Q3 2020 Willdan Group Inc Earnings Call

Please standby.

Good day, ladies and gentlemen, welcome to the Willdan group's third quarter 2020 conference today's call is being recorded at this time I would like to hand, the conference over to Mr. Al Kaschalk. Please go ahead Sir.

Thank you Lisa good afternoon, everyone and welcome to Willdan group's third quarter earnings call.

Joining our call today are Tom Rosen, Chairman of the board and Chief Executive Officer.

Jason Bachman, Chief Financial Officer, and Mike Peter President will then drew.

Call today built on our earnings release, we issued after market close today.

Can you find the earnings release and the volt in Investor report that accompanies today's call and updated for Q3 results in the Investor section of our website will then dotcom.

Management will review prepared remarks, and then we will open the call up to your questions.

Statements made in the course of todays 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 form 10-K for the year ended December 27, 2019, and subsequent quarterly reports on form 10-Q.

The company cautions investors not to place undue reliance on the forward looking statements made during the course of this conference call will.

Well, Dan disclaims any obligation and does not undertake to update.

Or revise any forward looking statements made today.

In addition to GAAP results. We will 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.

We believe net revenue defined as revenue net of subcontractor services and other direct costs allows for an improved measure of revenue derived from the work performed by our employees.

Adjusted EPS and adjusted EBITDA, our supplemental measures of operating performance.

Which removes the impact of certain expense items from our operating results.

The third quarter of 2018.

Increase was primarily due to the suspension of the law DWP small business program.

Net revenue with $51 million, a slight increase from $58 million in the year ago quarter, while net revenue in our energy segment was unchanged net revenue in our aviary in consulting segment increased cost of 1%.

Direct costs with contact revenue or $69 $90 million in the third quarter of 2020, a decrease of $15, 7% from $82.8 million in the same period last year. The decrease those primarily as a result of decreased contract revenue from our director installed programs for small businesses are energy.

Figment, partially offset by additional direct cost a contract revenues related to our acquisitions decrease.

Our direct cost of contact revenue or 67% of our total contract Avenue in the third quarter up from 65% in the second quarter of 2020, but down from 71% in the same period. The prior year. The difference in each period, primarily reflects changes in the mix at work and the degree to a subcontractor.

July.

Total general and administrative expenses for the third quarter or $33 $1 million compared to 33 $4 million from the prior year period the.

The next decrease in total general in the district of expenses was due to lower companywide travel expenses as we conduct business more efficiently and lower amortization of intangible assets derived from prior acquisition.

These lower expenses were partially offset by higher personnel and facilities costs attributable to the acquisition of 83.

In response to the COVID-19 pandemic. The company has taken it will continue to take measures intended to help minimize the risk of COVID-19 to a complete including required and the majority of its employees to work remotely to the spending all essential travel and restricting in person work related meetings.

Hi, Justin EBITDA with $11 million for the third quarter of 2020 compared to $11.6 million for the third quarter of 2019.

Adjusted EBITDA as a percentage of net revenue was 21, 6% for the third quarter of 2020, compared with 22, 8% for the third quarter of 2018.

I would like to point out that contract revenue was down 11% do covid suspension, but adjusted EBITDA and a quarter, it's only 5% from the prior year period.

Continue to do a good job of controlling costs in the quarter.

Third quarter net interest expense was in line with the same period last year.

Quite the higher desk borrowings are borrowing rate reduced approximately 200 basis points.

Versus the year ago period due to reductions in one month LIBOR.

For the three months ended October 2nd 2020, Rerecording, an income tax benefit of one $6 million versus an income tax benefit of $24 million in the same period last year due to increased tax deductions and tax credit.

We have net income in the third quarter of 2022 $6 million or 21 cents per diluted share compared with net income of $4 million or four cents per diluted share in the same period last year.

On an emergency basis.

Hum was eight $5 million or 68 cents per diluted share the load a significant adjustments from our GAAP net income for software compensation and tangible amortization, which are both non-cash items.

Trying to the balance sheet and cash flow from operations we.

We enter 2020 focused on improving our cash flow with an emphasis on cash collection, particularly for some of our large utility customers.

