow.
And basically rather than issuing new stock to finance potential asset that we own. It comes all from internally generated cash flow.
In addition to that I think the guideline that we will be using going forward.
Even that we will not invest all of that asset.
Cash flow generated from projects in the existing assets in R&M, we'll retain some of it to Delever the company.
Okay. Thank you very much.
Okay.
Okay.
Our next question or comment comes from the line of Julien Dumoulin Smith from Bank of America. Mr. Duma Smith. Your line is now open great.
Hey, good afternoon. Thank you guys very much I appreciate it just following up on a couple of things here first off how do you think about the timeline for these projects get critical back on track, obviously, bringing down 23, and 24 by roughly 50, I mean is there a catch up here in 'twenty five or are you thinking that categorically, we're rolling the ball, Florida across the <unk>.
Across the forward look here when do we get kind of that <unk> 25, and then as you think about.
Kind of catching back up here is there an element of <unk>.
Our opex that needs to play into this to get things back on track.
Where is there any other risk on the SG&A and then maybe also just to clean up on that last one.
On payments and cash do you wanted to clarify a little bit more about.
Payments on the batteries here on the timeline there.
Sure.
July 25.
First.
First answer.
No on the Opex the Opex will remain under control, we don't need to grow our opex in order to grow the company, we had $700 million in New awards come in the door. This quarter, one 7% for the year the business is going to grow.
I don't necessarily view this as a catch up when you look at 2025 or beyond obviously, we don't talk about.
There is in detailed that far into the future, but what we're observing is the timelines are stretching with respect to the sales cycle in the construction cycles right.
Macro economically everyone understands the labor shortage issues that are in the market. We've got to continue to watch those however.
The IRA and the amount of awards coming through the.
Overall growth of the business is potentially still there it doesn't necessarily mean that we need those timelines to compress to really continue to grow at our kind of 20% per year.
EBITDA target that's what we are.
That's what we're trying to trying to get too so.
That is a response to pursue with respect to Socal basically when we hit substantial completion, we've got 60 day payment terms. It's in the contract with public people can see that so you can assume that 1 billion. While we're talking about two of the projects being completed in Q4, and then a third one in the first half year.
<unk> kind of <unk>.
Forward from there.
We're not we're not going into.
Deep detail about those cash flows Julien.
Right.
Line Wise here are we confident that you guys have a real sense of when the new timelines are for the project question I mean, it seems like this has materialized relatively recently.
Over quarter here, just curious I mean, how do you know the depth of these delays here if you can speak a little bit more specifically to it.
<unk> some of the larger projects like R&D and how lumpy they can be.
I will say that.
From what we have seen so far is likely our LNG project, a 6% to eight months delay pretty much and then on the.
The other projects.
Construction.
We used to say we have one to two year construction schedule now it looks more than that.
One and a half two almost three years of construction and some of the headwinds.
Plus projects.
Hi, guys.
Is that something that Kathryn.
Projects that were in construction and we deliver the equipment to the particular air base and then because we're doing work at the North pole.
Some way that stuff didn't get loaded into the plane that's.
Six month delay on that particular project.
We lost sales.
But it wasn't a loss, but things like that that happened and left and right and Thats why.
We felt it was prudent on our part to try to incorporate as much of this stuff into our.
<unk> forecast.
But the business has not lost is there.
It will be done.
And I think that 20% target that we have on EBITDA in five years.
Growth I think we feel pretty comfortable with it.
Thanks, guys.
Thank you.
Our next question or comment comes from the line of George <unk> from Canaccord Genuity. Mr. <unk>. Your line is now open.
Hi, Thanks for taking my questions. So I just wanted to.
You hit on the same points.
You talked about.
Delays in contract conversions and I think I heard during the call that you mentioned that you don't think.
Any of those delays are related to the changes in the interest rate regime is that correct.
We heard on the call.
That is correct.
That is correct.
So can you then explain it.
Some of them.
Administrative.
The board's domain.
People don't show up or bureaucratic nightmare that some of the federal contracts.
