Good 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. I would now like to turn the call over to your host. Mr. Kaschalk, the floor is yours.

Thank you, Martin. Good afternoon, everyone, and welcome to Willdan Group's third quarter 2023 earnings call. Joining us today are Tom Brisbin, Chair and Chief Executive Officer; Kim Early, Chief Financial Officer; and Mike Bieber, President. This call builds on the earnings release we issued after the market closed today. You can 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. Management will review prepared remarks, and then we will open the call to your questions. Please note that statements made during this call, including responses to your questions, that are not purely historical, are forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties, and it is important to understand that the company's future results could differ significantly from those in any forward-looking statements. Factors that may cause actual results to vary and other risk factors are detailed in the company's SEC reports, including the annual report on Form 10-K filed for the year that ended December 30, 2022. The company advises investors not to place undue reliance on the forward-looking statements made during this call. Willdan disclaims any obligation to update or revise any forward-looking statements made today. In addition to GAAP results, Willdan also provides non-GAAP financial measures that we believe enhance the ability of investors to analyze 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 Brisbin, Willdan's Chair and CEO.

Thanks, Al, 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, we focus on how to make this affordable for people. We work for the largest, most stable customers, for example, governments, utilities and industry, who need to reduce their energy consumption for their customers. The utility 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 or projects that require bank financing. 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 two 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. To remind everyone, we are a professional service company, helping customers solve the problems with knowledge and software. We strive for affordable solutions. This word affordable cannot be stressed enough during this clean energy transition. People cannot afford significantly higher energy costs. Willdan projects help people save money. For example, our new construction contracts for utility touched 10% of all new commercial building construction in the United States. All services and software are focused 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, whether it be solar, wind or batteries, and we help integrate them into the grid at the least cost. For one of the largest healthcare groups in America, we are assessing 1,200 facilities in order to reach their decarbonization goals at an affordable pace. For New York City, we completed the study for their 4,000 buildings. Using proprietary software, we prioritize which buildings and measures should be done first within their budget. The common theme in our clean energy transition strategy has been an affordable reduction of carbon. Our strategy has always been to reduce the load on the grid and shift the demand. 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 the role we play in this decarbonization journey. Simply stated, affordable clean energy. It is a tough assignment. We have 1,600 really smart people taking on this challenge. Our business is growing again post-COVID. Results of the last four quarters are evident. Last quarter, we had a record trailing 12 months of EBITDA. Again, in this third quarter of 2023, we delivered another trailing 12-month record. For the third quarter, 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 of 11% for the quarter and 17% for nine months through 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 to continue our growth through 2024 and beyond. Despite the higher interest rates that are delaying and terminating large-scale projects dependent on financing, our affordable solutions model is growing. Here are some examples. Our Engineering segments are winning new projects and geographies as well as integrating the energy transition that cities are embracing. Organic growth in this segment is 15% for the quarter and for nine 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 demand for the software is increasing. 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 well. We have successfully restructured the California IOU programs. All re-competes this year were successfully won. We have also gained new utilities in the Midwest and Northeast. Our engineering work in the Northeast, our 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. Summarizing our performance to date, the Willdan organization has recovered. It 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 2024. In closing, demand for our services remains healthy, led by the energy transition and demand from 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. Our strong financial position, further amplified by the successful refinancing of our credit facilities, puts us in a position to actively pursue strategic acquisitions that align with our business objectives. 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, who will provide additional details on our financial results and our updated guidance.

