Gary Dvorchak - The Blue Shirt Group George Sakellaris - Chairman, President & CEO John Granara - CFO.

Noah Kaye - Oppenheimer.

Welcome to the Ameresco Third Quarter 2015 Earnings Results Conference Call. [Operator Instructions]. I would now like to introduce your host for today's call Gary Dvorchak. Sir, you may begin..

Thank you, Eric and good morning everyone. Thank you for joining us today for Ameresco's third quarter 2015 earnings conference call. I am joined today by George Sakellaris, Ameresco's Chairman, President and Chief Executive Officer and John Granara, the Company's Chief Financial Officer.

On the call management will review the operating and financial highlights of the second quarter as well as assess our outlook for the balance of the year. Following the highlights we will take questions from the audience. Before I turn the call over to George and John, I would like to make a brief statement regarding forward-looking remarks.

This call contains forward-looking information regarding future events and the future financial performance of the company. Ameresco cautions you that such statements are just predictions and actual results may differ materially as a result of risks and uncertainties that pertain to our business.

Ameresco refers you to the company's press release issued this morning and it’s Annual Report on Form 10-K filed with the SEC in March of 2015, which discusses important factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements.

We assume no obligation to revise any forward-looking statements made on today's call. In addition, the company will be referring to non-GAAP financial measures during this call. These non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles.

A GAAP to non-GAAP reconciliation as well as an explanation behind the use of non-GAAP financial measures is available in our press release as well as our prepared remarks. I will now turn the call over to George Sakellaris.

George?.

Thank you, Gary. And good morning everyone. As has been the case all year and as we could expect that our results are being driven by the resurgence strength in our U.S. regions and federal business segments.

Our US region segment grew its revenue 33%, a faster rate than both Q1 and Q2, the federal segment also continued it's now two year on of exceptional revenue growth by increasing 29% this quarter. The solid performances offset our weaker business units including Canada, and integrated PV resulting in 20% project and 12% total revenue growth.

We also sustained solid profitability. Adjusted EBITDA was $16.1 million up 42% sequentially. In addition we had strong cash flow this quarter generating $24.6 million from operations which is up substantially compared to last year.

Equally important our sales performance was outstanding which enabled us to continue to improve our visibility for future growth. Our new awards grew 33% to $208 million that’s increasing the total awarded backlog by over 7%. Our sales teams are energized and focused on driving new business.

We are confident that they can continue to win new words and keep up with our pace of implementation. In both our U.S. regions and federal segments, RFP volume is up, proposal submissions are increasing in the awarded projects are larger.

A great example is our eastern region where we booked a landmark award, one of the largest awards in our corporate history. We placed $75 million in awarded backlog to start and this housing related project may end up being even larger.

An award of this size clearly demonstrates both, the trend in our market to larger projects in our ability to win them as an industry leader. It [indiscernible] enforces the demand we’re seeing for housing related work.

In August we announced a similar project for the housing authority of the Birmingham District, the $37 million project also involves energy and water retrofits and we say Birmingham $66 million over the life of the contract. We have several additional housing related projects in our sales pipeline and we’re bullish about the prospects in this market.

The high level in sales activity in the east compliments it's solid revenue growth of approximately 20% and an adjusted EBITDA margin a bit ahead of our corporate average. However the east region is only one of our bright spots. In fact there is 33% growth in U.S. revenue was distributed evenly across the country.

Our largest [indiscernible] central which grew nearly 50% despite its size generating nearly a quarter of our adjusted EBITDA. The prospects in this region are also encouraging. For instance, Minnesota is becoming a prime market for solo work for us.

We previously announced our work at the Minneapolis, St Paul Airport and we believe our history there positions us well for additional follow on projects. Meanwhile our pace of proposals in the state is quite robust as activity under the so-called Solar Community Garden Law against traction.

We are pleased with a solid level of activity across the central region since it can offset pockets of weakness such as the state budget issues in Illinois, that's good delayed some contracted work there. Once again, the Federal segment reported superb results built in on our momentum in that market.

