Earnings Call Transcript - WLDN Q3 2021

Operator, Operator

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

Al Kaschalk, VP, Investor Relations

Thank you, Jenny. Good afternoon, everyone, and welcome to Willdan Group's third quarter 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 Willdan investor report that accompanies today’s call in the Stock Information section of our website 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 1st, 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 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.

Tom Brisbin, CEO

Thanks, Al. And good afternoon, everyone. During our call this afternoon, I will provide an update on the current operating environment and Kim will review our Q3 financial results. Our third quarter results were ahead of expectations. The LADWP start date was June 21st, then we had three months of wrap up in our results. We also received in August PUC on all our California IOUs that the Investor Owned Utility contracts. Southern California Edison on September 15. We are in the process of ramping or starting all of our California Utility Contracts. We have no contracts that have any COVID-19 restrictions other than state and local health and safety requirements. All are fully authorized to proceed, and funding is in place. We expect meaningful revenue from the California IOU contracts in Q1 of next year as we continue to ramp up to the fourth quarter. Our Engineering and Consulting segment continues to deliver steady performance in growing demand. We are growing organically at 5% in 2021, driven by collaboration efforts with our Energy segment. Our Software business at Integral Analytics had two new small licenses in Q3. Software revenue is still small overall at about $10 million in 2021, but they have become a meaningful profit contributor to Willdan. Additionally, in Q3, we successfully launched our internally developed software platform, Viewpoint. Viewpoint contains the best of Willdan's proprietary technology on a single platform to manage utility programs. Approximately 10% of our workforce is now software programmers, and this will further add to Willdan's technology differentiation in the market. We have big challenges before us with these massive California IOU programs. We know we can do it; we are confident based on our nationwide experience, lessons learned over the past 15 years, data management capability, exceptional people, experienced incumbent teaming partners, and the desire to be the best firm in the nation. We expect less than $10 million in the fourth quarter as we get started with the new California IOU program. Turning to the LADWP program, the team delivered strong financial results. I'm happy to report as of last week, one month into the fourth quarter, operations at LADWP had returned to our pre-pandemic run rate. As we discussed last quarter, LADWP did not spend the budget for energy efficiency service for approximately 15 months. We continue to advance discussions with our clients on how to invest these unused program dollars over the near term, which would be additional to our base program. Thank you to all of the staff who have been instrumental in the restart, and the team that has developed our Viewpoint online platform to expedite work and improve efficiency as well as lower our overall costs related to this program. We expect the LADWP team to meet the challenges of their rapidly growing program. We are encouraged by our growing width of opportunity as most of our capabilities and cross-selling collaboration have provided us with double-digit organic growth over the next three years. Expanding markets such as electrification and facilities have come to reduce cost of fuel, and grid modernization as utilities tackle the problems of distributed energy resources of resiliency. As the loan growth becomes the transportation fleet going to EV. As we have said, nuclear and fossil fuels are going away; the electric world is widely expected to reverse course and increase. We have disruption which is creating opportunities for Willdan. Today, our pipeline and backlog are at a record high. I want to share some of the new business wins. We expect to issue a press release for the major of these awards after the client approves the details and we can then share with the marketplace. The following are examples: A $90 million three-year design build contract to reduce infrastructure related greenhouse gases in New York City. This new first-of-its-kind program introduced innovative electrification measures to specifically lower the carbon footprint and improve infrastructure at a public housing facility. Willdan's technical approach was selected competitively above all others and has application across the United States. Another one is a new five-year $24 million energy efficiency program for a large mid-Atlantic investor-owned utility. We see the major competitor to grow into this new geographic territory. We have also been awarded additional work with multifamily housing in New York City. This work again is challenging but it is substantial and addresses equity as we move forward. We are working on a decarbonization plan for New York City buildings to meet their near and long-term climate goals. As a result, we'll be working on a long-term energy plan for the entire city. We have been working on a climate plan for New York State. The point we're making is that the leaders in climate action, being California, New York, and Massachusetts, are entrusting Willdan with their transition to a clean energy economy. In summary, we are emerging as a strong post-pandemic company. We did not lose any capabilities or contract value. We actually gained substantial market share. Now we want to deliver and get back to the growth rate where shareholders expect. Thanks to our employees and our shareholders for their continued support. I will now turn the call over to Kim to discuss our financial results. Kim?