Thanks Tom and good afternoon, everyone. Q3 reflects strong earnings performance and strengthening financial conditions. For the nine months year-to-date, we generated $28.2 million in adjusted EBITDA and $24.1 million in cash flow from operations. The $28.2 million of adjusted EBITDA is a company record for the first nine months of the year and the $40 million in trailing 12-month adjusted EBITDA is also a record. Continued strong execution drove the improvement in operating results, providing the means to further de-lever the business and bring our leverage ratio to 2.2 times adjusted EBITDA as of the end of the quarter. This helped us complete the refinancing of our credit facilities during the quarter, thereby putting us in a position to continue the pursuit of strategic acquisition opportunities. We recently closed on a small addition to our Municipal Engineering segment that broadens our service offering, and we're currently seeking additional acquisition opportunities. For Q3, gross revenue was up 9.3% over Q3, 2022 to a record $132.7 million. Net revenue was up 10.8% to a record $65.3 million, 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's gross revenue, while the Engineering and Consulting segment grew revenues more than 10% over the prior year for the fifth consecutive quarter. Q3 gross profit was 16% higher year-over-year as gross margin improved to 32.7% in Q3, 2023 versus 30.9% a year ago, reflecting the restructured California IOU contracts and improved productivity throughout the business. Despite the strong growth in revenues, Q3 G&A expenses were up only 3.4% versus the same period a year ago with lower stock compensation, depreciation, and interest accretion on earnout liabilities, partially offsetting higher employee compensation. Interest expense, on the other hand, increased 70% to $2.4 million in 2023 from $1.4 million a year ago due to the higher interest rates. Our income tax rate was 31% in the third quarter compared to a tax benefit of 105% for the third quarter of 2022. For the third quarter, net income was $1.6 million 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 $10.1 million, up 27% over the $8.0 million 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. In terms of the nine months ended September 2023 versus the nine months of September 2022, gross revenue was up 12.2% to $354.4 million, and net revenue was up 16.6% to $188.9 million 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 the period as G&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 earnout liabilities, which have now all been satisfied. Interest expense increased by $3.9 million to $7.1 million for the nine months ended September 2023 compared to $3.2 million in the same period a year ago due to the higher interest rates. And year-to-date income tax expense was $1.7 million or an effective rate of 37% compared to an income tax benefit of $5.6 million on the loss in 2022. The relatively high effective tax rate reflects the impact of certain reduced deductions in prior year returns resulting from the lower stock price on the stock compensation which vested in the first quarter of this year. For all of 2023, we now expect an effective tax rate of approximately 29%. Thus, year-to-date net income was $2.9 million or $0.21 per diluted share compared to a loss of $8.0 million or $0.62 per share in 2022. Improved results throughout the company enabled a significant turnaround. Our balance sheet also reflects the benefits of our improved earnings and the higher cash flows. At the end of September 2023, our leverage ratio improved significantly to 2.2 times trailing 12-month adjusted EBITDA, and net debt was $86.5 million. During the quarter, we paid off the $5 million outstanding under our line of credit, while maintaining a healthy $12.9 million cash balance at the end of the quarter. On September 29, we completed the refinancing of our bank credit facilities and entered into a new three-year credit agreement with a syndicate of five banks jointly led by BMO and JPMorgan. We used the proceeds from the credit agreement's term loan to repay and terminate the prior credit agreement, which was scheduled to mature on June 26, 2024. This will 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 purposes to continue to grow the company. As of the end of September and currently, there were no outstanding borrowings under our $50 million revolving credit facility. With the performance delivered year-to-date and our expectations for a strong fourth 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 million to $255 million. Adjusted EBITDA is now expected to be in the range of $40 million to $42 million, implying a fourth quarter EBITDA of $12 million to $14 million, 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 13.7 million. Our capital expenditures are expected to be in the range of $10 million to $12 million.

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

Good evening, gentlemen. Congratulations on another really strong quarter here.

Craig, you're a bit hard to hear. Could you move closer and repeat that?

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

You came in loud and clear. You can say it again if you want.

Great job. How's that? Yeah. So Tom, I really appreciate that 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. 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 one or two scoops less of a different flavor of ice cream than solar or something? Are we looking at maybe slightly smaller projects? And how do you see this interest rate environment impacting the broader opportunity set that Willdan's supporting its customers and addressing?

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

I think it's very clear. Yes.

It's very clear. So your next question was what solar projects are we done? I think was your next question. And...

That will address it in one way, I guess.

We do very few solar projects. If it's a customer like a hospital that wants solar, we will accommodate them. However, solar is not our primary focus. We are assisting them in making decisions about what to pursue, but we do not operate in that sector. Mike, would you like to address the few products where we are involved with solar or battery?

There are additions to bigger projects that focus on decarbonization or energy efficiency channel. Yeah.

