Good day, and welcome to the Willdan Group Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Al Kaschalk, VP, Investor Relations. Please go ahead, sir.

Thank you, Jenny. Good afternoon, everyone, and welcome to Willdan Group's Fourth Quarter and Fiscal Year 2021 Earnings Call. Joining our call today are Tom Brisbin, Chairman of the Board 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 close today. You may find the earnings release and the investor report that accompanies today's call and press release in the stock information section of our investor relation website at ir.willdan.com. Management will review prepared remarks, and then we will open the call up to your questions. Statements made in the course of today's conference call, including answers to your questions, which are not purely historical, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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-K filed for the year ended January 1, 2021. 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 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. Tom, I'll turn the call over to you.

Thanks, Al, and good afternoon, everyone. We continue to build post-COVID momentum. The fourth quarter and the year delivered results well ahead of our internal estimates. We see positive signs that the initial impact of COVID is behind us. As stated previously, all our contracts have restarted, and access to customers is open in all geographies we serve. I would like to repeat that no contracts were canceled, and revenue only moved out in time. Looking back at the year, we adapted well to the virtual work environment. As a services firm, our employees enjoy many benefits working from home. We anticipate most of our customers will be back in their offices over the next few months. We also expect our employees to return to a hybrid model. Our current challenge is ramping up the California IOU contracts. There are three key points I would like to make to help investors understand Willdan's position coming out of this pandemic. We have a record backlog of approximately $1.5 billion. We view this simply as three years of work. Thus, we conclude that winning work is not the priority for many parts of the organization. The priorities are ramping up, growing organically, executing, and collecting the money fast enough to offset the capital needs of organic growth. The second point is how will the customers respond post-COVID energy efficiency. We think we have a fairly good idea at this point. The really small businesses are struggling, and for the most part, utilities are looking at how to help them. Our largest energy efficiency contract, Los Angeles Department of Water and Power, LADWP, serving the Los Angeles area, is now exceeding the weekly pre-COVID revenue. Simply stated, we are doing more now than before COVID. This indicates that the commercial customers are buying energy efficiency. We expect to ramp this contract more throughout the year because we have excess budget that was not spent during COVID. The third point is that we have an all-time high headcount of 1,560 people, which marks a 15% increase. At the same time, we only had 4% organic growth for the year. Thus, we have ramped up personnel to deliver the California programs, but as planned, substantial revenue will not follow into the second half of 2022. Looking at the rest of our operations in engineering, consulting, and construction management, they are all well positioned for 2022. We do expect, as Kim will point out, that 2022 will ramp throughout the year, mainly due to the late start and the ramping of the California contracts. In summary, we have the work and proof that customers are buying energy efficiency. We also have all the people, the processes, the tools, the knowledge, and the experience to execute the contracts. We expect about 20% organic growth in 2022. Looking a little deeper, the market for reducing carbon continues to grow. Electrification, that is converting carbon fuels to electric, is increasing. The low electrification and electric vehicles will see increased demand for utilities. Thus, demand for energy efficiency will continue to be strong. As an example, we are starting a $90 million design-build project for a New York City Housing Authority facility. This first-of-its-kind program enters innovative electrification measures to specifically lower their carbon footprint and improve existing infrastructure in public housing. Willdan's technical approach was selected competitively above all others and has application across the United States. We have also started the two-year $75 million design-build project for facility improvements for the Pueblo County School District 70. Willdan will provide engineering and construction management to update 19 schools and four district buildings. In 2022, we expect our construction management revenue to double from approximately $70 million to $150 million. We have also gained ground in the IOU market. We were awarded a five-year $24 million energy efficiency program for a large mid-Atlantic investor-owned utility. We've been a major competitor in this new geographic territory. We have also won an expanded recompete with National Grid in New York. Our programs have not been immune to the disruption in the supply chain and overall cost inflation. In terms of procurement, we have seen delivery schedules extended. From a cost inflation perspective, we expect to see salary inflation as well as higher materials and equipment costs, which we expect to recover. We are building this potential disruption into our delivery study. The last two years of COVID felt very stagnant. Most of our efforts have been on surviving and adapting. However, 2021 demonstrated we are emerging stronger. Our position in the clean energy space is robust. Our dominance in New York, California, and the progressive COVID states is strong. We expect this year and the coming years to be our best years. We have worked many years to build the foundation of Willdan. Our team of people and our diverse capabilities is exciting to watch. The growing opportunities in this clean energy disruption are accelerating. Willdan is well positioned. COVID is behind us, and now we are back to the business of growing the company. Thank you to our employees and shareholders for their perseverance and tenacity over the last two years. I will now turn the call over to Kim to discuss our financial results.

