Q3 2024 Willdan Group Inc Earnings Call
Speaker Change: Greetings and welcome to the Wilden Group 3rd Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
It is now my pleasure to introduce Al Kaschalk. Thank you, Al. You may begin.
Al Kaschalk: Thank you, Julian. Good afternoon, everyone, and welcome to Will Deng Group's third quarter Fiscal 2024 Earnings Call.
Speaker Change: Joining our call today are Mike Bieber, President and Chief Executive Officer, and Kim Early, Executive Vice President and Chief Financial Officer.
Al Kaschalk: Our conference call remarks will include both GAAP and non-GAAP financial results.
Reconciliations between GAAP and non-GAAP measures can be found in today's press release.
and in the presentation slides, all of which are available on our website. Please note that year-over-year commentary on variances on revenue adjusted EBITDA and adjusted EPS discussed during our prepared remarks are on an organic basis. We will make forward-looking statements about our performance.
These statements are based on how we see things today. While we may elect to update these forward-looking statements at some point in the future, we do not undertake any obligation to do so.
As described in our SEC filings, actual results may differ materially due to risks and uncertainties. With that, I'll hand the call over to Mike.
Thanks, Al.
We had a record third quarter, exceeding consensus estimates and our own expectations. Contract revenue was up 19% organically and adjusted EBITDA was up 50% year-over-year.
Speaker Change: adjusted the EPS, doubled, and GAP EPS was up more than four times year over year. During Q3, all lines of business were strong.
We continue to do a good job of converting revenue into free cash flow.
Al Kaschalk: Through three quarters, we have generated $2.30 of free cash flow per share. An outstanding result. I'm proud of the team's consistent, excellent performance.
Al Kaschalk: Given our year-to-date results and our continued momentum, we are raising our full-year financial targets, which Kim will expand on later.
We are confident in Will Dan's growth trajectory as we support our clients in meeting critical energy efficiency and decarbonization goals.
Al Kaschalk: Demand for electrical power is rising, along with a heightened focus on energy security and expanded grid investments. On slide 3.
We'll then help transition communities to clean energy and a more sustainable future.
For the first time, we are now over 1,700 employees, comprised mostly of scientists, engineers, and technical professionals. We have 53 offices across North America and have helped clients avoid emissions of 7.8 million metric tons of greenhouse gases.
Wildan's work is a significant contributor to U.S. greenhouse gas reductions, particularly in the densely populated coastal states.
Commercial customers comprise 7%, government customers are now 50%, and utilities are 43% of our revenue.
Demand for our services with all three customer groups is healthy.
Our work for commercial customers has largely been related to energy usage at data centers.
AI-driven load growth is providing Wellden with many new commercial opportunities to help technology clients navigate electricity constraints. We would like to add additional acquisitions that strengthen our capabilities with commercial customers.
Al Kaschalk: Our work for government clients is growing organically at a double-digit pace and has remained surprisingly strong all year and the outlook is positive.
Al Kaschalk: Our work for utilities is primarily under multi-year contracts and remains robust.
I also want to mention California's energy affordability crisis. Since 2019, PG&E's electricity rates have risen 87%, SCE has risen 79%, and SDG&E has risen 41%.
These electricity rate increases have been driven substantially by wildfire preparedness costs due to climate change.
The increases make saving electricity in California more cost effective.
Will Den is the largest provider of energy efficiency services to California utilities and those programs are growing rapidly.
Al Kaschalk: On to slide four.
Al Kaschalk: Our upfront policy and data analytics work informs world and strategy. In our upfront work we are seeing particular demand for integrated resource planning and asset valuation on projects often associated with data center electricity load.
In engineering, we saw strong geographic expansion in Florida and Texas, and continued demand from southwestern city customers.
In program management, we performed above our plan on utility programs and building energy programs for cities.
The right side of this slide provides an example of how the business model works. More than 10 years ago, E3 started decarbonization and energy consulting work for New York City.
That work led to Wilden developing the Implementation Plan for Local Law 97, a decarbonization strategy for many of New York's largest buildings.
This year we have significantly expanded our work with the New York Power Authority, NYPA. To implement those plans developed years before. NYPA has grown to become Wildan's fifth largest client this year.
We are managing NIFA programs that decarbonize, electrify, and make New York's public facilities more energy efficient.
Al Kaschalk: on slide 5.
We had several notable wins this quarter.
We won Phase 2 at Clark County School District, the 5th largest school district in the country. This $103 million contract is for facility energy upgrades.