The other hand, the awards in that $700 million.
Once they settle contracts.
We're getting them, but then moving into the next stage is it getting tougher and then implementing them getting even more tougher.
So from the top of the funnel when you have this awarded project backlog that is now stretched.
$2 5 billion.
Just converting that to contracted it's strictly a function of just administrative delays and then somehow project delays or are impacting that conversion as well as this just where the administrative issues are showing up.
That's really the administrative side of it what George was just mentioning the project delays or post post execution of the contract rate certainly the construction timelines the schedule patient timelines in the schedules are stretching out a bit based on labor and material availability.
Okay.
And so you.
You haven't seen one of your slides. It is 12 months to 24 months the contract Keith I think you said, it's more like.
18 to 36 months now and attractive is that right.
I'll, let mark answer that question better than I mean, we're still seeing in that range.
And it's not impacting every one of our award, but what we've been talking about is we have several larger awards.
That are in kind of more mature stages of the contracting process, but these administrative delays are dragging them out. So on average we're still within that range overall, but it's really been several large projects.
That we had expected to convert to get into that next stage of active construction.
Where we've seen the delay and then to the other points. We've made once they have contracted that implementation period is starting to take a little bit longer to get we need to get the workforce mobilized.
<unk> get materials to the Worksite that is all in taking time. So so it's all really kind of stretching between the conversion and then and then the ramp up in the implementation, which is causing a lot of the push outs.
Okay and just maybe final question you mentioned that the stronger RIN prices are offsetting some of the unplanned unplanned downtime at year.
R&D facilities now as you ramp those back or what's your outlook anything you can share on the recent surge in D three wins.
And how you plan to monetize those have you missed an opportunity here to monetize some of your wins based on the downtime. Thank you.
Well, we've taken advantage of the market dollars, we started the year with about.
50% merchant.
In.
<unk>.
But right now what we have left for this year is probably the production of the last couple of months.
We then monetize.
Yeah.
Month to month and.
We've got pretty good prices I would say and its been reflected in our guidance.
This year as well as next year. The other thing I want to point out and I think I did mention is the one of the call and less time for <unk> before we were always optimistic about the RIN prices.
What do we get to use for that the old estimate it was pretty much.
Marine prices Thats, a day right now.
Thank you. Thank you. Our next question or comment comes from the line of Moses Sutton from BNP Paribas. Mr. Sutton. Your line is now open.
For taking my questions first for what it's worth that Youre not think you should slow growth like a pair of mine noted in order to return cash when there's real growth in the table.
I guess first question, how do you think about adjusted EBITDA margins at the project business.
4% for the nine months year to date.
I think of it as closer to 10% typically exists is it due to inflation is it due to certain mismatches on delay how do we think of that on the project side of adjusted EBITDA.
Yes, I mean, the 10% sounds a bit high but I think that.
It's typically a function of mix right and so when you're comparing year over year.
It's going to be a function of.
The mix of projects that are active at that point that are impacting the margin I think we've been probably closer to 6% historically, so we're not that far off.
And again I think we've seen some of our mix more recently.
A little bit lower margin profile, even though overall margins have been expanding so.
I think we're not far off of kind of where our historical margins have been.
Got it got it that's helpful and then I guess.
Back on the <unk> topic, so as the Rins on a spot basis sit near the 2021 peak and I know you typically talk about a certain like 50% spot exposure or about flash hedges, 50% contracted.
Is the delay in R&D projects actually offering you the ability to contract.
More of the future rent that you expect as projects roll online next year at a higher contracted price than you would've prior is that already embedded in the 250, yes.
Very good point actually we are talking to a couple of firms right. Now we have a couple of percent of the table Thats why we are not.
I'm not forecasting green prices for next year and so on.
<unk> entered into a couple of long term contracts.
With much higher prices than what we had.
And to do the contracts couple of fee three years back.
We are looking at and no question about it.
As soon as we feel very comfortable with the prices, we will execute them.
That's very helpful. Thank you and what the long term considered now in terms of tenure in terms of years.
You know we have.
