Willdan Group, Inc. (NASDAQ:WLDN) Q4 2023 Earnings Call Transcript

Willdan Group, Inc. (NASDAQ:WLDN) Q4 2023 Earnings Call Transcript March 7, 2024

Willdan Group, Inc. beats earnings expectations. Reported EPS is $0.585, expectations were $0.35. WLDN isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Willdan Group Fourth Quarter and Full Year 2023 Financial Results Conference Call. [Operator Instructions] At this time, I’d like to turn the call over to Al Kaschalk. Please go ahead, Al.

Al Kaschalk: Thank you, Kevin. Good afternoon, everyone, and welcome to Willdan Group’s fourth quarter and full year fiscal 2023 earnings call. Joining our call today are Mike Bieber, President and Chief Executive Officer; and Kim Early, Executive Vice President and Chief Financial Officer. 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 and press release in the Stock Information section of our Investor Relations website. In addition, we have prepared a slide presentation to go along with today’s financial results conference call. The presentation is available under the Events section of the Investor website.

Management will review prepared remarks, and we will then open the call up to your questions. Statements made in the course of today’s conference call, including answers to 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. 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. 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 the investors’ ability to analyze the business trends and performance. Our non-GAAP measures include net revenue, adjusted EBITDA and adjusted EPS. I’ll now turn the call over to Mike Bieber, Willdan’s President and CEO.

Mike Bieber: Thanks, Al, and good afternoon to everyone. Let’s begin on Slide 2. We had an exceptional fourth quarter. Revenue, profitability and cash flow were above our expectations and the analyst expectations aided by end-of-year program expansions. Strong performance throughout Willdan capped a record year and with an expanding backlog position us for another strong year in 2024. I want to take a minute and talk about Willdan and our market positioning. We’ll then transition communities to clean energy and a sustainable future. Today, our revenue is 84% energy-focused and 16% civil engineering-focused. In 2023, Willdan net revenue grew organically by 19% overall. We delivered 20% organic growth in energy and 16% organic growth in civil engineering.

By customer type, 47% of our work is from state and local government. We don’t yet serve the federal government. Utilities comprised 46% of revenue with 7% from commercial customers. We are a professional services company, helping customers solve problems with knowledge and software. We help make America’s clean energy transition more affordable for communities because of the funding sources of our projects, electrical user fees and government funding. Our business model is resilient and generally less impacted by economic cycles and inflation. We demonstrated this strength throughout 2023 capped by an excellent fourth quarter. On Page 3 of the slides, a customer’s challenge typically starts with our policy consulting analysis software and data analytics services, which provide a highly technical road map to a solution.

This upfront consulting work also informs Willdan’s strategy. We are agnostic to the generation source: solar, wind, battery, gas, nuclear. And we help integrate energy generation and energy efficiency into the local grid at the least cost. Our engineering services typically come next and often include financial consulting work and rate studies to help fund a customer’s project. After engineering design, our program management capabilities manage the delivery of a program on behalf of our customers. We see smaller, higher-margin projects at the top of this pyramid, while larger, longer-term projects are normally at the base. Let me give you some additional color on our markets and the opportunities we are seeing. In 2023, we talked about our goal to grow our consulting, software and data analytics business.

We did that successfully and entered 2024 with a robust pipeline that supports significant new software wins we anticipate in the first half of 2024. Our engineering business grew 16% organically in 2023, and much of this work is for state and local government customers. Counter to the fears about slowdown here, we have seen strong organic growth and are carrying that momentum into 2024. The biggest change to our business in 2023 was the recovery of program management work that had slowed during COVID. This work improved throughout the year as supply chain concerns became more manageable. Our program management backlog is at a record-high entering 2024 and is expected to drive strong performance. Each of these three areas is strategic to our model and provides us with a competitive advantage.

The upfront policy clients want to know about practical constraints we’ll then seize in engineering and program management. Engineering and program management clients want to know about policy and planning shifts that might affect their programs years later. On to Page 4. I want to provide you with a partial list of wins since the last earnings call. These include, at the top of the table, a $46 million program for Clark County School District, Base provides energy upgrades to about 1/3 of their schools. This program was two years in development and by a strong backlog for us entering 2024. Phase one will be mostly complete this year and there is an additional $100 million of opportunity with this client that we are developing for next year.

Next, the decarbonization strategies for the building portfolio of a national health care provider. This win is one of our most exciting opportunities in the next several years and touches over 1,000 hospitals and health care facilities for one of America’s largest health care providers. Next, we’ve won a $30 million to $50 million New England utility program for energy efficiency and program management. This new win that is being announced today is our first large anchor program in New England. The energy efficiency program addresses a wide variety of New England energy users, including small and large businesses, industrial facilities, multiuse buildings and municipal infrastructure. The contract is expected to ramp up through 2024 and is expected to continue its growth in 2025.