Thanks, Tom, and good afternoon, everyone. Our Q4 results were strong, continuing the recovery that began in Q3 of this year. While gross revenue for the fourth quarter declined by 4.8% from $96.9 million to $92.2 million, net revenue, net of subcontractors, materials, and other direct costs increased 2.1% to $51.8 million versus $50.8 million in Q4 of 2020. The divergent directions for gross and net revenue are a result of a shift in the mix of revenue. The increased revenue from LADWP was offset by lower construction management revenue. The decline in construction management revenue is a result of project completions earlier in the year, not yet being offset by the startup of new projects, despite the robust backlog of new contracts. Gross profit for Q4 of 2021 was unchanged from Q4 2020 at $34.5 million, though the gross profit margin was slightly better at 37.7% versus 35.6% in 2020 due to the change in the mix of revenue. G&A costs for the quarter were $6.6 million, or 16.5% lower than a year ago, declining from $40.2 million to $33.6 million for Q4 of 2021. This was driven primarily by lower stock compensation and lower interest accretion charges related to contingent consideration adjustments made in Q4 2020. The lower G&A expense was the primary driver for the turnaround in income before income taxes from a loss of $5.9 million in Q4 of 2020 to income of $500,000 in Q4 of 2021. The $1.1 million non-cash adjustment to our deferred tax valuation reserve related to certain state tax NOLs caused income tax expense to exceed pretax income for the fourth quarter, creating a net loss of $900,000 compared to a loss of $4.0 million in the same period of 2020. For the quarter, adjusted EBITDA increased by 9.7% to $9.4 million or 18.2% of net revenue compared to $8.6 million or 16.9% of net revenue a year ago. Our adjusted earnings per share were $0.47 per share for Q4 of 2021, compared to $0.46 per share in 2020. For the year, gross revenue declined 9.5% from $391 million to $354 million, but net revenue increased by 3.6% from $195 million to $202 million in fiscal 2021. The change in the mix of revenue sources accounts for the differing trajectories of gross and net revenue. The mix of revenue also accounts for the improvement in the gross profit margin when compared to the same period in 2020. Gross profit in 2021 increased 5% to $135.9 million, or 38.4% of gross revenue versus $129.4 million, or 33% of gross revenue a year ago. G&A costs for the year were essentially flat at $144.6 million versus $145.6 million in 2020, with higher salaries and wages being offset by lower facility and other expenses. The higher gross profit and flat G&A expenses were the primary drivers behind a 41.9% reduction in the reported net loss from a $14.5 million loss in fiscal 2020 to an $8.4 million loss in fiscal 2021. As a result of an increase in various deductions and credits, our effective tax rate was a credit 32.1% versus 26.3% in 2020. The adjusted EBITDA for 2021 was $27.5 million compared to $28.1 million a year ago, and adjusted earnings per share were $1.55 compared to $1.30 in 2020. The changes in our balance sheet and cash flow from a year ago reflect the changing mix of revenues, the impact of the restart of the LADWP program, the startup of the new California IOU programs, and continued debt reduction. Cash provided by operations was $9.8 million for the year. Capital expenditures were $8.5 million for the year, primarily for software development and IT-related equipment. Scheduled principal payments on our term loans and earn-out payments resulting from successful acquisition performance comprise the majority of the $18.5 million used in financing activities. On March 8, we amended our credit agreement with our five bank consortium to better match our expected cash flows and related covenant metrics with our expected growth-related working capital needs in 2022. Under the terms of the amendment, we drew the remaining $20 million available under the late draw term loan facility, leaving the full $50 million line of credit available to support liquidity and expected growth during the year. The amendment also adjusts our covenants to ensure an adequate margin for compliance obligations throughout the end of fiscal 2022 when the amendment provides were a return to the covenants under the original credit agreement. We're pleased with the support and cooperation of our banking partners as we prepare for our expectations of substantial growth in fiscal 2022. Looking ahead to fiscal 2022, we're expecting net revenue and adjusted earnings per share to grow by approximately 20% over 2021 and adjusted EBITDA to grow by about 50%. We estimate our effective tax rate will be approximately 25% for the year, and weighted average shares outstanding will average 13.4 million. We expect the year to start slowly in Q1 and continue to ramp in each subsequent quarter as we ramp up the new utility programs and expand construction management activities. We expect the first half of the year to provide about 25% of the full year earnings as revenues trail costs under the new programs and 75% of the earnings to be realized in the second half of the year. We expect that ramp to continue into and throughout fiscal '23 and beyond on the strength of the contracted backlog. Operator, we're now prepared to answer questions.