Al Kaschalk: With SCE, we were awarded a contract expansion for our commercial energy optimization program.
In New York, we were awarded a $9 million public building energy efficiency contract with NYPA, one of several NYPA projects we've been awarded this year.
We won several contracts in civil engineering, including two contracts with the City of Phoenix and Bellflower.
Recently we have also won several regional and state climate action and T&E studies.
Al Kaschalk: Turning to slide 6.
Al Kaschalk: We expanded our highly differentiated commercial energy consulting business with the acquisition of Eneca Engineering. Eneca is a trusted engineering advisor, providing energy, operations, and building automation solutions.
Their client base includes global pharmaceutical companies Regeneron and Novartis, private health care providers such as Sloan Kettering, and higher education research institutes such as NYU.
Al Kaschalk: Consistent with our strategy to expand our commercial capabilities, Anika is expected to generate about $10 million in revenue in 2024 and be accretive to 2025 margins, earnings, and EPS.
Speaker Change: On slide seven.
Electricity load growth is creating exciting new opportunities for Wildand and we believe will help drive our growth for years to come.
Speaker Change: On the left side of this slide
For the first time in many decades, material electricity load growth has started to occur in the U.S. Experts are uncertain about the future speed and scale of this load growth, but there is widespread consensus now that higher load growth will occur and has already begun.
Al Kaschalk: The main drivers for this growth include the electrification of cities, buildings and transportation, the reshoring of industrial manufacturing facilities in the U.S., and electricity consumed by data centers powering AI.
The map on the right shows that AI is expected to drive more power demand from data centers in certain pockets of the U.S.
Al Kaschalk: The D.C. area especially, the southeastern United States, Midwest, and the West Coast are projecting far more rapid growth than average areas.
Low electricity transfer capabilities between these regions is a key risk for reliability, particularly as electricity load shapes change.
Speaker Change: I'm excited to share that we are nearing the release of a significant enhancement to our LoadSphere grid planning software.
We have integrated artificial intelligence into LoadSeer's new API and are poised to launch new products that are quicker to deploy and scalable beyond the large investor-owned utilities.
This advancement allows us to penetrate new markets, creating value for smaller co-op utilities, municipalities, and virtual power plant owners. The new AI version also provides computational power for complex scenarios not possible to model today.
Al Kaschalk: Subs by www.zeoranger.co.uk
Speaker Change: We're excited about the energy transition capabilities that we've assembled, planning, software, energy efficiency, and engineering. We plan to add even more capabilities to future acquisitions in the quarters ahead. Kim, over to you.
Thanks, Mike, and good afternoon, everyone.
Kim Early: Slide 8 shows our key metrics for our third quarter performance. We delivered $158 million in contract revenue, up 19%, and net revenue, net of subcontractors and materials, of $76 million, an increase of 16%.
Al Kaschalk: Adjusted EBITDA increased 50% over the prior year to $15.2 million as we benefited from higher utility revenues and project management activities, as well as G&A expenses which increased at a slower pace than our revenue grew.
With reduced net interest costs and an exceptionally low tax rate, our adjusted earnings per share nearly doubled to $0.73 per share.
The third quarter results were favorably impacted by growth in municipal engineering, project management revenues, and expanded utility program management revenue.
Al Kaschalk: Lower leverage and higher cash balances reduce net interest costs.
Al Kaschalk: and discrete impacts related to building energy incentives and stock-based compensation aided in lowering the effective tax rate for the quarter to only 2%, driving a substantial bottom-line improvement for that quarter compared to last year.
Turning to slide 9. For the nine months to date, we generated $422 million in contract revenue and $217 million in net revenue of 19% and 15% respectively.
The revenue mix resulted in a slightly lower gross profit margin versus last year.
Al Kaschalk: But higher activity from our construction management projects, expanded utility programs, and higher municipal engineering services resulted in a 38% increase in adjusted EBITDA, to $39.1 million for the nine months.
compared to 28.2 million last year.
The increased adjusted EBITDA, reduced net interest expense, and the lower effective tax rate enabled adjusted earnings per share to grow by 79% to $1.70 per share.
From a balance sheet perspective, on slide 10.
Our net debt balance at the end of the quarter was $39 million, down from $75 million at year-end 2023, reflecting the strong earnings and efficient working capital management, resulting in a net leverage ratio
Al Kaschalk: meaning total debt less cash, of 0.7 times the adjusted EBITDA. This is down nearly one full turn from the 1.6 times in December 2023.
