Willdan Group Q3 2023 Earnings Call Transcript

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November 2, 2023

There are 7 speakers on the call.

Operator

Day, ladies and gentlemen, and welcome to the Willdan Group Third Quarter 2023 Financial Results Conference Call. Our host for today's call is Al Kaschalk, Vice President of Investor Relations. 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

Kajok, the floor is yours.

Speaker 1

Thank you, Morgan. Good afternoon, everyone, and welcome to Willdan Group's Q3 2023 earnings call. Joining our call today are Tom Brisman, Chair and Chief Executive Officer Kim Early, Chief Financial Officer and Mike Bieber, President. The call today is built 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 and we will then open the call up to your questions. Statements made in the course Today's conference call, including answers to your questions, which are not purely historical, are forward looking statements within the meaning of the Private The forward looking 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 and 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

Speaker 2

year ended December 30, 2022.

Speaker 1

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. In addition, the GAAP results will then also provide non GAAP financial measures that we believe enhance the 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, John, and good afternoon, everyone. Willdan's strategy is to reduce the amount of electricity and natural gas that people use. In this clean energy transition to reduce carbon, Utilities and Industry who need to reduce their energy consumption for their customers. Utilities and government are under extreme pressure To make this clean energy transition affordable, this is where Willdan is primarily focused. We are not in the generation of green energy Projects that require bank financing.

Speaker 3

Very few of our projects require bank financing and are not impacted by interest rates. Our projects are generally incentivized and are affordable for people. Paybacks are generally less than 2 years And save people money. Willdan's strategy started with energy efficiency, simply stated, Use less electricity and save money. We have expanded greatly over the past 10 years.

Speaker 3

To remind everyone, we are a professional service company Helping customers solve problems with knowledge and software, we strive for affordable solutions. This were affordable, cannot be stressed enough during this clean energy transition. People cannot afford significantly higher energy costs. Will that project help people save money? For example, our new construction contracts for utility Touch 10% of all new commercial building construction in the United States.

Speaker 3

All services and software Our focus on saving energy, again the word affordable. Integral analytics software Helps utilities modernize the grid at the least cost and highest benefit. We are agnostic to the generation source For one of the largest healthcare groups in America, we are assessing 1200 facilities In order to reach their decarbonization goals at an affordable pace for a New York City we completed the study for their 4,000 buildings Using proprietary software, we prioritize what buildings and measures Should be done first within their budget. The common theme to our clean energy transition strategy It's been an affordable reduction of carbon. Our strategy has always been to reduce the load on the grid and shift the demand.

Speaker 3

Our current electrification projects that increase the load are being coupled with demand response. This is where we can shift the load away from the time of day when electricity is expensive, again focused on affordable. I want our investors, employees and customers to recognize what role we play in this decarbonization journey. Simply stated, affordable clean energy. It is a tough assignment.

Speaker 3

We have 1600 really smart people For taking on this challenge, our business is growing again post COVID. The results of the last 4 quarters are evidence. Last quarter, we had a record trailing 12 months of EBITDA. Again, in this Q3 Of 2023, we delivered another trailing 12

Speaker 2

month record.

Speaker 3

For the Q3, we continued our solid performance. Our focused execution across the organization drove double digit increases versus the prior year in nearly all of our key metrics. The team is converting this organic revenue growth 11% for the quarter 17% for 9 months To profit and cash flow, our strategy is working. I would like to share some of the many opportunities we are capturing Supporting our expanding backlog. We are sharing these new projects to give our investors confidence that our strategy has the momentum And on financing, our affordable solutions model is growing.

Speaker 3

Here are some examples. Our engineering segments are winning new projects in geography as well as integrating the energy transition that cities are embracing. Organic growth in this segment is 15% for the quarter and for 9 months it is also 15%. Our integral analytics software group is having a great year and their pipeline for 2024 looks strong. We believe IA is getting better at selling and the software and the demand is increasing.

Speaker 3

Our Performance Engineering Group has won several new jobs that will be announced over the coming weeks. This service is being cross sold very effectively throughout the organization. Our utility programs are doing All right, I should say,

Speaker 2

are going

Speaker 3

well. We have successfully restructured the California IOU programs. All recompetes this year were successfully won. We have also gained new utilities in the Midwest and Northeast. Our engineering work in the Northeast for New York City Housing Authority NYCHA, The New York Power Authority and the dormitory authority of the State of New York are doing well and growing.

Speaker 3

Summarizing our performance to date, the Willdan Organization has recovered is functioning very well. We look to our E3 group to continue leading us during this energy transition. We also anticipate looking to E3 to add capabilities in in 2024. In closing, demand for our services remained healthy led by the energy transition and demand for municipalities. Given the strength in our end markets, our impressive year to date performance and our expectation for the momentum to continue, We are raising our 2023 guidance.

