Willdan Group Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 3, 2023

There are 7 speakers on the call.

Operator

Day, ladies and gentlemen, and welcome to Willdan Group's Second Quarter 2023 Financial Results Conference Call. Our host for today's call is Al Kaschok. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I would now like to turn the call over to your host, Mr.

Operator

Keshjok. You may begin.

Speaker 1

Thank you, Morton. Good afternoon, everyone, and welcome to Willdan Group's Q2 2023 earnings call. Joining our call today are Tom Brisbin, Chair and Chief Executive Officer Kim Early, Chief Financial Officer and Mike Bieber, President. The call today builds on our earnings release we issued after market closed today. You may find the earnings release and the Willdan Investor Report that accompanies today's call in the press release and stock information section of our Investor Relations website.

Speaker 1

Management will review prepared remarks, then we'll open the call up to your questions. Statements made in the course of today's conference call, including answers to your questions, which are

Speaker 2

not purely

Speaker 1

historical, are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward statements involve certain risks and uncertainties, and it's important to note that the company's future results could differ materially from those in any such forward looking statements. Factors that could cause actual results to differ materially Other risk factors are listed from time to time in the company's SEC reports, including but not limited to the Annual Report on Form 10 ks filed for the year ended December 30, 2022. The company cautions investors not to place undue reliance on the forward looking statements made during the course of this conference call. Willdan disclaims any obligation and does not undertake to update or revise any forward looking statements made today.

Speaker 1

In addition to GAAP results, we'll then also provide non GAAP financial measures that we believe enhance investors' ability to analyze the business trends and performance. Our non GAAP measures include net revenue, adjusted EBITDA and adjusted EPS. I will now turn the call over to Tom Brison, Willdan's Chair and CEO.

Speaker 3

Thanks, Al, and good afternoon, everyone. Our 2nd quarter performance was strong. This continues the momentum we started last year. Net revenue grew 17% in the 2nd quarter. For the 1st 6 months of this year, we grew net revenue by 20%.

Speaker 3

All of the growth was organic and across the entire company. The Willdan team is converting this net revenue growth to profit and cash flow. For the trailing 12 months ended June 30, EBITDA was $37,900,000 the highest level ever at Willdan. Our backlog is solid and we are seeing many new opportunities. These opportunities replace the annual reduction we saw from the SCE contract.

Speaker 3

These new opportunities include $40,000,000 with NYPA, that's the New York Power Authority, dollars 120,000,000 from 1 of the nation's largest school districts, $30,000,000 plus from Southern California Edison, dollars 20,000,000 from PG and E in a program called SETA and $10,000,000 from the San Diego Gas and Electric. Our policy and planning group E3 remains very strong. They provide energy consultant to the entire country helping develop the framework for the clean energy transition. In addition, E3's asset valuation and market price forecasting practices are growing rapidly. Large Private Infrastructure Funds are pivoting their portfolios to clean energy investments.

Speaker 3

These investments support Willdan's other capabilities such as city engineering, utility programs, grid distribution, data analytics, Design and Construction Management. Recently, we supported Blackstone Infrastructure Partners on their $2,150,000,000 equity investment and the Northern Indiana Public Service Company. Cross selling is working. We were recently selected by a major healthcare provider With over 1200 facilities, the problem we are working on is how much of their capital budget is allocated to their decarbonization goals. To solve this problem, we're using our finance consulting services, E3, along with our utility, energy efficiency programs and Design Construction Services.

Speaker 3

This decarbonization project is very similar to the LL97 project for New York City. Financial Services grew 16% year over year and continue to expand margins. Municipalities are an important customer for us And we've served 90% of the cities and counties in California for nearly 50 years. We see cities starting to address the use of IRA and infrastructure funds. In times of a recession, it's often cities that see the slowdown first And our work with Citi does not show any signs of a recession.

Speaker 3

Our broader municipal capabilities Combined with the labor shortage at Citi's is creating opportunities for growth. We're successfully Expanding our municipal engineering and financial services into other states such as Arizona, Florida, Texas to name a few. Overall, our portfolio of utility programs is performing well. Our San Diego Gas and Electric Outreach program is on schedule. We're receiving Change orders to expand work under our small business program.