Kim Early, CFO

Thanks, Tom. And good afternoon, everyone. Overall, we had a very good Q3 with revenue and cash flows exceeding expectations as we're focused on execution. Gross revenue for the third quarter was $98.3 million, a decline of $6.2 million or 5.9% from the same quarter a year ago while net revenue, net of subcontractors, materials and other direct costs, was $54.5 million for the quarter, an increase of $3.5 million or 6.8% compared to Q3 in 2020. The diverging directions for growth in net revenue are a result of the shift in the mix of revenue, with increased revenue from LADWP and other utilities offset by lower construction management revenue. The construction management activities generate significantly smaller net revenue as a percentage of gross, and thus the reduction in gross revenue is significantly greater than the reduction in net revenues. The decline in construction management revenue is due to project completions earlier in the year not yet being fully offset by the startup of new projects despite a strong backlog of new contracts. G&A costs were $3.6 million or 11% higher in Q3 2021 compared to the year-ago quarter, reflecting increased staffing, professional services, and travel charges as we work to startup the new California IOU contract and other organic expansion opportunities. The higher SG&A costs were partially offset by the higher margins and net revenue resulting in adjusted EBITDA for the quarter of $10.1 million, compared to $11.0 million in Q3 of 2020. The adjusted EBITDA margin for the quarter was 18.6% of net revenue. Our adjusted earnings per share were $0.53 per share for Q3 of 2021 compared to $0.68 per share in 2020. Nearly all the difference in adjusted earnings per share is accounted for by tax deductions and credits realized in 2020 that were not repeated in the third quarter of 2021. For the nine months-to-date, gross revenue of $261.5 million was down 11.1% compared to a year ago, but net revenue increased by 4.1% to $149.7 million. The change in the mix of revenue sources accounts for the different trajectories of growth in net revenue through the first nine months of the year. The reduction in gross revenue from our construction management activity translates into smaller reductions in our net revenue due to the higher subcontracting materials content. While the gross revenue increases from utility programs and advisory services had lower pass-through expenses and therefore translate to a higher increase in net revenue. The mix of revenue also accounts for the majority of the 640 basis point improvement in gross margin year-to-date when compared to the same period in 2020. Higher gross profit was partially offset by a 5.3% increase in G&A costs versus a year ago. Higher G&A costs were due to wage and staffing reductions implemented in Q2 of 2020 that were later restored, as well as stepped-up activities related to the new California IOU program and other organic expansion opportunities in 2021. The interest expense in 2021 was $900,000 lower than a year ago on reduced debt levels. As a result of an increase in various deductions and credits, our effective tax rate was a credit of 41.6% versus a credit of 23.8% in 2020. The net effect of those changes resulted in adjusted EBITDA of $18.1 million for the first nine months, compared to $19.5 million a year ago, and adjusted earnings per share were $0.99 compared to $0.77 in 2020. The changes in our balance sheet and cash flow reflect this changing mix of revenues, the impact of the restart of the LADWP program, the startup of the new California IOU program, and continued debt reduction. Cash used in operations was $1.7 million for the nine-month period as the working capital expansion required by program startup costs offset the cash generation from revenues. Scheduled principal payments on our term loans and earn-out payments resulting from successful acquisition performance comprise the majority of the $17 million use in financing activity. $4.8 million in CapEx comprised the remaining cash usage. As a result, our cash balance has been reduced from $28.4 million at year-end to $4.8 million at the end of the third quarter. Our $50 million line of credit and $20 million of available delayed draw term loans remained unused at quarter end. We do expect, however, the restart of the LADWP program and the commencement of the new SCE programs in Q4 will expand our working capital requirements and result in some usage of the line in Q4. We will expect to continue to use that line until cash flows from the expanding revenue begin to catch up in the second half of 2022.

Operator, Operator

Thank you. We will go first to Craig Irwin of Roth Capital. Craig, your line is open, please go ahead.

