Q2 2023 Willdan Group Inc Earnings Call

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Good day, ladies and gentlemen, and welcome to will Dan groups second quarter 'twenty to 'twenty three financial results Conference call.

Our hosts for today's call is our cash chalk.

At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session.

I would now like to turn the call over to your host Mr. Gas Jock you may begin.

Yeah.

Thank you Martin good afternoon, everyone and welcome to the old NN group's second quarter 2023 earnings call.

Joining our call today are Tom Brisbin, Chairman and Chief Executive Officer, Jim already Chief Financial Officer, and Mike Theater President.

The call today and builds on our earnings release, we issued after market closed today.

You can find the earnings release and Investor report that accompanies today's call and the press release stock information section of our <unk>.

Investor Relations website.

Management will review prepared remarks, and then well.

On 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.

Forward statements involve certain risks and uncertainties.

It's important to note that the company's future results.

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 for the year ended December 32022.

<unk> cautions investors not to place undue reliance on the Florida statements made during the course of this conference call.

<unk> disclaims any obligation.

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 revenue adjusted EBITDA and adjusted EPS I'll now turn the call over to Tom risen well desk chair.

F C.

Thanks, Al and good afternoon, everyone.

Our second quarter performance was strong.

And here's the momentum we started last year net revenue grew 17% in the second quarter.

For the first six months of this year, we grew revenue by 5%.

All of the growth was organic and across the entire company.

Well there are teams is converting this net revenue growth to profit and cash flow.

For the trailing 12 months ended June 30th EBITDA was $37 9 million the highest level ever.

Our backlog is solid and we are seeing many new opportunities.

Richard as you place your annual reduction we saw from the SCE contract.

These new opportunities include $40 million a nightclub at the New York Power authority of $120 million for one of the nation's largest school district.

$30 million.

While southern California Edison.

$20 million from P. G. P. J D. In a program called Cedar and tend to have from that San Diego gas and electric.

Our policy planning E G III remains very strong.

Provided she can sell into the entire country, helping develop a framework for the clean energy transition.

In addition, each of these asset valuation and market price forecasting practices are growing rapidly.

Large private infrastructure filings are pivoting the portfolio two clean energy investments.

These investments support where they had other capability, especially the city engineering utility programs, great distribution data analytics design and construction management.

Recently, we supported lifestyle infrastructure partners, either to one $5 billion of equity investment and the Northern Indiana Public service company.

Cross selling is working.

We were recently selected by a major health care health care provider with over 200 yourself.

The problem. We are working on is how much of their capital budget is allocated to their decarbonization goals to solve this problem. We're using our consulting services E. III, along with your utility energy efficiency programs and design and construction services.

The CCAR authorization project, it's very similar to the L. I just kind of a project for New York City. They are we creating a $4 billion budget to help decarbonize over 4000 buildings.

The additional engineering and financial services grew 16% year over year and continue to expand margin.

Yes, the penalties are an important customer for us.

And we serve 90% of the cities and counties in California for nearly six years.

We see cities starting to address the carbonization exploring the use of IRA and infrastructure funds.

In times of a recession. It's also the cities they seem to slow down first.

Work with Citi does not show any signs of a recession.

Our broader municipal okay.

Our broader municipal capabilities combined with the labor shortage.

It's creating opportunities for growth.

We're successfully expanding our municipal engineering and financial services and some other states such as Arizona, Florida.

Texas to name a few.

Overall, our portfolio of utility program is performing well.

San Diego gas and electric outreach program is on schedule.

Any change orders to expand work under our small business programs.

Given our PGD public program success, we saw $2 million contract increase for 2023 P. G E.

Extending the contract for 24000 Psi added another $17 million to the contract.

Our restructured SCE Southern California, Edison contracts are delivering a modified FC program goes we're having encouraging implementation discussions and that program has improved operating results.

Our small business program for the Los Angeles Department of water and power.

<unk> worked with the Los Angeles Unified School of history is doing well and the same goes for our utility programs around the country such as.

Puget Sound energy joke in several New York details.