And we will go first to Moshe Katri of Wedbush.

A nice quarter. Good to hear from you. So just to confirm, we're going to have a bit of a more backend-loaded year than usual. Can you talk a bit about the costs associated with ramping some of the new contracts? How will that kind of impact margins during the first half? You have a lot of stuff, I guess, still getting deployed here with the team on board. Maybe talk a bit about wage indication and how that actually factored into some of the contracts that you have in terms of the ability to recoup some of that?

Sure, Moshe, I'll start. This is Mike. And Kim, you can fill in where I missed something. First, Tom mentioned, we have hired about 200 people in the last year and now are at full strength to do the work that we have lined up for '22. All of those people have been hired. We already know what the cost is. There's not future cost risk we take in '22, one labor because we've already hired those people. That's first. Second, we're carrying roughly 150 people to operate the California utilities, and we did approximately $1 million of revenue last year. Obviously, that cost doesn't cover those types of people. That cost is going to follow us throughout the first half of the year. The minimal contribution in Q1, a little more revenue in Q2, but the big contribution will come in Q3 and Q4. That schedule is aligned with the contracts we've signed with these California IOUs, which have very specific delivery schedules and milestones in them. So we've built our forecast for '22 around those milestones in those contracts. There's not a lot of subjectivity or mystery about them at this point. We're well underway, and we're pleased with the way things are ramping up. Does that answer your question?

Yes. To confirm, any recruiting costs necessary for ramping up in '22 have already been included in the P&L at this time?

Yes, it has. Correct. We don't expect substantial hiring from this point forward. We have the people on staff we need.

Understood. And then do you measure attrition within your current staff? Has that been changing in any way?

We monitor attrition closely. Similar to many companies, it did increase somewhat in 2020 and 2021, the two COVID years. This trend was consistent with the industry data we reviewed. Despite the attrition, we successfully replaced all those individuals and added an additional 200.

Okay. And where are we at on the attrition level right now?

Voluntary attrition was coming down. Last I saw, it was around 15% voluntary.

And if you have any further questions, please rejoin the queue at this time. We'll go next to Craig Irwin of ROTH Capital Partners.

So can you maybe clarify for us in your guidance what you expect this year in terms of revenue from the California IOU contracts that you signed in the last 18 months? How much of Willdan's 2022 guidance is from these contracts?

Yes. At the gross revenue level, that will be approximately $50 million.

Okay. Understood. So you're pretty clear about the higher cost of the start-up of this business. How do we gauge confidence or how do we gain external confidence that this theme of higher costs will taper down? This is something we've been talking about for two years now, higher cost, higher cost. I know COVID was a horrible thing for everybody to deal with. But what do you see as the confidence that we'll see the execution on higher costs becoming less high costs in the back half of the year?

I'll try to take that, Craig. There are two primary costs to our business that we'll separate: labor and then equipment and materials. The labor cost now we've already defined for the business. We know what that is going in. We didn't know necessarily in Q3 or even in early Q4 of last year, but now we do. And we've factored that into our guidance. You see that flowing through most of the Q4 results, actually. So that's the labor, that's the largest component. The second-largest component, of course, is equipment and materials. Those costs have risen, depending on what you're doing, anywhere from 5% to as high as 15% to 20%. The costs in general have been able to be passed through our business onto the customer. We've been able to do that. We have not seen margin erosion at the project level thus far. What has happened, though, is the second part, which is supply chain duration delays. As a percent complete basis, we would be 10% or so ahead of where we are right now, where we're not waiting on equipment to be delivered at our project sites around the country. So that's the biggest change that has occurred. It's the delay of materials that we install on job sites. Does that answer your question?