We continue to see improvements in this area and for the nine month period ended October 2nd 2020, regenerated $26 $90 million in cash flow from operations Ah record levels by the company. During the same period last year regenerated generated eight $3 million in cash flow from operations.

As of October 2nd 2020, we have $115 $3 million outstanding on our credit facility, we have no borrowings under a revolving credit facility with $50 million available or.

Our net debt to adjusted EBITDA trailing 12 months leverage ratio as measured drive in charge of our credit facility was three one time.

I wanted to take a moment to provide you with some additional details about our near term outlook.

Our business development efforts remain robust with proposal activities for new programs continuing to advance.

Second or 2021 budgeting process is underway and we expect to be in a position to provide you with additional details in March 2021.

Last quarter, we expected the Los Angeles Department of water prior program to resume in the fourth quarter of 2020, but we no longer expect that to occur due to the high ratio COVID-19 in Los Angeles County.

And lastly, we are anticipating a decrease and adjusted EBITDA with compared to Q4 2019 due to the large software sales reports at the end of last year combined with the impact of COVID-19 operating actions to continue the virus <unk> impact.

Fourth quarter of 2020, adjusted EBITDA is expected to be damned, approximately 15% from the third quarter of 2020 results.

In terms of interest expense, we estimate fiscal 2022 be approximately five $5 million down from $6 million previously communicated view.

This pandemic is pilot several things over the past seven months, one of which is the ability to work efficiently remotely.

As part of our long term strategy, we will be adding focus on real estate costs are average release lease duration is three to five years, and we said spend seven $2 million or four 8% of G&A per year on real estate expense.

As easily as expire we're setting a goal to reduce facilities cost by 25% on the current account pages.

When complete this should result in a 100 basis point margin improvement.

Now I'd like to turn the call over to Tom.

Perfect spaces and good afternoon, everyone.

Overall, we performed well during the third quarter.

Driven the reopening extra room narrowed all of our markets are will provide highlights of our third quarter results are versus followed for merging from this year's covered.

And conclude by sharing insights into our business development pipeline.

During the third quarter of 2020, our business continued to be encouraged embarked COVID-19.

Third quarter revenue and the energy Fairgrounds goes up.

5% sequential order.

The small business program DWP territory remains a lot stone.

During the third quarter hour DWP shift of resources to Los Angeles Unified School District provided summer to move to the program the shifts allow us to improve energy efficiency services and so many schools.

Expect an entire program through soon early in January 2021.

Our business volume of New York improved during the quarter with all New York utility programs 40 brands.

It is open customers are cited up and setup covid increased and contractors continue to run fast as customers captured better deal.

Re under 2020.

<unk> focus.

Improve our cash converting cycle and reduce our debt level.

State you mentioned the majority of the highest level cash flow from operations for nine months during that period in the company's history. We will continue to work on cash flow to invest in the business and reduced though.

During the second quarter conference call are discussed how the company took all appropriate actions to limit the effects of the COVID-19 financial impact.

These actions include fertile playoff salary reduction or two suspension structure four okay, rach loans and stuff and all discretionary spending.

In the third quarter re re hired a larger percentage of the furloughed employees and continue to add back or warranty.

We also restored salaries and benefits for employees expect to resume coming bouchie.

Four one K plans during the fourth quarter.

Well that is where this year.

Firmly offer our business virtually more efficiently and with a lower cost structure.

While still really would see signs of holding onto cost food and operating efficiencies.

Those projects have resumed we have been extremely disciplined and bringing back employees and controlling other direct costs.

10 beverages allowed us to integrate technology are covered job servings, we are use technology to dwell and implement effective protocols to keep our employees.

For instance, in some cases, we are able to do a virtual on these are virtual energy of this.

Ability to look for energy efficiency measures measures with all.

Entering the facilities.

We are planning to publish our initial.

Company Sustainability report in the fourth quarter of 2020 and plan to update. This report annually. This report will also address diversity and we are available to track her progress.

Despite the impact of COVID-19, we continue to customers conducting procurements.

We finally have some information that can that Richard sure on a California I O U's.

First redundancy iou's for new schedules and second for awarding will down a significant amount of work.

Rio size, a total of 781 million, new California, IOU contracts today.