Up to 15 years.
Excellent. Thank you I'll get back in the queue.
Yes.
Our next question or comment comes from the line of William Griffin from UBS. Mr. Griffin. Your line is now open.
Great. Thanks, very much first question I was just hoping you could maybe give a little more color around the R&D financing you recently announced with hassey.
My understanding is that that structure is flexible and that there might be a returns sharing component to your actual costs to that financing is that something you are able to elaborate on.
Hey, Bose this is Josh baribeau here so.
It's not variable how it works is there is a fixed cash component of interest rate.
Until the loan is to amortize.
And then after that handing gets a bit of cash sweep until they achieve an IRR internal rate of return on their initial investment about.
Alright are you able to disclose what the actual I guess the upfront rate is for you. The effective rate for you is on that financing.
Yes, that's in the 8-K and were accruing at the at that IRR right.
Got it alright, thanks very much.
Thank you. Our next question or comment comes from the line of Christopher <unk> from B Riley Mr. <unk>. Your line is now open.
Thanks for taking my questions here.
The cycle being extended.
Contract Award and implementation.
I think this year was much more backend loaded with the visibility you're going to have so I'm just kind of curious how you're thinking about the visibility today.
No.
When you gave kind of a full guidance for 2024.
Should we consider.
Expectation that there's going.
You'll hear a lot more visibility.
Awarded kind of contract contracted backlog as we enter the year.
Maybe wishful thinking on my hands.
How do you think about like the visibility on that too.
Yes.
I think we.
You have pretty good visibility and we are relying more on kantar.
Contracted.
We're going to be at the end of the year and are contracted and that is more in fact.
Anything else and not rely as much we don't want to have the big.
Hockey stick like we did this year for the lso.
Quarter, especially.
But we are so.
Okay.
On the cover.
Potential development project sale is there any sector in particular youre seeing.
And that you'd be focused on for a potential sale of the solar batteries R&D.
Specific areas will give you kind of looking at those kind of all the above.
I think.
No not really R&D I think.
Yeah.
Solar certainly in the hybrid hybrid batteries solar and battery.
I wouldn't put it past us to think about some of the Standalone battery.
Given the fact that some of those markets like I said, we continue to develop in multiple markets. Some of those markets might have more merchants than we'd like and so therefore, we will work on them.
And NTP sale of projects like that so I think it's more along those lines versus the.
The R&D.
So you guys I want everybody to understand developing assays, whether it's solar or is it better assets.
Monetizing them, it's not different in the development of entertainment.
Correct.
Basically we sell the receivable and then.
We get we get the money in then.
The financing and then at the end of the day, we get into the savings.
This is even a simpler process just takes a little bit longer time.
And then we have the option to keep it at once that they have.
Better returns.
We've met that hurdle rate of return.
R&D projects.
Generally they are more complicated no question about it but at this point in time to have better returns.
And solar.
Thanks, a lot.
Thank you.
Our next question or comment comes from Vermont of Pavel <unk> from Raymond James Mr. <unk>. Your line is now open.
Yes.
Thanks for taking the question.
A lot of commentary about the <unk>.
Core domestic business I'll ask two questions about Europe first.
First of all or any of the permitting issues and supply chain complications affecting any of your work on the other side of the Atlantic.
So first first.
Got it.
I will tell you.
Because I was there last week visiting one of the sites one of the large sites.
The there's been a little bit, but not to the tune that we've seen here in the United States with respect to labor availability and materials. So I think that we.
Especially on that 100 megawatt Delphine project that we've got in Greece.
That is still kind of cruising along on time and.
We've only had slight variations associated with the timeline, there so and I think that what we're projecting on many of the new wins in the awarded category.
Some of which was there in Europe on the EPC side.
Expectations still remain strong on availability of materials labor.
Those jurisdictions where were winning projects.
And that was even in the UK the only exception.
Was that the Bristol <unk> contract that we have.
And we.
We mentioned the numbers.
Good margin.
We didn't have the projects but.
This is a lesson for us.