Our software business is having a great year.

The pipeline is robust and are positioned for their best year.

Strategically we see the demand for electric vehicles solar battery, Windpower and electrification driving opportunities for both distribution grid planning and forecasting.

Our software helps utilities plan and optimize their solutions further we're collaborating across the organization by leveraging IAA software with <unk> consulting.

Our performance Engineering group is trying their true strongest production quarters, beginning work for the six largest school district in the U S and advancing production on five new Californian based performing engineering contracts. These wins were based on collaboration with their municipal engineering utility engineering.

<unk> and new construction software capabilities.

Our New York Energy Engineering business saw a contract revenue up 16% over the 2022 periods with an improvement in product profitability.

Our work with the dormitory authority of New York, Tennessee, The New York City housing authority in nature, and New York Power Authority sniper. This group is on track for 50% organic growth in 2023.

They're electrifying extra housing to Decarbonize grid provide better.

Second.

Better load for the rest of it.

In closing.

We expect to finish strong in 2023.

These positive trends to continue next year right.

We're looking to resume acquisitions by late this year early next year.

Our earnings growth strong backlog acquisition, we expect greater than 15% annual growth for the next three years.

As Ken will discuss.

We have increased our 2023 guidance for all financial metrics 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 detail on our financial results and our updated guidance.

Yeah.

Thanks, Tom and good afternoon, everyone.

Tom mentioned Q2 continued extremely strong performance driven by our growth in our utility programs additional software licenses and strength from our municipal services segments as well as expanding revenue from our direct to customer construction management businesses.

As a result, we generated $18 1 million in adjusted EBITDA and $18 9 million in cash flow from operations for the first half of 2023.

Improved earnings providing the fuel to continue to delever the balance sheet, bringing our leverage ratio to two four times adjusted EBITDA, putting us in a position to resume pursuit of strategic M&A opportunities.

We recently closed a small addition to our municipal engineering segment.

Broadens our service offering and we are actively seeking additional acquisition opportunities.

Q2, gross revenue was up 16% and net revenue was up 17% versus Q2 in 2022, we saw a double digit growth as both of our segments with the revenue increase is distributed widely across our service lines.

Q2, gross profit was 29% higher year over year as our gross margin improved to 34% in Q2 of 2023 versus 38% a year ago higher.

The higher margins reflect the restructured, California, IOU contracts strong growth in our municipal engineering revenue and additional software licensing revenues.

Q2, G&A expenses were up modestly versus the same period, a year ago, primarily due to higher employee incentive compensation, resulting from the improvement in income from operations.

The interest expense more than doubled to $2 2 million in Q2 of 2023 due to the unfavorable impact of higher silver interest rates.

Our income tax rate was 38% in the second quarter compared to a credit of 28% second quarter of 2022.

For the second quarter net income was $397000 or <unk> <unk> per share.

This was a loss of $4 3 million or a loss of 33 cents per share a year ago.

Adjusted EBITDA in Q2 of this year was $8 2 million compared to $1 2 million in 2022 and adjusted earnings per share was 26 cents versus a net loss of six cents per share a year ago, a welcome turnaround and should have growing revenues and improved utility contract terms.

In terms of the six months ended June 32023 versus the prior year's.

Gross revenue was up 14% of net revenue was at 20%.

All of that growth was organic led by construction management planning and analysis services and expanding services for our munis client base.

Gross profit increased 30% gross margin improved to 37.

In 2023 compared to 32% a year ago, driven by the higher level of software revenue improved productivity and a favorable service mix.

We realized significant operating leverage in the period SG&A expenses increased only two 1% versus the same period a year ago, while net revenue was growing 20%.

Higher employee incentive compensation due to the improvement in income from operations was partially offset by lower stock based compensation.

Interest expense increased $2 9 million to $4 7 million for the six months ended June 20, <unk> June 32023, compared to the same period, a year ago due to the impact of the higher silver rates.

Income tax expense was one point.

A 43% effective tax rate compared to an income tax benefit of $4 1 million.