Double-digit earnings growth and an increase in non-cash working capital contributed to $38.6 million in net cash provided from operations through the first nine months of the year, up from $24.1 million a year ago.
Our total liquidity was $103 million and included our $50 million untapped line of credit and $53 million cash balance.
Al Kaschalk: We've begun to deploy this liquidity to enhance our growth and future potential through acquisition as exemplified by the acquisition of Enica Engineering.
We're excited about the expanded skills, broader customer base, and the potential synergies that Anika brings to our energy segment, and the prospects for additional acquisitive investments to broaden and strengthen WellDAN.
Al Kaschalk: In terms of our guidance on slide 11
Recall that the fourth quarter of 2023 was a record quarter for Will Dann in terms of the revenue and EBITDA.
In that quarter, we delivered on our client's request for expanded energy efficiency services, which we estimated would be a $15 million headwind to comparisons of 2024 and 2023 Q4 net revenue.
Al Kaschalk: and a $3 million headwind to those same adjusted EBITDA comparisons.
Al Kaschalk: Based on our year-to-date performance and the continued momentum, we are raising our full year guidance. We now expect net revenue between $285 and $295 million.
Al Kaschalk: Adjusted EBITDA between 52 and 54 million and adjusted diluted earnings per share between $2.15 and $2.25
Al Kaschalk: assuming a full year tax rate of about 14% and 14.2 million shares.
Operator, we're now ready to take questions.
Speaker Change: Thank you.
Speaker Change: We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
You may press star two to remove yourself from the queue. We do ask that you please limit yourselves to one question and one follow-up. For further questions, you may re-enter the queue. Thank you. One moment while we poll for questions.
Speaker Change: And our first question comes from Craig Irwin, Roth Capital Partners
Craig Irwin: Good evening. Thank you for taking my questions.
Speaker Change: away from renewables or maybe a little bit more enthusiasm could be seen actually across the
the federal customer base and the states as well in the other potential outcome.
You know, can you maybe unpack for us the sensitivity of Wildan to federal policy, or do you see more of an impact from state policy?
and state support for different programs. And, you know, if we did see a change in administration, is there maybe an incremental opportunity on some of the consulting work that you do as, you know, grid planning and, you know, renewables planning maybe takes a different path.
Speaker Change: Thanks for watching!
Speaker Change: Yeah, great. Great question.
We have always said that state policy dominates the type of work that we do and it actually dominates Most of the electricity decisions made in the United States right now So the public utility commissions in those states make those types of decisions
Speaker Change: With regard to federal policy, we've sort of seen this show before. Business was good under the Trump administration.
Speaker Change: and business was good under the Biden administration.
Speaker Change: Kamala Harris administration. So we've seen them both.
Speaker Change: Business was healthy under both.
You're right though, the dominant amount of policy fluctuations we see really affect the state, at the state level and not the federal level.
Excellent. So my next question is, you know, another big picture question. Rising energy prices are something on all state governors' minds, right? You know, if they're Republican or Democrat, it really doesn't matter. Energy costs are pressuring consumers.
Speaker Change: Are you seeing any change in attitudes around
Speaker Change: utility commissions as far as holding utilities accountable.
Speaker Change: for the implementation of their energy efficiency programs and efforts to control prices, particularly given that the very strong low growth that we're seeing from AI and data center demand.
Speaker Change: Yeah, it's a big issue with the Public Utility Commissions. For the first time, we've seen a number of rape cases that were not approved by the PUCs. We've seen that around the country, where rapes were proposed to increase and the PUC pushed back.
Speaker Change: We've also seen increased focus on saving electricity, as you mentioned, the importance of electrical efficiency.
Speaker Change: becomes more valuable as electric prices rise. So places like California, as an example.
Speaker Change: Now have electricity prices
Speaker Change: Just behind Hawaii. They're the second highest in the nation right now.
And so the value of energy efficiency in California increases. We're seeing that around the country as well.
Speaker Change: Okay, and then my last question, if I may.
Speaker Change: I know, it's a little tricky to...
You know, when you haven't put out guidance for 25, right?
Speaker Change: everybody's going to be scratching their heads and saying you know you've had well over 10% growth in 24.
Speaker Change: And, uh, you know...
You've always been careful in the way you give guidance and, you know, spoken pretty much consistently about a, you know...
a growth outlook that I think is achievable.
Speaker Change: You know, is it possible we see something north of 10% growth in 2025 on an organic basis?
Speaker Change: I mean, is there potential for similar results, similar growth in net revenue for 2025 to what we actually saw reported in 2024?