Revenue grew 29% and profitability was very good with adjusted EBITDA margin well above our corporate average. Visibility also improved with contracted backlog up 33%. The growth in Federal contracted backlog demonstrates our passions and persistence in growing this business, this quarter we contracted two longer cycle awards.

It took over two years to Fort Hamilton into contact but it was worth the wait since we expected to bring in $17 million of revenue. Similarly there coastguard opportunity took over 18 months to get contract and while smaller at $7 million creates potential for more repeat business.

We are also identifying opportunities as will enable us to grow our commercial business. We are creating a joint venture with international property and development company. LendLease, a joint venture will pursue efficiency projects in the commercial space both, we have seen LendLease's portfolio and with other third party properties in the U.S.

This is an important strategic development for us as it meets one of our key objectives to further develop the commercial industrial market. We're excited about this partnership in the new market opportunities it will create for Ameresco. We intend in the near future to more formally announce the JV and the first project.

In addition to strong performance in our projects our recurring revenue streams also contributed significantly to results. We are focused on growing our own operations and maintenance in the energy sales from our operating assets.

Both of those business are stable with gross margin and EBITDA margins well above the corporate average and they both create a solid foundation for our profitability. Notably we expect energy sales to steadily increase as we expand our operating asset portfolio.

Our operating assets under development grew 68% or $185 million which bodes well as we place those assets into service in the quarters ahead. Finally I want to mention some steps we are taking to defend the value of our energy efficiency offering.

As you know we have aggregated the number of built-in efficiency software tools into a portfolio of analytic and monitoring solutions. This effort has resulted in a solid market position.

For example we ranked well in a recent study that benchmark 27 built in energy software vendors, that study noted that many customers would prefer to utilize analytic and monitoring tools provided by the same company implementing the efficiency improvements.

With this tool set that is recognized for its quality and functionality we now need to optimize how we go to market. Because customers like to buy from their efficiency vendor, we have a natural advantage in how we can offer analytics and monitoring tools.

By combining these tools with our core offering we’re making our energy efficiency proposition even more valuable. To optimize our efforts we are reorganizing our software group to be highly integrated with the project teams.

This should result in a more effective selling strategy for both tools and projects and better leverage our large existing projects sales force and implementation teams. As part of this of optimization effort we expect to take some restructuring charges in Q4 which John will explain shortly.

In addition we have continued to take steps to better align our cost structure in Canada. In 2016 we expect to operate as a smaller and leaner business with an investment strategy balance between the near and long term. Our focus remains to position the Canadian business unit to accelerate growth in 2016 and beyond.

Let me now turn the call over to John to provide more details about our financial results and guidance.

John?.

Thanks, George and good morning everyone. So before we get started I did want to remind everyone that unless otherwise stated all the amounts I reference relate to Q3 2015 and comparisons are for the year over year change. Starting with the P&L revenues of $189.1 million was up 12%.

As George discussed this quarter was characterized by strong performance in our core project business in the U.S. Those were partially offset by the lower revenue from Canada and Solar PV equipment sales which is a continuation of the headwinds we have been fighting all year. In our core project business the 20% revenue growth was broadbased, U.S.

region was up 35% with all areas record double digit growth. Federal was up 34% as we built on the momentum we have seen for the past few quarters. Outside of our borders the decline in Canada was large year over year but that segment has stabilized now, and was down only slightly sequentially. We believe we have contained the problems there.

We have put in place an experienced local leadership team, we have a growing awarded backlog and we think we can start posting growth again in 2016. To further prepare for growth and to rationalize the cost structure based on the new revenue run rate. We are reorganizing the group and further reducing costs.

For example we're closing one of our sales offices and consolidating the coverage across others. We expect to take a restructuring charge in Q4 to handle the reorganization which I'll discuss shortly. Recurring operations of maintenance revenue of 15.5 million was up 8%.