Speaker 3

Given our PG and E public program success, We saw a $2,000,000 contract increase for 2023. PG and E is in the process of extending the contract from 24 to 27, added another $17,000,000 to the contract. Our restructured SCE Southern California Edison contracts are delivering the modified SCE program goals. We are having encouraging implementation discussions The program has improved operating results. Our small business program for the Los Angeles Department of Water and Power Including our work for the Los Angeles Unified School District is doing well.

Speaker 3

And the same goes for our utility programs around the country such as Puget Sound Energy, Duke and several New York utilities. Our software business is having a great year. And optimize their solutions. Further, we are collaborating across the organization by leveraging IA Software with E3 Consulting. Our Performance Engineering Group is growing in their 2 strongest production quarters.

Speaker 3

They're beginning work for the 6th largest school district in the U. S. And advancing production on 5 new California based performing engineering contracts. These wins were based on collaboration with our municipal engineering, utility engineering efficiency and new construction software capabilities. Our New York Energy Engineering business saw contract revenue up 16% over the 2022 period with an improvement in profitability.

Speaker 3

Given our work with the dormitory authority of the State of New York, Daseke, The New York City Housing Authority, NYCHA and New York Power Authority, NYCHA, this group is on track for 50% organic growth in 2023. They're electrifying NYCHA housing to decarbonize the grid and provide better hang on a second, Better alluded to the residents. In closing, we expect to finish strong in 2023 and for these positive trends to continue next year. We're looking to resume acquisitions by late this year, early next year. With our earnings growth, Strong backlog and acquisitions, we expect greater than 15% annual growth for the next 3 years.

Speaker 3

As Kim will discuss, we have increased our 2023 guidance for all financial metrics. I want to thank our employees, customers and stockholders for your support. I will now turn the call over to Kim, who will provide additional details Our financial results and our updated guidance. Ken?

Speaker 4

Thanks, Tom. Good afternoon, everyone. As Tom mentioned, Q2 continued the stream of strong performance driven by our growth in our utility programs, additional software licenses and strength from our municipal services segment as well as expanding revenue from our direct to customer construction management businesses. As a result, we generated $18,100,000 in adjusted EBITDA and $18,900,000 in cash from operations over the first half of twenty twenty three. The improved earnings provided the fuel to continue to delever the balance sheet, bringing our leverage ratio to 2.4 times adjusted EBITDA and putting us in a position to resume pursuit of strategic M and A opportunities.

Speaker 4

In fact, we recently closed on a small addition to our municipal engineering segment that broadens our service offering and we're actively seeking additional acquisition opportunities. Q2 growth revenue was up 16% Net revenue was up 17% versus Q2 and 2022. We saw double digit growth in both of our segments with the revenue distributed widely across our service lines. Q2 gross profit was 29% higher Year over year as our gross margin improved to 34% in Q2 of 2023 versus 30.8% a year ago. Higher margins reflect the restructured California IOU contracts, strong growth in our municipal engineering revenue and additional software licensing revenue.

Speaker 4

Q2 G and A expenses were up modestly versus Interest expense more than doubled to $2,200,000 in Q2 of 2023 due to the unfavorable impact of higher sulfur Our income tax rate was 38% in the 2nd quarter compared to a credit of So for the 2nd quarter, net income was $397,000 or $0.03 per share versus a loss of $4,300,000 or a loss of $0.33 per share a year ago. Adjusted EBITDA in Q2 of this year was $8,200,000 compared to $1,200,000 in 2022 And adjusted earnings per share was $0.26 versus a net loss of $0.06 per share a year ago, a welcome turnaround, thanks to the growing revenues In terms of the 6 months ended June 30, 2023 versus the prior year, Gross revenue was up 14% and net revenue was up 20%. All of that growth was organic and led by Gross profit increased 30% as gross margin improved to 37% in 2023 compared to 32% a year driven by the higher level of software revenue, improved productivity and a favorable service mix. We realized significant operating leverage in the period as G and A expenses increased only 2.1% versus the same period a year ago, while net revenue was growing 20%.

Speaker 4

Higher employee Interest expense increased $2,900,000 to $4,700,000 for the 6 months ended June 30, Income tax expense was $1,000,000 a 43% effective tax rate Compared to an income tax benefit of $4,100,000 on the loss in 2022, The high effective tax rate is a result of the timing of certain tax adjustments and will moderate toward the high 20s for the full year as the year progresses. Thus, year to date net income was $1,300,000 or $0.10 per share compared to a loss of $8,100,000 or 0.6 revenue and improved results throughout the company enabled for significant turnaround. Our balance sheet also reflects the benefits of our improved earnings and higher cash flows. At the end of June 2023, our leverage ratio improved We feel good about our first half performance as we move into our busiest production period. We have a strong backlog of projects in our Energy segment For 2023, we now expect net revenue growth of 9% to 10%.