In the projects approved through the city Council and everybody else by the suo a pool of those particular projects.
Considerably longer than we thought.
Now we have.
Incorporated monthly maintenance, we will meet with the board and identify with project is going to be doing them and have them pretty much approved by the end of this year. We won't have those next year. So that one we missed the boat as far as what we thought was possible and what they actually happen.
And again its administrative not because they don't want to do or anything else, but yes administrative and thats about the cycle of just conversion of awards to contracts not anything about actual construction activity and Furthermore, it's a push to the right. It's.
It's not a change in any of the scope of the awards.
We can slow.
Okay clear.
Staying on the European theme you.
Okay.
For this year.
Have to imagine that with.
Some of the macro.
Issues.
Multiples on prospective M&A have come down in that context are you seeing more opportunities to bulk up your business there.
Via M&A.
Yes, we don't have anything specific to talk about today.
We would agree with your comment and we are seeing again were very opportunistic.
We're still sticking to our knitting in terms of what we're looking for management fit financial valuation so on and so forth, but yes. The number of opportunities that look interesting has increased.
Very good thank you guys.
Thank you.
Thank you. Our next question or comment comes from the line of David Sunderland from Baird. Mr. Sunderland. Your line is now open.
Hey, guys. Thank you very much.
Yes.
Most of my questions.
I just wanted to ask is there any possibility recovery expenses associated with some of these projects.
Games that have been drawn out.
As with Socal or other deals that you've done in the past.
And my follow up is given the lack of visibility into labor and component shortages. How are you thinking about these variables and contracts now going forward. Thank you.
Yes, sure. So sorry Davis your line is a little bit fuzzy, but I think I think I got the question. So the.
First point is when something actually has created by a force majeure situation, Yes of course, we can.
We can we can claim back costs for certain delays and that's always contractual.
Any particular anecdotes for you or or numbers on that but yes in general the contracts generally looking for force majeure, not not necessarily a general slowdown or availability of labor, though.
With respect to looking through the remainder of the year end and talking about thinking about the 250 number next year.
Secondly taken into account.
What is happening in considering the cadence of construction going forward.
As we as we talked about we don't typically lose business out of the awarded backlog our contracted backlog certainly not out of the contracted backlog. However, if theyre slowdowns things just kind of push out to the right. So we've adjusted our expectations with respect to cadence.
And we presented numbers on that basis to you all today.
Thank you. Our next question or comment comes from the line of Greg <unk> Zukowski from Webber Research Advisory Mr. Weber Koski. Your line is now open.
Yeah, Hey, Thanks, everyone. Just one for me I just wanted to ask a little bit more about the prospect of <unk>.
Selling off some assets in development, because I, just feel like I might not be drafting it or maybe I misheard it.
It seems like that would allow you to stay in front of customers and maintain business within projects and O&M, which is great but.
If you are trading energy asset business for projects and O&M business isn't that isn't that like trading a high EBIT margin business for a low one so in a sense, yes, it wouldn't be as much pushing it out to the right as much as it would be kind of more like margin erosion for the sake of continuity.
Is that is that a fair way of looking at it or am I off base there.
Yes, so I'll just.
Kind of guide you to the way we think about these things.
A couple of important metrics for us when we're evaluating assets that go away from EBITDA generation in Levered equity IRR, our cash generation and net income.
And as it turns out some of these assets when we look at anything that might have.
Merchant tail on it.
Others, where the Unlevered IRR is relatively tight versus the funding costs.
We.
And then turn our turn our attention to.
Well from a from.
From an overall cash flow generation perspective.
We are probably better served when.
When we look at where the market is pricing some of those assets to perform the EPC and grabbed the O&M contract to generate additional cash flow and recycle that into something thats actually going to look better for us from a cash flow and net income perspective over the long term.
That's the only kind of modification I might might throw there.
Okay. So it's got layers alright, thanks, Darren I appreciate it that's it.
Thank you ladies and gentlemen, this concludes the Q&A session and this concludes today's conference call. Thank you for your participation. You may now disconnect everyone have a wonderful day.
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