Speaker 3

Our strong financial position further amplified by the successful refinancing Our credit facilities puts us in a position to actively pursue strategic acquisition that align with our business objective. I am confident that by executing our strategy, we are positioning the company to deliver strong long term shareholder returns. I want to thank our employees, customers and stockholders for your support. I will now turn the call over to Kim, He'll provide additional details on our financial results and our updated guidance.

Speaker 2

Thanks, Tom, and good afternoon, everyone. Q3 reflects strong earnings performance and strengthening financial conditions. For the 9 months year to date, we generated $28,200,000 And adjusted EBITDA and $24,100,000 in cash flow from operations. The $28,200,000 of adjusted EBITDA is a Company record for the 1st 9 months of the year and the $40,000,000 in trailing 12 month adjusted EBITDA is also a record. Continued strong execution drove the improvement in operating results, providing the means to further delever the business complete the refinancing of our credit facilities during the quarter, thereby putting us in a position to continue the pursuit of strategic acquisition opportunities.

Speaker 2

We recently closed on a small addition to our municipal engineering segment that broadens our service offering and we're seeking additional acquisition opportunities. For Q3, gross revenue was up 9.3% over Q3 20 22 to a record $132,700,000 Net revenue was up 10.8 percent to a record $65,300,000 fueled by our strong backlog and continuing demand across the broad range of our services. We saw an 8% revenue growth in our Energy segment gross revenue, while the Engineering and Consulting segment grew revenues more than 10% over the prior year for the 5th consecutive quarter. Q3 gross profit was 16% higher year over year as gross margin improved to 32.7 In Q3 2023 versus 30.9 percent a year ago, reflecting the restructured California IOU contract And improved productivity throughout the business. Despite the strong growth in revenues, Q3 G and A expenses were up only 3.4% versus the same period a year ago with lower stock compensation, depreciation and interest accretion on earn out liabilities, partially offsetting higher employee compensation.

Speaker 2

Interest expense on the other hand increased 70% to $2,400,000 In 2023 from $1,400,000 a year ago due to the higher interest rates. Our income tax rate was 31% in the Q3 compared to a tax benefit of 105% for the Q3 of 2022. So for the Q3, net income was $1,600,000 or $0.11 per diluted share versus net income of $76,000 or $0.01 per diluted share a year ago. Adjusted EBITDA in Q3 of this year was $10,100,000 up 27% over the $8,000,000 in Q3 of 2022. Adjusted earnings per share in Q3 of this year was $0.37 versus $0.42 in Q3 a year ago, mainly reflecting the difference in tax rates.

Speaker 2

In terms of the 9 months ended September 2023 Versus the 9 months of September 2022, gross revenue was up 12.2 percent to 354,400,000 Net revenue was up 16.6 percent to $188,900,000 with solid growth across All our service lines and increasing momentum supported by a strong backlog. Gross profit increased 25% as gross margin improved to 35.4% in 2023 compared to 31.8% a year ago, driven by higher software licensing and improved performance on our utility contracts. We realized significant operating leverage in G and A expenses increased only 2.6% versus the same period a year ago, while the net revenues had grown 16.6%. Higher employee incentive compensation consistent with the improvement in income from operations was Partially offset by lower stock based compensation and lower interest accretion on earn out liabilities, which have now all been satisfied. Interest expense increased by $3,900,000 to $7,100,000 for the 9 months in September 2023 compared to $3,200,000 in the same period a year ago due to the higher interest rates.

Speaker 2

And year to date income tax expense was $1,700,000 or an effective rate of 37% compared to an income tax benefit of $5,600,000 on the loss in 2022. The relatively high effective tax rate reflects the impact of certain reduced deductions and prior year returns resulting from the lower stock price on stock compensation, which vested in the Q1 of this year. For all of 2023, we now expect an effective tax rate of approximately 29%. Thus, year to date net income was $2,900,000 or $0.21 per diluted share compared to a loss of Our balance sheet also reflects the benefits of our improved earnings in the higher cash flows. At the end of September 2023, our leverage ratio improved significantly to 2.2 times trailing 12 month adjusted EBITDA The net debt was $86,500,000 During the quarter, we paid off the $5,000,000 outstanding under our line of credit, while maintaining a healthy $12,900,000 cash balance at the end of the quarter.