Completely. So last question, if I may. Many of your shareholders own the stock for more than $1 billion of additional work that is expected to be awarded over the next couple of years, both in California and in other markets. And your leadership in securing a very healthy share of the IOU work for California energy efficiency. What would have you maybe bid differently on this work, this scope of work that's in front of us, what would have you changed to pursue higher natural margins? Or at this point, is there nothing that you would change as far as the way that you are chasing the broader longer-term opportunity?

Well, I would love to tell you what we could change, but we've been telling our competitors what we negotiated. There wasn't a lot of room for negotiation. There were variables, let's call it, that the state, the PUC, the utilities had stated: we need to meet this number. If you don't meet this number, then it came in at the TRC, primarily total resource costs. So we have to put in measures that are cost-effective, is what that's saying. There wasn't a lot of negotiating power.

So Tom, usually, the public utility commissions, right, when you do EMC work and things do not contain the profit profile that is forecast. You can go back and get change orders, right? And this is done regularly. Some transmission line companies are more liberal in their pursuit of change orders. They bid more aggressively upfront and then go for change orders. Others bid a bit higher and are known for not being very aggressive in front of the commission asking for change orders. Is there an opportunity for us to see remediation on the profitability of these projects with change orders, given that things are obviously tracking below what was generally expected when all this work was laid out to bid?

Yes. We've seen the utilities talk about change orders, which may not be the right term, but changing the contract terms because of COVID. What we've done is we're sampling the market in some of these contracts and showing and proving that, let's take the real small businesses. They are just not interested in energy efficiency. There is room for renegotiation when you prove that the world has changed. Utilities are coming to the table saying the world has changed. So does that answer your question, Craig?

Well, Willdan is a very special company, right? Your execution in energy efficiency is highly unique, and you're committed to the success of what the California Utility Commission has set as far as some pretty aggressive goals that reach beyond some underperformance in the utilities over the last many years. And this special status of Willdan is something as a company, either public or private, there's a legitimate expectation that you could earn a minimum level of profitability on your contracts. It seems like with the guidance, maybe just being a little lighter than most were looking for that, that would be a very clear and fair thing to get in front of the commission with, given that they want people to actually bid on the next round of work instead of refusing to do it and letting them return to the dysfunctional models they were using to execute energy efficiency in the past. You follow my logic. I'm just looking for potential ways to get recourse where some serious effort and engagement from one of the leading experts is compensated fairly. It doesn't seem like with the guidance that you shared with us today.

Guidance I would consider until you said the guidance we shared with you.

Outlook for '22?

You mean you think the margin should be higher? Do you think the revenue should be higher? What are you saying?

I think the margins are tracking below where they should be, and there's probably frictional costs below the margin line that are probably not included in the contract that should have been in the first place. The start-up costs really need to be carried as a burden by the utilities because that is a functional piece of the total equation. If California is committed to the success of their energy efficiency programs, they need to take a holistic view. They've got the best guy in the market working on this. But the profitability is not what many people would believe is fair natural profitability should be, given that you're carrying on your P&L the expense of these employees on start-up when there shouldn’t be the impact of dilution, but maybe breakeven or modest profit ahead of a very large scope of work that has to get done. There's a lot that they really want to see you do, and I know you're going to do a great job on it. You follow my logic?

Yes. We love start-up costs, but this contract didn't include it. So we have to deliver what we included in our price that we provided them, and we have to deliver. What we're working on, right, is just getting started. Once we deliver, I think our voice will get stronger, and we'll have a better negotiating position. Do you want to add anything to that? I'm trying to.