Craig Irwin, Analyst

Hi, I apologize, I was on mute. Thank you for taking my questions, and congratulations on another really solid result here. So, Tom, it was probably three or four years ago, there was a major budget flush in the fourth quarter. Your customers had underspent during the year and really wanted to keep up with their energy efficiency priorities. Now, I know this environment we've been through in the last two years now is a strange one. It's very difficult to predict and accountable budgets are not necessarily sort of marked at the front end. But can you maybe talk us through how a budget flush might work? And is this in and around with the possibility for the fourth quarter for Willdan?

Tom Brisbin, CEO

Normally, that has happened. But given the fact that we're coming out of COVID, I would temper those expectations. We see a steady state sort of in the fourth quarter. So, it's not so much about the bureaucracy of the contract COVID anymore; it's really about starting up and selling to a customer base that has come out of COVID at a medium rate. So, I will temper those expectations this year. Okay, Craig?

Craig Irwin, Analyst

That absolutely does. So, even execution which everybody's trying to guess their way in front of your quarters, the second most common question from investors is the outlook for the IOU bid schedule for 2022 and the potential scope of work. Now, I know you've been conservative about what you've said there and you still haven’t really started to recognize the revenue that is the opportunity captured already. But can you maybe just sketch it out for us, give us some idea roughly how you see your bid teams being, and maybe if you're not comfortable with a dollar value, a proportionate measure that indicates to us what's available versus what's already been contracted. What would be really helpful for people looking at the future?

Tom Brisbin, CEO

What's available has grown during the pandemic because it's been delayed with schedules. The endpoints of the schedule were still the same, so they're trying to pack more into less time. So, our budgets have actually grown. So, the question I think is how much we can pack into the three or four years that we have left in all of it, in some cases it's five years. But Mike, you want to add to that part of that whole question?

Mike Bieber, President

Well, all of the new projects have started, first of all. We'll start to ramp in Q4; you'll see a little bit of that, but the major impact is next year. I would say that likely each of the next four quarters in 2022 will be progressively greater than their earlier quarter. So, Q4 may be our largest exit in 2022, and that will continue to grow into 2023; very likely so. The run rate just for the California IOU programs has averaged about $150 million of incremental revenue over the next 4.5 years. So, to the extent we do, say, less than $100 million next year, that means we have to be up around $200 million in 2022, take it over milestones. Further than that, Craig, is difficult to break down at this point, but we will break down for investors as we get back to guidance in March of 2022 with the announcement of our fourth quarter and provide a detailed outlook of what we think it will look like at that point. But since we're just getting started right now, we're going to wait a couple of months to do that.

Craig Irwin, Analyst

Understood. So, maybe can you just give us a couple of sentences on the specific opportunity for new projects, new contracts, not the contracts that you have already won?

Mike Bieber, President

So, when we went through the script, Craig, what we tried to demonstrate was what's going on in other parts of the country. We gave you a $90 million example of multifamily housing in New York City where this is just one unit, and they want to revamp how the buildings are heated and cooled. The first award through public housing facilities in New York City, which Willdan has won, is $90 million. So, that's new. I also talked about a new energy contract that's been signed but we can't announce yet, a mid-Atlantic contract for $24 million. What's also exciting is what we're doing in New York City and the States on helping them decarbonize. We're not only helping them, but we are also working across the organization on all the buildings to model them. We’ve also been doing the design and the upgrades. So, we're trying to give you a little flavor of other states. If you go back to California, I might point out maybe around '23, the end of '23, this is going to just keep ramping for three years. As we said, the less we do now, the more we have to do later. It’s known that they want to outsource about a third in California. We'll be back in California going after more if we do well in delivering for the next couple of years. There’s huge opportunity growing in this area, in terms of electrification, grid modernization, renewables, or whatever term you want to put on it.

Craig Irwin, Analyst

Sort of an ideology, you gave me. You gave me what I wanted, and I know you're kind of shy about saying 1/3rd is done, there's 2/3rds out there. But that's really what investors want to understand. So, thank you. Just another couple of very quick questions if I may. Labor is a hot subject for a lot of companies, and investors are watching closely, particularly on the services side. You guys have navigated well to put up the results you gave us. Can you talk a little bit about the labor capacity and your confidence in having sufficient labor to execute on the revenue ramp?