Speaker 2

On September 29, We completed the refinancing of our bank credit facilities and entered into a new 3 year credit agreement with a syndicate of 5 banks jointly led by BMO and JPMorgan. We use the proceeds from the credit agreements term loan to repay and terminate the prior credit agreement, which was scheduled to mature on June 26, 2024, as well as to fund the fees and expenses associated with the refinancing. The new credit facilities will provide working capital, finance capital expenditures and acquisitions and serve other general corporate Purpose is to continue to grow the company. As of the end of September and currently, there were no outstanding borrowings under our $50,000,000 revolving With the performance delivered year to date and our expectations for a strong 4th quarter, We're raising our 2023 financial guidance. For all of 2023, we now expect net revenue growth of 10% to 12%, implying net revenue in the range of $250,000,000 to $255,000,000 Adjusted EBITDA is now expected to be in the range of $42,000,000 implying a 4th quarter EBITDA of $12,000,000 to $14,000,000 and adjusted diluted earnings per share in the range of $1.33 to $1.38 We're raising our estimated full year tax rate to 29% And assuming 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 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 3

Craig, This is the crew. You're breaking up a little bit. Could you get closer and start over?

Speaker 4

Hey, I wanted to say congratulations on another really strong quarter here to start. Is that clear?

Speaker 3

You can't say it loud and clear. You can say it again if you want.

Speaker 4

Great job. How's that?

Speaker 2

No, all right.

Speaker 4

Yes. So Tom, I really appreciated that you You hit the interest rate question head on, right, in your prepared remarks. A lot of chatter out there with investors. People are looking at the solar industry and the wind industry and knowing that there's a lot of projects that are kind of being pulled off the table Because interest rates have gone too high for those to be profitable to finance. But you're beating numbers, raising guidance.

Speaker 4

Obviously, your customer base out there is still doing quite a lot of consulting activity, looking at renewables and other projects that they want to develop. Can you maybe talk a little bit more about the character of these projects? Are they likely to just maybe Take 1 or 2 scoops less of a different flavor of ice cream than solar or something. Are we looking at maybe Slightly smaller projects, I mean how do you see this interest rate environment impacting the broader opportunity set that Willdan's supporting its customers and addressing?

Speaker 3

I've got 3 questions in there. Mike is going to take a couple. I just want to Start off with, we would like to differentiate ourselves from the solar industry that It's so tied to interest rates. Do you think we've done that and what we've said?

Speaker 4

I think it's very clear. Yes.

Speaker 3

Today it's very clear. So your next question was what solar projects are we doing, I think was your next question. That

Speaker 4

will address it in one way, yes.

Speaker 3

All right. Well, we do very few. If it's a customer like a hospital or something that wants solar, but we will do it. Solar is not what we're doing. We're helping them decide what they should do, but we're not in that business.

Speaker 3

Mike, do you want A few projects where we are doing solar or battery, it's so small.

Speaker 5

They're Additions to bigger projects that focus on decarbonization or energy efficiency generally. Yes.

Speaker 3

And I don't know what you're looking for with that question, Craig, but I want to make sure we really make it clear that we're Consulting, helping people decide what they should do. And when and that big hospital chain I talked to, They won't do a project unless their IRR is 11%. So we are scraping through their 1200 facilities, Trying to show them what they can do with incentives and other things to meet their internal rate of returns. And that's the type of work we do. We also do with utilities, all these commercial buildings and commercial customers, small businesses, they're all getting incentives That are part of the special purpose tax where the money is already there.

Speaker 3

In California, it's a 1,000,000,000 New Jersey, it's a 1,000,000,000 New York, it's almost a 1,000,000,000 And so we're working off of money that's already there. It doesn't require bank financing or susceptible to interest rates. The third part of your question, Craig, was? How do

Speaker 4

you see this impacting The project sizes and project velocity that Willdan is addressing. Obviously, it doesn't change the count of the number of total hospitals out there. 1200 for 1 is pretty good, but do you imagine this shrinking the number of hospitals that would be considering A proper analysis that Willdan would do, to review their options as far as energy efficiency and renewables. No, I can't imagine that scenario, but maybe you can talk us through, whether or not interest rates address whether or not they impact the total opportunity consulting for hospitals across the country.

Speaker 3

I can't see it because they're highly driven by 2,030 and 2,050 decarbonization goals. They're actually looking for more help in my opinion to try to figure out how to get there With the financial crunch, so we are not seeing any decline in their interest. We're just seeing more motivation on how they get there. And that requires actually like our E3 group, a lot smarter people Because they know what's coming in the future, they help these companies see it and then they dig through all the possibilities whether it be The IRA money instead of money on the utilities. So I don't see it shrinking that problem because we all have goals to meet.

Speaker 3

Mike, do you have anything to add to that?

Speaker 5

No, that partially explains why our results are getting stronger and stronger As interest rates have gone up 5%, there's no correlation. The projects are Dropping off or getting more difficult, we're actually accelerating right now.