Loss in 2022.

The effective tax rate is the result of.

The timing of certain tax adjustments and will moderate towards the high <unk> for the full year as the year progresses.

Year to date net income was $1 3 million or <unk> 10 per share compared to a loss of $8 1 million or 63 cents per share in 2022 <unk>.

Restructuring, California, IOU contracts higher software licensing revenue and improved results throughout the company enables a significant turnaround.

Our balance sheet also reflects the benefits of our improved earnings and higher cash flows at.

At the end of June 2023, our leverage ratio improved significantly to two four times trailing 12 months, adjusted EBITDA and net debt with $89 million.

We feel good about our first half performance as we move into our busy as production periods. We had a strong backlog of projects and higher energy segment, and our engineering and consulting segment continues to enjoy strong growth and improving profitability.

This gives us confidence to raise our 2023 financial guidance.

For 2023, we now expect net revenue growth of 9% to 10%.

Adjusted EBITDA is now expected to be in the range of $38 million to $40 million.

Adjusted diluted EPS in the range of $1 30 to $1 35.

We're assuming a 27, 5% full year tax rate and a diluted share count of $13 7 million.

Our capital expenditures are expected to be in the range of $10 million to $12 million.

We also wanted to note that we are in the process of refinancing our bank credit facilities, which expire in June 2024.

I don't have it through a new three year credit agreement in place by the time of our next quarterly call to facilitate our expected growth.

Operator, we're now prepared to answer your questions.

At this time, we will conduct a question and answer session.

If you would like to ask a question. Please press Star then the number one on your telephone keypad now and you will be placed in the queue in the order received.

Once again to ask a question. Please press Star then the number one on your telephone keypad now.

Your first question comes from Craig Irwin with Roth M. K M. Your line is open.

Evening, guys, congratulations on a really solid quarter here.

Thank you.

So.

My first question is really about gross margins you mentioned a few different in there.

They are working for you can you maybe sort of list them in order of priority as far as margins and.

Any color you could share as far as.

Whether or not those are those factors are likely to sustain over the next couple of quarters or maybe even build from here.

Well I would say in order of.

Magnitude of the impact on improving margins of course is the software revenue is a big factor.

And that had a strong first half and that that's a strong contributor to the higher gross margin that we that we realize and we do.

Our strong backlog of opportunities in that business. So we expect continued.

Our revenue growth in that in that area.

I think the second.

Pat was the restructuring of some of the California, IOU contracts compared to a year ago.

By that additional gross margin.

They want to achieve and that's probably the.

Second biggest factor.

And then third overall I think it's just the expanded volume is kind of a productivity increase across a.

A lot of our municipal engineering.

Planning and analysis work those are that's.

Probably third in order of branch of the impact of that higher margin.

Okay.

And a follow up yeah, just to answer the question about whether or not that sustainable I believe it is all sustainable in fact, some of that volume increase as we mentioned this is going to be.

The second half of the year is going to be our busiest time.

We expect Opex in <unk>.

A M service oriented business those margins to continue to improve.

Okay excellent and then just to continue on the I'm on the line of software right has been the largest impact in the first half SMU D.

And the low tier contract was the only press release contract are in the in the second quarter for integral analytics.

Can you maybe give us some idea on the materiality of this contract is it's sort of a you know a small base of big fish.

You know just.

Something incremental how would you.

Yes.

Yes.

So that was a small fish Greg.

We had a big fish in the first quarter that we press released we didn't announce the name of it because that was confidential, but we have that in the first quarter. So the big.

Fisher said in the first quarter small fishes in the second quarter and we have a very good pipeline.

Oh software opportunities in the back half of the year and going into 'twenty four.

Excellent that's really good to hear.

Follow up question.

Investor perception out there seem to look at the world and is largely benefiting from a utility spending on energy efficiency.

You know your comments on the call.

And some of the meetings, we've done I'm, giving you the impression that that is not the case that utilities are actually a minority of your your drivers right now, but yes, those are great contracts to having great customers.

Are you finding a lot of a lot of activity.