Tom Brisbin, CEO

We've been very good at attracting talent during this period, and we have ramped up effectively. We hired about 100 new people, new faces in California and even more across other parts of the company. Attracting talent has not been an issue for us, Craig. To my surprise, actually, people want to come to work at Willdan. We have a lot of work and a lot of job openings, and we're acquiring and hiring a lot of talent. That's piece one. Piece two, it is coming at some escalation. People are quoting anywhere from 5% to 7% escalation on labor rates. We're seeing the same thing occur. We are passing that along to our clients in escalation, and our contracts will for the most part allow us to do that. So, labor is coming at a higher cost, but it has not been a restriction on growth.

Craig Irwin, Analyst

That's really excellent. Last one, if I may. Another company sort of in the ecosystem, not such a direct competitor, has gone out there and landed basically a $1 billion EPC contract, a massive pivot in the business model for them to build these massive energy storage facilities where they really don’t have a lot of experience. They would face liquidated damages if they are laid, and all sorts of other terms. You guys are not going to surprise us with any changes to the business model or fundamental shifts in what you're doing to try and change revenue and the initiatives that you have that you've communicated. Can we expect these to be the ones to drive your model and consume your time over the next number of years?

Tom Brisbin, CEO

No changes in business model; it’s working.

Craig Irwin, Analyst

Alright, thanks! Love it, congratulations on the strong results.

Operator, Operator

And we'll go to our next question from Chip Moore of EF Hutton.

Chip Moore, Analyst

Hey, good evening everybody. Thanks for taking the question. Nice to have a lot of good things to talk about. We had, yes, we had a good start. Maybe on the software side, I think in the past, last quarter you've factored in some wins per IA in the plan. Just wondering how we should be thinking about Q4, any margin implications. In the bigger picture, Tom, you talked about this new unit work side platform. Can you expand on that and what it brings?

Tom Brisbin, CEO

And Mike, could you hit both IA and Viewpoint?

Mike Bieber, President

Okay. So, in IA, IA did exactly what we thought they were going to do in Q3 with two new small software licenses. We do not expect further software licenses in Q4; that was just the upside. They've had a great year and been a great contributor to the bottom line and more incumbent for 2022. So, they are doing a great job. Viewpoint has launched on LADWP; it’s been two years in development. We've taken all of the proprietary technologies across the company that have been acquired and invented at Willdan and put them in one platform to be able to manage these large utility programs; it's called Viewpoint internally. It has a customer-facing portal, which allows contractors to log on and see where they are on their programs. It integrates technologies that Integral Analytics has, building modeling from the White Group, and many other software technologies into one platform. This has never been done before and it's working great at LADWP. We're about a month into the launch, and it’s going just like we expect it. So, we're going to roll it out across the company.

Chip Moore, Analyst

Great, good to hear. Maybe one more on the new $90 million contract in New York City. Nice win. I assume it has the multifamily opportunity referenced last quarter. Maybe we can talk about, I think you've given it out already, but the potential for that to grow with federal stimulus or things like this. It seems relatively early days, so just clearly some on pipeline for those network book wins.

Tom Brisbin, CEO

No, I sort of separate them. One is a utility type contract for multifamily, and one is another state authority for buildings and building complexes in multifamily. They are separate; they are two wins. I'm looking at a diagram here on the board that Mike put up and there is overlap, and we can see synergies between them that will really help. So, Mike, you want to expand on any of that?

Mike Bieber, President

Well, these customers have different objectives and many problems in common. We run both major programs, and there is an opportunity to combine what we're doing in those programs to better serve these customers. So, we're going to work on that tonight, actually. They are two new great wins and they will contribute substantially to revenue and profitability over the next three years.

Tom Brisbin, CEO

I think the market for it is just unlimited. I mean, we could never keep up with it across the country and tackle the high-rise multifamily housing projects and infrastructures that are anywhere from 50 years to 75 years old. I mean, the heating, cooling, and the individual units, I mean it is endless.

Chip Moore, Analyst

Yes, I know. I remember we need to just open your window to get it, you know.

Mike Bieber, President

You go through New York, right? Everybody's got their window opened up to regulate the heat.

Chip Moore, Analyst

That's right.

Tom Brisbin, CEO

Great. Great to hear. Congrats on the momentum, good to see. Look forward to watching and hearing. Thanks. We would like to thank everyone for joining us today and have a good weekend. Take care.

Operator, Operator

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