Speaker 4

Adjusted EBITDA is now expected to be in the range of $38,000,000 to $40,000,000 and adjusted diluted EPS in the range of $1.30 to $1.35 We're assuming a 27.5% full year tax rate and a diluted share count of 13,700,000. Our capital expenditures are expected to be in the range of $10,000,000 to 12,000,000 We also want to note that we are in the process of refinancing our bank credit facilities, which expire in June 2024. We plan to have a new 3 year credit agreement in place by the time of our next quarterly call to facilitate our expected growth. Operator, we're now prepared to answer questions.

Operator

At this time, we will conduct the question and answer session. Your first question comes from Craig Irwin with ROTH MKM. Your line is open.

Speaker 5

Good evening, guys. Congratulations on a really solid quarter here.

Speaker 2

Thank you.

Speaker 5

So, my first question is really about gross margins. You mentioned, a few different things in there that are working for you. Can you maybe, sort of list them in order of priority as far as margins? And Any color you could share as far as whether or not those factors are likely to sustain over the next couple of quarters or maybe even build from here?

Speaker 4

Well, I would say in order of magnitude of the impact on the improving margins Software revenue is a big factor in that. They had a strong first half and that's a Strong contributor to the higher gross margins that we realized and we do have strong backlog opportunities in that business. So we expect continued revenue growth in that area. I think the second impact was the restructuring of some of the California IOU contracts Compared to a year ago, provide that additional gross margin that we're able to achieve in that. That's probably the 2nd biggest factor.

Speaker 4

And then 3rd, overall, I think is just the expanded volume and kind of a productivity increase across A lot of our municipal engineering and the planning and analysis work, those are that's probably a third in order of Frank, the impact of that higher margin.

Speaker 5

Okay. As a follow-up

Speaker 4

Yes, Yes. And just to answer the question about whether or not that's sustainable, I believe that it is all sustainable. In fact, some of that volume may increase. As we mentioned, this is going to be The second half of the year is going to be our busiest time. We expect on that

Speaker 5

Okay, excellent. So then just to continue on the line of software, right, as being the largest impact in the first half. SMUD and the Loadseer contract was the only press release contract in the Q2 for Integral Analytics. Can you maybe give us an idea on the materiality of this contract? Is this sort of a small fish, a big fish, Just something incremental.

Speaker 5

How would you This slide the contract with me?

Speaker 1

Yes, Mike. That was a small fish, Craig.

Speaker 2

We had big fish in the Q1 that we Press release, we didn't announce the name of it because that was confidential, but we announced that in the Q1. So the big fish was in the first the back half of the year and going into 2024.

Speaker 5

Excellent. That's really good to hear. So then a follow-up question. Investor perception out there seems to look at Willdan as largely benefiting from utility spending on energy efficiency. Your comments on the call and some of the meetings we've done give me the impression that that is not The case that utilities are actually a minority of your drivers right now, but yes, those are great contracts to have and great customers, But you're finding a lot of activity in other markets.

Speaker 5

Could you maybe update us on mix And markets that are maybe working for you in a big way versus markets that are sort of incrementally improving?

Speaker 2

Sure. State and local is actually a little larger percentage of work for Wheal Dan overall than And even utility contracts, those are similar in size and then a very small part about 8% to 10% is commercial. So in order, the same local work where we do policy analysis, a lot of data analytics, A lot of our software is sold there. We also do different types of energy upgrades for infrastructure is very strong. State and local business is very good right now and that's the largest customer segment.

Speaker 2

Utilities are also good. It's kind of a steady Eddie business. So that's the size, but we're really being driven by spending at the state and local level, which Those customers have a lot of confidence right now.

Speaker 5

Thank you. So you also mentioned in your comments that some of this work Preparing for the IRA money is benefiting you at the moment as different State and muni entities, look to plan and position themselves to participate in those programs. Can you maybe describe for us whether or not there's a follow on opportunity after the consulting engineering is done as far as Addressing the pinch points in the grid or the other needs in a local geography?

Speaker 2

Yes. To be clear, the IRA money does not really hit our marketplace. A lot of customers are paying us to how to receive those funds though and what to do with them, how to prioritize projects that will help decarbonize and to infrastructure projects later on, which positions us well for that type of follow on work, which might occur over the next couple of years.