We typically do not expect rapid growth in O&M rather it acts like a steady annuity for us bringing in stable revenue and profit year in and year out. Energy revenue which we primarily report in our small scale infrastructure segment was 14.7 million up slightly from last year and essentially flat from prior quarter.

As George mentioned we expect this revenue stream to grow in the quarters ahead as we continue to invest in our portfolio of owned and operated assets. Moving on to gross margin and operating expenses, gross margin for the third quarter was 19.2% down somewhat both year over year and sequentially due mainly to the revenue mix.

Project revenue was somewhat lower margin than are other lines of business and with project revenue surging it is natural that gross margin percentage is diluted somewhat. Keep in mind our objective is always to grow gross profit dollars from that angle gross profit grew 3.6% year over year and by over 5 million sequentially.

In addition, we are also still impacted by the often discussed problem project in Canada which is a revenue contributor but with 0% gross margin, that too is expected to change in 2016 as we complete the project and enjoy the benefit of the lower cost rupture we are implementing in Q4.

SG&A expenses were 26.6 million or 14% of revenue that is down over 100 basis points from 15% last year and 280 basis points sequentially from 17%. Inevitably absolute dollar expenses will grow with the company but we have structured ourselves to see some operating leverage as revenue ramps.

Importantly project development expenses increased 27% from the prior year that spending reflects our efforts to build a healthy pipeline of projects and indicates our sales and development teams are working hard pursuing new opportunities.

We consider our PDC spent to be a good leading indicator of awards and projects in the quarters ahead, we are seeing the benefits of our project development efforts in the form of new awards and the increase in the assets we are developing. Operating income was 9.7 million up 5% from last year due to the increase in revenue.

Net income was 4.2 million or $0.09 per diluted share that is down versus last year because we are still recording a higher tax rate which was 44% this quarter versus a benefit in the prior year or rate of negative 8%.

As we've mentioned we do expect before year end to realize some energy efficiency related tax incentives that will bring our effective tax rate down to 25% for the year. Originally there were two possible incentives that could kick in for us but now one of those is out of play.

Massachusetts did not pass the net metering law which caused a delay in several solar projects we are developing here, the delay pushed the completion date and the related ITC to 2016.

The second path was taking advantage of the energy efficiency deductions provided by section 179D which is included in a tax extenders bill that is working its way through Congress. We still believe that passage of the extenders before year end is likely so for now we are maintaining our guidance assumption of a full year tax rate of 25%.

If the tax extenders are not passed before year end our full year tax rate will approximate the 50% rate we've been accruing all year.

As we've discussed in the past, in addition to the timing of the tax incentives our full tax rate is being driven higher by the valuation allowance in Canada which currently represents approximately half of the effective tax rate. As an aside using the full year assumed tax rate of 25% EPS would have been $0.12 in Q3.

Adjusted EBITDA and non-GAAP measure that we believe to be reflective of our economic performance was 16.1 million or $0.34 per diluted share. Adjusted EBITDA grew 1.5% from last year and 42% sequentially, all of the business is delivered positive adjusted EBITDA except Canada and our software solutions business unit.

We still have some work to do in optimizing our software solutions as George alluded to, we are now integrating the software teams in our core business which should positively impact results in 2016. Now let's turn to the balance sheet. Our solid performance resulted in a balance sheet that is stronger than last quarter.

We generated 24.6 million in cash from operations and paid down the corporate revolver as of the end of the quarter. Cash was up 1.9 million from Q2. Receivables were up due to the increase in revenue. However day sales outstanding were down to 83 from 91 in Q2.

Consolidated debt declined by over 7 million to 96 million removing project debt which is non-recourse to us, corporate debt was 15.7 million.

Looking at CapEx, year-to-date gross capital expenditures were 41 million, that's up 61% from prior year and that increase represents the planned investments related to our assets and development for the final quarter of the year we expect growth CapEx of approximately 20 million. Our total project assets are now 239.1 million.

On the financing side we secured another round of tax equity funding during the quarter. We now have up to $85 million available to support our solar asset development. Looking at backlog and visibility, we started the quarter with 398 million a fully contracted backlog and ended the quarter with 379 million.

