Earnings Call Transcript - WLDN Q1 2023

Operator, Operator

Good day, everyone, and welcome to the Willdan Group First Quarter 2023 Financial Results Conference Call. At this time, I would like to hand it over to your host, Al Kaschalk. The floor is yours.

Al Kaschalk, Host

Welcome to Willdan Group's First Quarter 2023 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 the market close 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 found at ir.willdan.com. Management will review prepared remarks, and then we'll open the call up to your questions. Statements made in the course of today's conference call, including answers to your questions, which are 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 is 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 on time in the company's SEC reports including, but not limited to, the annual report on Form 10-K filed for the year ended December 30, 2022. The company cautions investors not to place undue reliance on the forward-looking statements made during the course of this conference call. Willdan disclaims any obligation and does not undertake to update or revise any forward-looking statements made today. In addition to GAAP results, Willdan also provides non-GAAP financial measures that we believe enhance investors' ability to analyze the business trends and performance. Our non-GAAP measures include net revenue, adjusted EBITDA, and adjusted EPS. I will now turn the call over to Tom Brisbin, Willdan's Chairman and CEO.

Tom Brisbin, CEO

Thanks, Al, and good afternoon, everyone. Two months ago, we communicated that we had overcome the significant headwinds that were impacting our business and began our trend back to a growth company. Our first-quarter performance continues that trend, enabling us to deliver our best first quarter ever. The continuing improvement in our financial performance and our strong backlog gives us confidence we can deliver the full year 2023 outlook. Let me share with you some additional details. Cities are important customers for us, and we have a 60-year-long relationship in California. Our city services model provides us a unique opportunity to bring our energy and infrastructure capabilities to the municipalities. We expect the strength and demand for our engineering and financial services for cities to continue. We do not see a slowdown due to inflation or a potential recession in this area. We expect the Inflation Reduction Act and the Infrastructure Investment and Jobs Act to help cities fund important new projects over the next several years. In addition, we see our cities struggling with the difficulty in hiring qualified engineers. This helps our outsourcing model. Our software business enrolled two new contracts for our distribution planning software during the quarter. The larger contract was for one of the nation's largest energy investor-owned utilities. We also signed a software contract with one of the largest municipal-owned electric service companies. There are approximately 170 investor-owned utilities and 3,000 municipals. The software business pipeline looks good. And strategically, we see opportunities in both markets to support distribution grid planning and forecasting in both the near and midterm. This market is being driven by electric vehicles and electrification. The load is growing on the grid. Our software solution helps plan and optimize the solution. Our New York Energy business is executing on their backlog, working with the Dormitory Authority of the state of New York, the New York City Housing Authority, and New York Power Authority positions this group for 50% organic growth in 2023. They are electrifying NYCHA housing as their way to decarbonize the grid and provide better living for their residents. Our Performance Engineering Group is entering their strongest two quarters as it starts to work on five new California-based performance engineering contracts. These wins were based on collaboration with our cities engineering group. Our new professional service contract with San Diego Gas & Electric is performing well. This one-year customer service program supports small businesses statewide that are recovering from COVID. The California IOU contracts are performing well and were a positive contributor in the quarter. We expect the performance and contribution to continue throughout the year. Interest continues to grow at over 20%, providing high-end energy solutions to the entire country, helping develop the framework for the clean energy transition. They've been, and will continue to be, Willdan's light into the future and where we move for the continued growth of Willdan. Last month, we released our 2022 sustainability report. At the forefront of Willdan's sustainability efforts is our commitment to achieve carbon neutrality by next year. In closing, 2023 is off to a solid start with a strong first-quarter performance and the strength of our backlog; we are on track to deliver the full-year 2023 outlook we provided two months ago. I want to thank our employees, customers, and stockholders for their support. I will now turn the call over to Kim, who will provide additional details on our financial results.

Kim Early, CFO

Thanks, Tom, and good afternoon, everyone. Much has been accomplished from a financial perspective over the past two quarters. The amendment to our SCE commercial contracts in Q4 and the completion of new software licenses in Q1, alongside ongoing strength from our municipal services segment and the continued solid performance of the rest of our business units, have enabled us to generate more than $22 million in cash flow from operations over the past two quarters. Our Q1 gross revenue was up 11.7%, and net revenue was up 23% over the same period a year ago. All of that growth was organic. Gross profit was 32% higher as gross margin improved to 40.2% in 2023, driven by the same course as increasing our revenue. G&A expenses were essentially flat versus the same period a year ago as increased employee and tenant compensation on strong earnings was offset by reduced stock compensation expense. Interest expense increased $1.7 million to $2.5 million in Q1 of 2023 due to the changing interest rate environment. Our income tax rate was seasonally high at 44.7% in the quarter, compared to a credit of 38.8% in the first quarter of 2022, mainly due to the timing of certain discrete tax adjustments. So for the quarter, net income was $932,000 or $0.07 per share versus a loss of $3.8 million or a loss of $0.30 per share from Q1 a year ago. Adjusted EBITDA in Q1 of this year was $9.9 million compared to $2.3 million in 2022, and adjusted earnings per share was $0.32 this year versus $0.07 per share a year ago. It's a significant improvement in operating performance, which has enabled us to reduce our leverage ratio to 3.0 and bring our credit facilities back into compliance with our original loan covenants, removing the borrowing limitations under our $50 million line of credit. The net result is a reduction in our annual interest rate spread by 2%, saving about $2 million on an annual basis. Our balance sheet also reflects the improved earnings and higher cash flows. Our cash balance at the end of March 2023 was $17.9 million, up $9.1 million from the end of 2022. We are on track to deliver the full-year outlook we provided in March and continue to delever our balance sheet. Moreover, we're encouraged by several factors, including significant improvement in Willdan's financial health, a strong backlog of new contracts and new projects, and ongoing proposal activities. We look forward to providing an update to our 2023 outlook with our next call. Operator, we're now prepared to answer questions.