Speaker 4

Excellent. That actually that answers what I was going to put up as my next question a little bit, but maybe I'll ask in a slightly different way. So typically during periods of economic weakness, you mentioned the financial crunch, Tom. The CFOs of different institutions take a look and say, where can I save money? Now Willdan's energy efficiency business exists because it delivers verifiable savings to the customers.

Speaker 4

So can you maybe talk about the tempo of activity away even from some of these IRA or renewables related projects? Are you seeing sort of the countercyclical impact of sort of economic weakness, interest rate, Higher interest rates and these other factors in the environment driving an elevated tempo of activity across your customer base?

Speaker 3

Well, we've said before, we're doing 0 to Very few IRA type projects that might pick up in the future. How that flows down, we don't know. We see money coming through the Green Bank for financing. I think this whole strategy that we've talked about here was preparing for this day Given our 2,007, 2008 experience, most of every part of what we do and will then now, We went right through the recession, 2007, 2008,009 without a hit And we haven't seen one yet.

Speaker 2

We have a little bit

Speaker 3

of a canary at a coal mine here with the engineering business. As I told you, they're up 11%, 12%, 13%. There's a couple of explanations that we Hypothesize what's going on in this economy. Wanda, it's harder to get people. So these municipalities versus 'seven, 'eight are using our people outsourcing it.

Speaker 3

We always talked about That they would figure out outsourcing is cheaper than hiring and maybe with The way the retirement structures are in municipalities, they finally figured out they can't afford to pay for 1 position, 2 or 3 people, The retirements. So we see we are not seeing what we thought we would see in municipalities. It's actually increasing when we think it should be decreasing. So I think we're bucking the trend the right way. As Mike said, The numbers show we are.

Speaker 3

And I don't know if I completely got this question, Mike, if you guys need to add to that?

Speaker 5

We don't know whether higher interest rates are accelerating our business or not yet. I don't think we have enough data. That was exactly what your question was Craig, but we are accelerating in our higher interest rates. How about that?

Speaker 3

When can higher rates ever help anyone? Yes.

Speaker 2

Yes. Hi, Bob. Yes.

Speaker 3

Yes. Saving energy would be it, yes. But I think this rate is Never any good for anyone.

Speaker 4

Understood. Understood. No, you guys are definitely showing momentum. So then last question, if I may. Can you give us a quick update on Integral Analytics?

Speaker 4

This is obviously a real gem at Willdan and can be lumpy from time to time. Is there anything in front of commissions right now that you think is notable that we should get an update on? Or is there anything Given this elevated level of activity for planning for renewables, are we likely to see some of these contracts be awarded before the end of the year?

Speaker 5

They have a great pipeline right now And it's going to carry over into 2024. I'm not going to get into specifics because we're in the middle of specifics On a few of these and it is possible some would be executed and announced before the end of 2024 or 'twenty three rather. We're also carrying a great pipeline into 2024. These states are In places where distributed energy is a bigger proportion of generation, pressuring the utilities to modernize and adopt Tools like IA Software. So there's strong demand that is increasing In new states that we have not worked before.

Speaker 4

Excellent. Well, thank you. Congratulations on a strong quarter. I'll go ahead and hop back in the queue.

Operator

Your next question comes from Richard Eisenberg, a Private Investor. Your line is

Speaker 6

open. Good afternoon. Should we expect any sizable acquisitions in the 4th Quarter or in the Q1 of next year? Thank you.

Speaker 3

Well, Richard, I don't know if we know you, met you on the road, If you can say or

Speaker 5

you just like to answer the question?

Speaker 6

I'm a private investor.

Speaker 3

Okay. Go ahead, Mike.

Speaker 5

We don't forecast acquisitions and none is in guidance or in the raise. I want to point that out. We announced them when we closed them. Having said that, we just got our credit facility renegotiated. We're just starting To reinitiate our acquisition process, it's possible we could have acquisitions soon, but we're just starting The re initiation process and it's more likely that it will be later in 2024, but not out of the question that it's earlier.

Speaker 6

Okay. Thank you very much. Congratulations on a good quarter.

Speaker 3

Thank you for being an investor.

Operator

At this time, it appears there are no further questions. I would now like to turn the call back over to management for any closing remarks.

Speaker 3

Well, thank you to all who are on the phone, employees, shareholders, possibly customers. It's Great working with all of you. It's been a great year and things are improving here in Willdan and we hope to keep it going. So thank you very much.

Operator

This concludes today's Willdan Group Third Quarter 2023 Financial Results Conference Call. Thank you for attending and have a wonderful rest of your day.

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