I’m not entirely sure what you’re looking for with that question, Craig. However, I want to clarify that we are consulting and assisting people in making decisions. For instance, the large hospital chain I mentioned previously wants to initiate a project only if their internal rate of return is 11%. We are analyzing their 1,200 facilities to demonstrate ways to utilize incentives and other options to meet their return expectations. This is typical of the work we do. We also collaborate with utilities, where all commercial buildings and small businesses receive incentives that are part of a special purpose tax, and the funding is already allocated. In California, New Jersey, and New York, there is nearly $1 billion available in each state. Therefore, we are working with funds that are already secured and do not necessitate bank financing influenced by interest rates. What was the third part of your question, Craig?

How do you see the impact on project sizes and project velocity that Willdan is addressing? It doesn't change the total number of hospitals out there, which is 1,200 for one, and that's impressive. But do you think this will reduce the number of hospitals considering a thorough analysis that Willdan would conduct regarding their options for energy efficiency and renewables? I can't envision that happening, but perhaps you can clarify whether interest rates influence the overall consulting opportunities for hospitals nationwide.

I can't see it because they're highly driven by 2030 and 2050 decarbonization goals. They're actually looking for more help in my opinion to try to figure out how to get there with their financial crunch. So we are not seeing any decline in their interest or 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, incentive money in the utilities. So I don't see it shrinking that problem because we all have goals to meet. Mike, do you have anything to add to that?

No. And it 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.

Excellent. That actually addresses what I was going to ask next, but I'll phrase it a bit differently. Generally, during times of economic downturns, CFOs at various institutions look for ways to cut costs. Willdan's energy efficiency business thrives because it provides verifiable savings to customers. Can you discuss the level of activity beyond just the IRA or renewables-related projects? Are you noticing any counter-cyclical effects from economic weakness, higher interest rates, and other environmental factors that are increasing activity among your customers?

We have previously mentioned that we are not currently engaging in many IRA-type projects, although that may change in the future. The pace of that change is uncertain. We are seeing financing through green banks. Our strategy, developed from our experiences in 2007 and 2008, has prepared us for this moment. During the recession from 2007 to 2009, we managed to operate without any significant impact. So far, we have not experienced any downturn. Our engineering business has seen an increase of approximately 11% to 13%. We have some theories about what is happening in the economy. One possibility is that municipalities are finding it more difficult to hire staff, leading them to outsource services. We always hoped for a time when outsourcing would prove to be more cost-effective than hiring directly, and it seems that with the current retirement systems in place, municipalities are realizing they can't afford to have more employees on payroll. Surprisingly, our observations in municipalities indicate an increase in demand rather than a decrease. Thus, we believe we are defying the expected trend. As Mike noted, the data supports this. I'm not sure if I fully addressed your question, Mike. Do you want to add anything?

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, I think, Craig, but we are accelerating and there are higher interest rates. How about that?

When can higher interest rates ever help anyone?

Saving energy.

Yeah. No.

Saving energy would be, yeah. But higher interest rates are never any good for anyone.

Understood. You are definitely showing momentum. So, for my last question, could you provide a quick update on Integral Analytics? This is a significant asset at Willdan and can experience fluctuations from time to time. Is there anything related to commissions right now that stands out and deserves an update? Considering the increased activity in planning for renewables, should we expect some of these contracts to be awarded before the year's end?

We have a strong pipeline at the moment that will extend into 2024. I won't provide specific details yet as we're still working through some of them. It's possible that some will be executed and announced before the end of 2023. We're also bringing a robust pipeline into 2024. The states we are focusing on have a higher proportion of distributed energy generation, which is putting pressure on utilities to modernize and adopt technologies like IA software. This is creating strong and increasing demand in new states where we haven't operated before.

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

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

Good afternoon. Should we expect any sizable acquisitions in the fourth quarter or in the first quarter of next year? Thank you.

Well, Richard, I don't know. If we know you, met you on the road. Who are you with if you can say or you just like the answer to the question.

I'm a private investor.

Okay. Go ahead, Mike.

We don't forecast acquisitions and none is in guidance or in the raise I want to point that out. We announced 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.

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

Thank you for being an investor.

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.

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 you going. So thank you very much.

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.