Six contracts are three to five years in duration and on a weighted average basis represent $150 million per year and incremental revenue. This is of course based on successful execution.

The new work will begin slowly and pick up in the back half of 2021 for the six executed contracts or waiting Californian, California Public Utilities Commission approval to have been approved we will announce more detailed the.

The contracts, where the PUC approves of contracts and utilities allow us to announcer.

In summary, the six California's energy efficiency contracts are expected to have an average duration of four to five years of programs are expected to ramp in the second half of 2021 with deep ramp expenses incurred in years, three and four additional budget is.

It is likely to go to the program or programs that can Ram execute project milestones and deliver required savings.

Even though the market potential for these programs.

Has been cut through to the pandemic.

We'll ban still one more than the incremental dollar amounts that were told me during our secondary often which date event that if we could read more than $100 million per year and incremental revenue we'd give ourselves today.

About $150 million per year has been awarded to us so far.

We have additional California, IOU proposals Phillips them. Thus, we will provide you additional details when it doesn't compromise our competitive position.

Beyond the California, IOU procurement process. This development proposal efforts remained robust are entered engineering segment remains strong during this quarter and the opportunity probably strong.

Within the energy segment, we see demand for energy efficiency services, including grid modernization. For example, we've kind of moved from California to the East Coast style with New Jersey, we're looking at at least $25 million per year for small business and other commercial demand side management programs have colon, Maryland $30 billion.

Per year design, and implement small business and combined power programs.

And mentioned the New York City housing Authority is 90 billion over a two year period for electric transportation those steam boiler plants.

On behalf of our board of Directors management and shareholders, we would like to thank our employees and customers for their resiliency valid dedication and hard work during the pandemic.

I want to thank our teams for their commitment to developing and implementing effective protocols to keep our employees safe and projects running the health and safety of our employers is our first priority and I'm proud of what we've accomplished operator, we are ready to begin the question and answer session.

Thank you and if you would like to ask a question. Please take off I think star one on your telephone keypad.

Okay, Thanks, and you hear function.

Please make sure that you mention it turned off turn on your signal to reach our appointment again that is Childline task in question.

And we will take our first question from tank Erwin with capital partners.

Please go ahead.

Good evening and thanks for taking my questions.

Tom 781 million that is a beautiful number congratulations I know you'd like you've been working really hard on this for.

Years.

The big accomplishment.

Thanks, Craig you're right, we have that and it it is.

And it's a great number.

So I wanted to check how far through to ask more questions.

Yeah, No I have the I have a bunch more.

I wanted to verify uhm, but we're roughly at 40% margin of the $900 million opportunity.

Using your comments about the weighted average of $150 million a year over the duration of the three and a half three three to five years.

These contracts representing.

It's basically 150 million out of 360 million that was awarded meaning 840% plus when right.

Available scope.

Okay.

It's a little hard to answer.

So you want to answer when Ray.

You want to answer how much they are awarded.

Well I guess, what there's a couple of questions and there yet so are the awards done from the procurement you've already submitted.

Submitted for for for this year do we do we do we have a final tally or are there are potentially other awards stinky comfortable.

There are a few other awards for us.

They're not as big.

But let me let me give you a little bit of an answer here.

We propose.

These are rough numbers about 1.2 million one.

One 2 billion.

Those buses or reduced by the Iou's to about 903 million.

So there wasn't effects took place.

The pandemic.

Due to the lateness of the procurement they adjusted their awards alright.

So the 900 that was one thing that took place so of the remaining 903 million we.

One 793 million or 88%.

What we went after.

Now.

The next part of your questions what's left.

Yeah, two hours to our understanding from public information of what we know.

And we get stuff hedge I know you go into this.

So we think the total.

Awards, either pending or publicly available.

Will be about 1.5.

Billions.

We've got.

Will down towards either rewarded or pending will be about 825 million.

Or 50% of the total.

54% of the total available funding.

Wow.

[laughter] that's.

That's pretty pretty sent out to <unk> congratulations.

How would we think it's hum turning on for you as far as revenue in the relieve some in your prepared remarks, you were very clear this doesn't start today uhm.

Uhm It comes on incrementally as these jobs ramp up in 2021, you know do we see.