As George mentioned our implementation teams did an outstanding job recognizing a 139 million of work, that execution outpaced the tremendous job our sales team did in converting 120 million awards into contracts. Even though contracted backlog was down 5% due to the completed work.

The water backlog is up 7% causing our total ending backlog to grow 3%. New awards were 208 million, 33% larger than the new awards we won last year leading to an award to sales ratio of 1.7.

Our performance through the first three quarter gives us confidence in the full year guidance we have offered throughout the year because we have delivered on the revenue and have good visibility into Q4, we’re raising the low end of our revenue guidance range. We now expect full year revenues to be in the range of 625 million to 640 million.

We expect the momentum in the project business to continue through year-end along with some growth in our recurring revenue streams and relative stability in Canada and in solar PV equipment sales.

Due to the surge in project revenue we now expect gross margin to be at the lower end of our guidance at 19% while operating expenses should still be around 16% to 17% of revenue.

As I mentioned we continue to anticipate the effective tax rate for the full year to be around 25% but caution that we could end up at a higher tax rate of Congress does not cooperate on tax extenders. EPS should fall within a range of $0.16 to $0.20, adjusted EBITDA is expected to be in the range of 43 million to 46 million.

This outlook is before the charges we are taking as part of our optimization efforts and we're not sure of the exact amounts yet. But we believe we can provide an estimated range of the cash expenses related to the optimization.

As of today we expect to occur $1 million to $1.5 million for severance and lease termination cost, savings from all the restructuring activities identified to-date should yield an annualized savings of approximately $2 million to $2.5 million. There could be some additional non-cash impairment charges as a result of the optimization.

Now we'd like to open the line for your questions. I'll turn the call back over our coordinator, Eric to run the Q&A session..

[Operator Instructions]. And our first question comes from Noah Kaye from Oppenheimer. Your line is now open. .

I would like to start with a few questions on the project side if I might. First of all, we understand that Massachusetts is trying to lift the cap on that metering before end of November.

What are you assuming for timing on that in your guidance, how does that relate to both kind of the cadence of solar installed projects and in the tax guidance that you’ve given..

So the net metering cap really impacts the development in the construction of the projects in Massachusetts more so than the current year guidance.

So we are -- in terms of our guidance we are assuming that even if passed in November that there is not going to be enough time to materially impact the amount of solar that we're able to place in service so at this point where we stand the projects that we were targeting that are impacted by the net metering cap have not begun development so there's really, virtually no way that those are going to be placed in service.

So to kind of give you an update I think we've said in the past that we are expecting 15 megawatts to be placed in service. We still think that's a doable amount but I think the component of that is now shifting a little bit.

In that we will probably be placing closer to 8 or 9 megawatts in Massachusetts and we're also now expecting about 50% of our Fort Detrick project to be in service by the end of the year as well and just as a reminder that's about 18 megawatt project.

So net-net we think that we're probably still in that 15 to 20 megawatt range for the year but the components of that is different, it's less Massachusetts project than we originally thought. Related to the tax rate, although not impacted by the net metering, that is directly related to the tax expenditures that’s making its way through Congress.

We are assuming that that does get passed and that will bring us to the 25% tax rate for the year. So that is our current assumption. .

Second question on the project side. You mentioned 85 million of tax equity capacity now back on the envelope math for me that would support around 100 to 120 megawatts of solar.

Do you agree with that math and if so does that mean that your solar pipeline is actually expanded since the last earnings call?.

So our pipeline has certainly expanded, the increase in the assets in development from last quarter all of it is essentially solar. So that is true.

I would be hesitant to give you an exact megawatt per dollar amount because our projects really vary in size and I think as you know our projects tend to be on the smaller side and we'll aggregate projects -- to give you a specific dollar amount I think that that could be misleading.

But you know what it will say that you know the 85 million gives us the capital we think for what we have currently in development and construction and given that we have 185 million of assets in development in total, you know we’re going to be seeking additional sources of capital but we feel comfortable that we're going to be able to do that..