Operator

Your next question comes from Mahesh Khatri with Wedbush Securities. Your line is open.

Speaker 2

Moshe, if you're talking, we cannot hear you.

Operator

Your line is open.

Speaker 6

Sorry about that. I said, let me add my congrats on very strong results. You started by Is there any way to quantify the bid and proposal pipeline that you're kind of looking at And I think you've done this in the past. And in that context, you also suggested that the software business also has a very, very solid pipeline. Is there any way to quantify that as well?

Speaker 6

That's my first. Thanks.

Speaker 3

So the decarbonization study or municipal or the private sector Our just getting going and we've landed what we believe are 2 very important contracts in the country that was New York City and a Large Healthcare Systems. Every Fortune 500 company is looking at the same thing. How do I meet Goals for decarbonization between now and 2,050. That's just getting started, Moshe. And we've landed the Early contracts that were very significant.

Speaker 3

So we're putting an effort into that. Utilities are growing at your typical pace. We're adding some services, Well, we don't believe that's where the future is. The utility work for us has been a great way to get to know their customers, A great way to put measures into their facilities, a great way that they When we walk back in on bigger projects, they know who we are. So going from there to software, which I'll let Mike address, We've consolidated software across the company and they're all working together.

Speaker 3

You want to finish that one way?

Speaker 2

They're set For a record year, our best year ever was about $12,000,000 in revenue from software sales External to external customers and we're looking to significantly beat that this year, but we've got another 6 months to go Moshe.

Speaker 3

Yes. The other thing Moshe is the utilities are looking more at electrification, that's also getting started, versus Energy Efficiency. And they're going to kind of go in parallel where energy efficiency, I would say, is more mature With utilities and their customers, where electrification is in a very early stage with utilities, probably No. First inning of the 9 inning games is faster than that, maybe the opening inning. So That's a market that we have dipped our toes into in both California and New York, just like we did with energy efficiency back some 14 years ago.

Speaker 3

So does that help you at all?

Speaker 6

Yes. And just to follow-up on this one, Are there any renewals coming up here that we should be aware of?

Speaker 3

Yes. Con Ed, Our proposals end, it's under evaluation, that's for the end of the year. LADWP, There'll be a recompete by the end of the year or maybe extended, we don't know. Puget Sound Energy is being recompeted. Do you have any others, Mike?

Speaker 2

Those were the large. Every year we have 25% of our contracts that It recomputed or so and that's true this year. Tom just mentioned the big ones.

Speaker 3

Yes. And just so you know, We've had Con Ed since about 2,009. We've gone through 4 recompetes. We've had LADWP for about 11 years, there's been 2 recompetes. Puget Sound, there's been 3 recompetes And that's also a 10 or 11 year history and those are the big ones for us.

Speaker 3

We had no other significant recompete. We have a few new opportunities that we're down to We have not been selected yet, but we're in what we call best and final or we submitted all our paperwork. We have not heard the decision, Which we've never worked for before, so we're waiting on those.

Speaker 2

In the first half of the year, we also had a Mid America recompete. Our contract was due to expire and they elected because of our technical qualifications and internally developed Software that they should procure that service no place else and they extended our contract with the new contract without getting that work.

Speaker 6

Any kind of Any guidance on how we should look at Q3 versus Q4? I appreciate the annual guidance, but just in general, how should we think about Q3 On the revenue side net revenue side and some of the other metrics?

Speaker 4

Yes. Well, we're expecting it to be Better than Q2 and for that kind of it's probably kind of a straight line from the first half results The guidance for the full year that if you take that on a straight line Q3, Q4, You probably get a pretty good ramp there. Q3 will be better than Q2. Q4 should be a little better than Q3.

Speaker 6

Understood. All right. Thanks.

Operator

At this time, it appears there are no further questions. I'd like to turn the call back over to Tom Brisman for any closing remarks.

Speaker 3

Just thank you all for participating on the call. I hope the good news makes you as happy as it makes us. We feel like we're out of the woods a little bit or out of the dark and it's getting much brighter. So thank you all for sticking with us and being patient. Thank you.

Operator

That does conclude today's Willdan Group's 2nd Quarter 2023 Financial Results Conference Call. Thank you everyone for attending. Have a wonderful rest of your day.

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Willdan Group Q2 2023
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