Revenue impact in the first quarter of 21.

No proportionately.

You know how far do we get towards that $150 million run right by the end of the year.

Should we be looking at the at the room.

I would say nothing in the first quarter, a little of the second third and fourth we ought to be at about.

<unk> did have I don't think.

I'm looking at this as a guest skies.

By the fourth quarter, we don't think will be fully rant and certainly not to the maximum.

And revenue will follow.

The actual work, we're doing by whatever 60 to 90 days.

Great.

Yeah, I think so then the margins available on this work I I know you were in long negotiations with both utilities and the commission here.

We expect something similar to the to the corporate average you know maybe if we take out software is a corporate average mm.

And it's gonna be pretty typical as far as profitability for Ya.

Are you still have competition going on Craig.

And we said about all we can say.

Got it got it.

Then the other side of the business I wanted to ask on it's integral hemolytic. So you guys wanted a few out there with a really credible solution.

That'd be greenlights for a bunch of conventions, but we haven't necessarily seen all of the.

Oh the contract since I know, there's I know, there's a lot of fish in the pond.

Uhm.

As an analogy we all like.

How should we be thinking about the contribution some integral analytics headings at the back end of the year.

Uhm. It grows there are focused in 2021, I know you've had been putting resources in there do you feel like those resources are getting results.

Cricket Cricket's going well and we have been investing there.

And.

By comparison, we only have one large contract in the pipeline.

Whatever multi million dollar itself contract last year now we have three large contracts in the pipeline. So.

That's good.

I think it's a pretty good probability that one of those three at least toolkit between now and the end of Q2 of next year, but any time is they're trying to predict when it contracted side is too difficult.

Can't we can't predict at this point, whether we will have one of those tickets this quarter of this fiscal year or the first half of next year too difficult to predict for the pipeline itself looks good we have some chunky contracts in there and also a splattering of smaller contracts and the million dollars right. So.

We're pleased with their activities.

Excellent well congratulations on the strong result, guys the.

88% win rate, it's really impressive 50 per cent on the.

[noise] total total opportunity, it's still just an absolutely fantastic results. So congratulations.

But but Craig you do know that's based on what we know at this point.

Yes.

How they adjusted and what happens.

Yeah, I know I mean.

That's why your language and the release, it's <unk>, we don't know how these projects ramp we don't know.

Final profitability, so I I I completely understand that as do most of the investors with someone this call. So.

Just because you know later.

You've been waiting a long time for some notes.

And we were able to give you some nose.

And we think we're very pleased with the outcome like I said, we thank you I O U's.

For having their confidence in us.

And.

We're going to perform now so that.

We can continue to grow on this.

Again, congratulations all all about back into the queue now.

Our next question will come from.

<unk> with my advice.

Go ahead.

Okay. Thanks, Congrats on some results from bookings as well a couple of things one.

What happened to execute assuming all these contracts get approved how are you set up from him and put pressure perspective on the execution fried we need to add headcount at executive project managers of Petra and then maybe you can provide some more color on other.

Sending out the communities in terms of the pipeline.

And then what about contacts.

And that's what they're any large renewal.

But you should expect kind of heading into the next 12 noon 12 to 24 months. Thanks a lot.

Okay.

Will break it down into three parts of your question Moshe the first.

We are filled all of the project management in key positions, but we do need to add quite a few staff in fact, and we're making that assessment right now we are lucky that.

These procurement first staggered and some of the start date art until the second half of next Sharepoint.

For us so you're fortunate in the way they have become staggered and we will be able to ramp up.

And a much easier manner.

Then of the title away from work.

So we're hiring right now we feel the key positions.

We don't know how many staff will have to add at this point, but we're guessing 50 ish something like that all in California.

And those will come on over the next.

Three six months.

Second you asked about doing business development activities you wanted further color on that on the East coast, Yes.

Yes.

According to them.

I mentioned a few of the state is Maryland, New Jersey, So what's happened is.

Have picked up on the east coast and we are in.

We are submitting proposals were in interviews is kind of like the same thing we've been telling you about California it shifted.

To the.

Again for Us Californian just about ended when the east coast picked up so we were able to.

It takes a team and the team on the other side of the country then.