No. The volume of revenue we can claim in the first part of the year is very low and does not cover our costs due to how the programs are designed and how they were bid. Margins will improve significantly as that volume increases, so we do not have a margin issue when we reach the expected run rates for these programs in the coming years and even in the latter half of this year as we ramp up. As Kim mentioned, $50 million in revenue is one-third of the average volume we need for these projects over the next four years. Therefore, we will experience a significant ramp-up even in 2023. We just weren't able to persuade them to cover the start-up costs, as that was how the programs were structured. Everything that has happened is consistent with what we anticipated and aligned with the program designs when we signed the contracts. We simply require more volume.

And that's timing. I mean, we're behind. We're behind because of COVID, and we started later than we should because California was delayed. The world just did not start. So we'll catch up.

We will go next to Chip Moore of EF Hutton.

I wanted to follow up on the California IOU revenue. In 2022, it was $50 million, which is about one-third of the average volume projected over the next four years. That's a pretty significant increase expected in the coming years. Are there any limiting factors, and what would be a realistic figure for 2023 that you could project if everything goes as planned?

Yes, Chip, in '23, the number will be between $150 million and $200 million in revenue from the California IOU contracts, something like that. And that's set forth in the goals of the contracts.

And just a couple of minor ones for me. You talked about LADWP, they have some unused funds from when that program was shut down. Any way to think about potential magnitude? And would that be potential upside?

It is. There's, I don't know if this is a public number, so I'm not going to give the specifics, but we know the number. There's more than $100 million of additional unspent money. How about that? They've given us all the numbers. They have recently expanded the scope that we're serving, and we continue to work with the customer on ways to expand the program so that we can fully utilize the dollars they have in the contract and have charged the public for. The customer support has been instrumental in that. So there is potential upside there.

None of that is in the guide?

None of that is in the guidance, correct?

Just one last one. IA software. I think you were talking about $10 million for the year. Is that where it came in? And are you expecting sort of similar for this year?

Yes. They were a little above that, Chip. I think they were closer to $11 million for the year. They had an outstanding 2021. We would expect that number to grow, frankly, in '22. The pipeline of opportunities for software is very good. Even in Q1 and Q2, I think we'll sign some new licenses and bring in some new customers. It looks good.

We'll go next to Marc Riddick of Sidoti.

Wanted to touch on a couple of things. First of all, I appreciate the guidance provided regarding the visibility. I wanted to discuss a little bit on that because it seems that with all the pieces that you've mentioned, overall visibility for you is meaningfully improved over the last three to six months. From that vantage point, is there any kind of swing factor that you're looking at that is still a bit uncertain in terms of how you're looking at the numbers going forward, not just around the '22 guide, but specifically, is there any particular issue that you're looking at as a major swing factor to what you're currently expecting?

No, there's not. I would say that we've never been in this position before. We have booked the overwhelming majority of work that we need to book this year. We've never been in a stronger position. It’s unusual, and this applies not only to this year but throughout 2023 and even into 2024. Right now, it's all about execution. It's not about work. We've never been in this position before, so it's very good.

Excellent. And then the extra piece, and I appreciate you mentioning some of the supply chain constraints on timing and things like that. I was wondering, were there any meaningful or visible impacts from Omicron that slowed things down as far as operations?

Supply chain has slowed certain projects, especially when delivering more complex equipment like custom-built boilers, chillers, and large machinery for universities and hospitals. That type of equipment is being delayed. We're working closely with our customers. I mentioned we might be 10% or so ahead on those projects on average. We didn't have those types of delays. The customers are understanding, and it has not resulted in cost escalation for that complex equipment.

And any Omicron impacts?

Those are abating. I can't think of any that were substantial in Q4.

And we will go to our next question from Richard Isenberg, a Private Investor.

Since you expect in 2023 for the contribution from California to increase between $150 million and $200 million, is it logical to assume that you should make more than $3 in EPS in 2023?

That's a long way away for guidance. So you can apply your logic. We're not going to give guidance as far as the answer. We've told you where the revenue is expected to go, but that's where we're at.

And with no further questions in the queue, I would now like to turn the call back over to Tom Brisbin for any additional or closing comments.

I'd just like to thank all our investors and employees throughout the phone, and we'll see you again next quarter. Thanks a lot.

And so this concludes today's call. Thank you for your participation. You may now disconnect.