Speaker Change: It looks like we'll see Reported in 24, I guess is the way it is.
Speaker Change: to clarify.
Speaker Change: I'll stick with the answer that we've been providing all year long, which is if you're modeling 2025, assume you know a high single-digit organic growth rate, seven, eight, nine percent. Seems more reasonable.
Speaker Change: We haven't changed our tune on that. Having said that, yes, it's possible that we could exceed that. We'll announce guidance really five months from now.
Speaker Change: in early March of next year. So we haven't done the bottoms up yet. We don't quite know exactly what that looks like.
Speaker Change: So, we'll stick with our answer of, you know, high single-digit organic growth rate. I think that's a more reasonable assumption and gives us a chance to beat that. As we have all year this year, it's been a great year. We're on a tear.
and we're doing exceptionally well.
Speaker Change: Well, I look forward to continuation of this trend and congratulations. It's just another really solid quarter.
Speaker Change: Thanks, Creighton.
Speaker Change: Thank you. Our next question comes from Jay McAnals, Wedbush Securities.
Speaker Change: Yeah, great question, Jay. To put this in context...
Speaker Change: Five years ago, between Florida and Texas, I want to say we had maybe ten employees at Little Den working.
Speaker Change: Today, that number is in excess of 50 and it's our fastest growing area. We are hiring in both of those states. There's enormous growth at the state and local level for the services that we provide.
Speaker Change: They work around Texas, providing work around the state, and in Florida, most of that's in northern Florida right now, up around the Orlando area.
Speaker Change: We're doing a bit of work in Florida
Speaker Change: under framework contracts to help rebuild after the last two hurricanes. We're seeing some opportunities there under existing contracts that we already had in place with several of the cities there. It's a relatively small part of the business right now, but it's rapidly growing and we're hiring those states.
Speaker Change: That's great.
And then maybe talk also about the Anika Acquisition, what other types of acquisitions might be on the horizon and I think you said for Anika, this helps expand your opportunities in commercial. Is that kind of the line you want to be heading down is more opportunities there, especially
Data Warehouse that is coming online and requiring more power.
Yeah, another great question, Jay. We're really happy that the NFF team has joined us.
Speaker Change: seven percent of our revenue right now
Speaker Change: It is focused on the commercial sector. It's underweighted in our portfolio. We'd like to further diversify by
Speaker Change: increasing that commercial area.
Speaker Change: Anika will help with that by a percentage or two.
Speaker Change: We would like to add other acquisitions that focus specifically on the data center opportunities we're seeing. And we've got a good pipeline of those, so more news to come on that. It's an area of investment, one of the several areas we'd like to invest in.
Speaker Change: It's front of mind though because that's only 7% of the business and we're seeing enormous opportunity there with some of the big tech players and the work that's done around providing power to these large data centers.
Speaker Change: Great.
Speaker Change: And then, could you talk to, and congrats on raising the guidance, just maybe again walk through what you're thinking in terms of...
Speaker Change: Where that revenue, the revenue growth that's going to come from, is it mostly going to be on the government side or maybe just give us a little more depth there on how those targets are moving up please?
Speaker Change: Hmm.
Speaker Change: State and local has actually been the
Speaker Change: The standout in terms of customer segments thus far, I think that's going to continue.
Speaker Change: We're also going to have a very strong quarter this year in Q4.
Speaker Change: with utility revenue. Kim, can you think of anything else there? No, that's, I think that's right. It's pretty broad-based. We have remained growing faster in that state and local government side where we're working directly for
Speaker Change: for the cities, both in terms of the engineering work that we're doing and the energy efficiency work that we're doing in the building, so that it has been a standout, but it's pretty pretty broad-based across all of our customer base.
Speaker Change: Thanks for watching!
Speaker Change: Okay, great. That's all I have. Thank you.
Speaker Change: and the New York Times. Thanks for tuning in. We'll see you next week.
Speaker Change: Thank you. Once again, if you would like to ask a question, please press star 1 on your keypad, and you can press star 2 to remove yourself from the queue.
Speaker Change: Okay, well if there are no further questions at this time, I would like to turn the floor back to Mike Bieber for closing remarks.
Mike Bieber: Great, I just want to thank everyone for following us and being a shareholder of Wild Ant. We'll talk to you when we announce our Q4 earnings and that will be in March of next year along with our 2025 guidance at that point. So, talk you then.
Mike Bieber: Thank you.
Speaker Change: Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.
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