Sponsor these opportunities. So we're we're an act of.

Procurement more of that means we've submitted proposals or were in interviews.

And that's about all I can say about that where but I gave you some ideas of New Jersey, Maryland, and some other nursing states.

Is there a reason why I want to find these opportunities.

We know.

So, let's let's take an example.

<unk> looked at right now New Jersey, you'll have the opportunity to bid.

Let's say there is 11 counties in New Jersey.

Been on one to Covid on all 11, and it's a strategic decision you make as to what you bid on.

So that directly relates to the revenue will generate.

And if you get too greedy you could lose it all if you.

Those are those are just the things that get into it.

Spread the work they want to give it to other contractors.

I wanted them to minority business enterprises.

The host of variables there are large.

So.

To tell you what we are trying to tell you what we're doing and we can do that.

Understood and how 'bout renewal supposedly during the next 12 to 18 months.

There's only one that I can think of which is about a 10 million dollar contract with con Edison will come up for renewal likely next year.

That's the only one.

Alright, Thanks, a lot.

Our next question will come from Margaret English Sally.

Please go ahead.

Hi, good evening.

<unk>.

[noise]. So congratulations that's certainly Ah Ah Ah Ah.

A significant amount of success.

<unk> with the Wednesday, I was wondering if you could sort of touch a little bit and thank you for the color on on the the the teaching of what can be expected going into at least on the top like maybe to some degree going into my schedule wondering from eighth be hiring perspective and.

I get it that has been done are there particular areas of of expertise that knee required more more senior folks versus some folks that can be trained how how should we think about maybe what's that it makes it may be and it certainly.

Certainly communicated to diminish some amount of time that you have on your side, but I was wondering if you actually go into that and then maybe how 'bout beds.

The the neighborhood still set my curiosity and the other colors to come.

We're very fortunate that we've been working on these programs.

For in excess of 10 years here in California.

And we've had the opportunity for many of our staff.

To take all sorts of positions from sales too.

Installation too.

<unk> Porsche in the management portions accounting portion so we have.

Rather robust trained staff in California, and just like with you on the East coast. So we're because we've been working there for 10 years.

So as the programs grow with a really management, bringing in highly qualified entry level people.

And train them.

By people, who have been doing it for 10 years. So it's just a matter of getting more people doing what we've been doing.

Does that make sense soon.

Is that a big big.

Big Leap.

You have to yeah, no that makes sense.

Yeah.

That makes sense I was I was wondering if you could talk to <unk> I'm sorry go ahead.

I just can say as part of.

Part of.

The proposal active you have to show your head and keep people in place ready to go on very one that's that's just a requirement and again, we're fortunate that we've been working for a V. I O U's for so long.

And I take us a competitive advantage.

To you it might look like risk.

What to look for is a competitive advantage and we're ready to go.

I can certainly get you just wanted to touch a little bit on what the B E. D. D. It if you could share a little bit more around but the thought process on the the real estate slipped print spelled 140, you certainly touched on this a little bit employer calls and commentary.

And and so I certainly appreciate the D V level Uhm specifics <unk> would you keep it on this call today, especially given me in light of the decisions that you have the 20th so once you talk a little bit of Bob that that thought process, maybe the the things that led you to get there, especially as we're we're showing.

You see that little by little across the copay push the corporate world and and rethinking near the long term.

Yeah, I think I'm looking at it.

They are.

Salaries are people in our facility. So is one area that we can definitely make an impact on and when it comes to cutting costs. It over the past several.

We have deteriorated that we have a lot of pain.

We can get a loft bed without using all the state that we have.

And you wanted to add to our goes maybe forward.

To look at all I needed as they can do it.

Deteriorate that space is that.

Are people really going into that office space and working on a mostly remodel and seeing where we can gain more efficiency.

One of our larger income statement items.

Overhead.

Okay, great. Thank you for the color that.

And that's Catherine our questions I'd like to turn it back to Tom for instance, or any additional I'm closing remarks.

Well just thank everyone for joining us today and.

Have a good day, when we get home or might go further that is.

Maybe we'll know next week so.

Thanks, a lot for being a shareholder in with us.

And it's gonna cause today's conference. Thank you for your participation and you may not.

[music].