Operator, Operator

And we have our first question from Chip Moore of EF Hutton. Please go ahead.

Chip Moore, Analyst

Good evening.

Creighton Early, CFO

Good evening.

Chip Moore, Analyst

Hi, thanks for taking the question. Congrats on the very strong quarter. I guess I wanted to start with Kim, your last comment there on updating guidance next call. I guess, just given that strong Q1 beat and what seems like good momentum across most of the business. Just curious how to think about the existing guide, sort of the high end, certainly seems very achievable, if not beating it. But what are some of the risks to the guidance and visibility you need to update that.

Creighton Early, CFO

There is always the question of when some of our projects will start, but we are not seeing significant downside risk from supply chain issues. There are timing concerns related to project launches that could affect our revenue mix in any given quarter and, consequently, our risk profile. However, we remain confident in our initial forecast for the year. While we are optimistic, we will have a clearer picture by the time of the next call.

Chip Moore, Analyst

I understand. Thank you for that. Could you provide some insights into the recent software wins for iA, particularly regarding their scale and scope? I assume this has positively impacted our margins this quarter. Additionally, concerning one of the larger investor-owned utilities, is the implementation covering their entire territory? Is there potential to expand this contract, and does it include any recurring service elements?

Michael Bieber, President

Yes, Chip, this is Mike. This is the first contract where we do have a companion service license and additionally, the software license. So we'll be providing significant services to this customer over the next five years. We're looking to provide that on an ongoing basis. Unlike usual, we don't break out individual software licenses, but it really puts us ahead of our plan for Q1. We started off the year great, and we'll look at guidance again at the end of Q2. But right now, we feel pretty good that we're ahead of plan.

Chip Moore, Analyst

Got it. Okay. And maybe just one more for me. I'll let others hop on. On the momentum you're seeing on the city side, on engineering and financial services as well, net revenues at 15%. It sounds like you've seen an acceleration there. You announced that electrification deal in Percept County. Just maybe if you could expand on that opportunity. It sounds like you're incrementally more bullish on the synergies there. I would love to hear what you're seeing.

Tom Brisbin, CEO

The five projects that I mentioned collaboration on, our engineering legacy business was instrumental in making the introductions to do the performance contract you referred to as electrification. So we are seeing that synergy really taking place. Was that your question, Chip?

Chip Moore, Analyst

Yes. And then also on sort of backlog and outlook there. Obviously, a lot of funding to come from the IRA and elsewhere, but how those discussions are going and when that could kick in?

Tom Brisbin, CEO

I think I already said the second and third quarter on the performance contracting will be very strong, and they're doing work for cities in California as well as across the country. So we see them growing. And we're very optimistic about the year.

Chip Moore, Analyst

Appreciate the color and congrats again. I'll hop back in queue.

Tom Brisbin, CEO

Thanks. All right.

Operator, Operator

Our next question is from Marc Riddick of Sidoti. Please go ahead.

Marc Riddick, Analyst

Hi, good evening. So I was wondering if there was anything that you were seeing as far as the timing of customer activity or any tangible delays or changing order patterns that either would be tied to just general economic conditions, but also maybe some of the banking headlines that we've seen, if there's anything that would be connected to what you're seeing currently?

Tom Brisbin, CEO

Yes. I referred to it in the script. We have not seen anything change due to inflation or a lot of talk about a recession. If you want to get very specific when we talk to city managers, see financial people, what they're doing this time, which we think is different than '07 and '08 is it's not such a big surprise. We've been talking about recession for so long that they are preparing for it; they are not spending. They are buckling down. And as I commented in the script, they are not hardened. So we provide outsourcing people to cities in a big way. So they are going to more of an outsourced model. So we haven't felt any effect yet. And if there is one, unless it's massive like '07 and '08, we think we're going to be okay and much better than what we saw in '07 and '08. And we're now for a little more detail, I think, Mike, they're 25% of our net revenue, whereas in '07 and '08, it was 100% of our net revenue. And on the 75% that's in the, let's call it, energy space. Back in '08, they saw no effect. So we are hoping for a similar outcome. Does that help you at all?

Marc Riddick, Analyst

That's helpful. I was thinking about the availability of labor in some areas of the economy, which seems to have improved somewhat recently. Could you discuss your staffing needs and how the labor availability has changed over the last few months?

Tom Brisbin, CEO

We're pointing at each other right now. I'm trying to get Mike to answer.

Michael Bieber, President

Labor remains tight in the U.S. As we noted last quarter, we completed most of our hiring at the beginning of this year. We will fill the remaining positions throughout the year as we keep growing. These roles will mainly be in our front-end services, our energy consulting business with E3, and performance engineering, especially for electrical engineers, which we require. We have made significant progress in hiring for the energy efficiency sector so far.

Marc Riddick, Analyst

Okay. That's helpful. I appreciate it. Thank you.

Tom Brisbin, CEO

Thank you.

Operator, Operator

And there are no new questions so far.

Tom Brisbin, CEO

Okay. Thank you very much to everyone listening on the call today, and we will see you in about 90 days. So thanks again for being patient, and it was a good quarter, and we expect a good year. Take care.

Operator, Operator

This concludes today's conference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.