And could you just give us an idea of how diversified in terms of geographies your solar pipeline is now? You know obviously Massachusetts being one but just how many states does that represent and how concentrated is it just so we can start to think a little bit about some of the puts and takes around the policy and demand environment for solar by state..

Yeah I mean I think I can tell you that we do have a large concentration in Massachusetts, it's about half and then the other half is it's really it's not significantly concentrated in one particular area I mean we know that Fort Detrick is in Maryland so that's a that's a pretty large concentration.

But outside of that it's pretty widespread in the areas that you would typically expect..

Moving to ESPC business. Would like to ask just a question about the tailwinds in federal first of all, you know I think some of the DOE, Data I/O announcements as well as the President's Executive actions pointed to a much larger contracting opportunity.

Just wondering in your conversations and in your federal group's conversations with the agencies, is that really starting to flow through now and how would you kind of characterize the pipeline of federal opportunities now versus say a year ago..

Versus a year ago it's better, and continues to improvement and we see more pick up in the activity as well as in the executing the contract going all the way from the [indiscernible], the awards and then moving the contracts to execution and implementation.

No question about it and that’s why I pointed out the tailwinds, a very favorable in the federal market right now and we feel pretty good about it's direction for the next couple of years I would say..

I will just say, the only thing I would add is the thing that we have seen is that the federal government certainly getting smarter the way they contract and so they realize that they're able to get more return on their investments so to speak by combining and aggregating as much as they can and that's what we're seeing with a lot of the deep retrofit projects.

So the projects are certainly larger, now the downside of that is as we said in the call is some of the larger projects do take a little bit longer to convert but overall we see this as a positive in a growing opportunity..

That is a great point and that would make that project larger and larger what they call deep retrofit measures..

Right. So I wanted to ask about the partnership with LendLease, you mentioned you're going to be providing more details in the future. So you know we look forward to that.

You know but obviously a massive property infrastructure group and international is the thinking here on CNI, that you might be able to expand to new geographies or should we really think about that as still kind of focused on growing the domestic CNI market and any other color you can give on how you're viewing these guys as both sort of channel partner and a value add as you go through the sales process..

We met them because as you know they managed a substantial amount of federal facilities and we are working with them on couple of projects that we plan to announce later on but we will focus in the United States and that's why I think I did mention it on my remarks that even though they own facilities across the globe we will focus domestically.

We feel they bring a lot to the table by introducing us, managing their own facilities or introducing us to one of their partners and then as you probably know they have a pretty good execution installation team that we can leverage and implement [indiscernible] the project.

So we feel pretty good about the partnership and when we have the project that we want to talk about it then we will get more details regarding the joint venture. I don’t want to take too much [indiscernible] press releases..

[Operator Instructions]. And I'm showing no further questions at this time. I would like to turn the call back to George for any closing remarks..

Thank you, Eric. I want to conclude by highlighting the fact that we are executing the critical activities that will cause this company to grow. The most important is winning new business. Obviously without a steady flow of the new awards projects our growth stalls. We believe that new awards are our most important leading indicator.

We grew new awards by 33% this quarter to $208 million. That number is far higher than the average rate we were winning in the recent past. And we are proud of this exceptional performance. After winning new business we need to execute. Completing projects, on or ahead of schedule and on or under budget is the hallmark of Ameresco.

This keeps both customers and shareholders happy and increases our ability to win follow on work. A $139 million of project revenues this represents outstanding execution. With a pace of accomplishment well ahead of earliest quarters.

Our execution team keep our customer satisfied as well as incentive, our sales team to work even harder to keep our pipelines full. We’re pleased to be demonstrating progressively better performance again this quarter as we promised at the start of the year.

We deliver solid revenue growth by executing in our core project business and we improved our visibility due to the work of our sales team in capturing ever larger project opportunities. We look forward to finishing the year on a strong note and intend to build on our momentum in 2016 and beyond. Thank you..

Ladies and gentlemen thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day..