Next, the $18 million Puget Sound contract, is the seventh consecutive time; and Con Ed, the $16 million contract, is the fifth consecutive time we’ve won those important recompetes, indicating the success of those programs. We’ve also won a major Western utility grid planning contract and two smaller municipal utility software and planning services contracts. These new wins on top of our other multiyear contracts position us well to continue mid- to high single-digit organic growth in 2024. Kim, over to you.

Kim Early: Thanks, Mike, and good afternoon, everyone. As Mike said, our fourth quarter provided a very strong finish to an exciting and productive year, resulting in record-setting performance and establishing a firm foundation for continued momentum in the new year. The fourth quarter results reflect the highest level of quarterly and annual contract net revenue, gross profit and operating income in the Company’s nearly 60-year history. Looking on the right side of your presentation and moving to Slide 5. For the fourth quarter of 2023, contract revenue was up 37% over Q4 2022 to a record $155.7 million, and net revenue was up 25% to a record $80.8 million. The increase was fueled by some exceptional opportunities to over-deliver target quantities on some of our utility programs, providing approximately a $20 million contract revenue boost and a $3 million adjusted EBITDA boost to the quarter.

The quarter also reflects significant year-to-year increases across our service lines as demand for energy and municipal services remains strong. The growth in revenues was accompanied by a solid 35% gross profit margin for the fourth quarter, while G&A expenses increased only half as fast as revenues as lower stock compensation, depreciation and interest accretion on earn-out liabilities partially offset higher wages and incentive compensation derived from the improved profitability. Interest expense increased 9% over the prior year quarter to $2.3 million in Q4 of 2023 due to the higher interest rates, and our income tax rate was 19.5% in the fourth quarter compared to an extraordinary tax rate of 120% for the fourth quarter of 2022. So, for the fourth quarter, net income was $8.0 million or $0.58 per diluted share versus a net loss of $425,000 or a $0.03 loss per diluted share a year ago.

Adjusted EBITDA in the fourth quarter was $17.5 million, up 48%, over the $11.8 million for the fourth quarter of 2022. Adjusted earnings per share in Q4 of this year was $0.80 versus $0.36 in Q4 a year ago, mainly reflecting the increase in pretax income. In terms of the full year, move to Slide 6. Slide 6 shows that 2023 continued the pattern of double-digit annual organic growth since the emergence from the COVID restrictions. Contract revenue for 2023 increased 19% over 2022 to a record $510 million, and net revenue also increased 19% to $270 million with solid growth across all our service lines. Double-digit percent increases in program management activities and our utility programs were the primary factors behind the higher revenues in the Energy segment, while revenue from Engineering and Consulting Services also grew a robust 16%, reflecting increased demand for our Municipal services.

Right-clicking again, on Slide 7, you can see that adjusted EBITDA nearly doubled in 2023 to $45.7 million, and our adjusted earnings per share also nearly doubled to $1.75 per share compared to $0.88 a year ago. Gross profit in 2023 increased 25% to $179.8 million, and gross margin expanded to 35% from 33.5% a year ago driven by higher software licensing and improved performance in our restructured California IOU contracts, tempered by higher revenue from construction management activities, which carry a lower margin profile. We realized further operating leverage in 2023 as G&A expenses increased only 5% versus the same period a year ago, while net revenue grew 19%. Higher employee incentive compensation, consistent with the improvement in income from operations and increased costs related to employee benefits, was partially offset by the lower stock-based compensation and lower interest accretion on earn-out liabilities, which have now all been satisfied.

Interest expense for the year increased by 77% to $9.4 million in 2023 compared to the same period a year ago, primarily due to the higher interest rates. Income tax expense was $3.7 million or an effective tax rate of 25.1% compared to an income tax benefit of $3 million on the loss in 2022. For 2023, net income was $10.9 million or $0.80 per diluted share compared to a loss of $8.4 million or minus $0.65 per diluted share in 2022. Improved results throughout the Company enabled a significant turnaround. On Slide 8, highlights of some of the important metrics reflecting our significantly improved balance sheet and financial condition are presented. With $39.2 million in cash flow from operations and $29.3 million in free cash flow for the year, our leverage ratio of net debt, net of our $23.4 million year-end cash balance, improved significantly to 1.6x trailing 12-month EBITDA from 4.3x at the end of 2022.

Net debt was $75.1 million at the end of 2023, a reduction of $24.1 million over the course of the year. With the refinancing of our bank credit facilities and our new three-year credit agreement, no outstanding borrowings under our $50 million revolving credit facility to a leverage ratio below 2.0, and we’re well positioned to pursue strategic acquisition opportunities. Moving to Slide 9, it provides our financial guidance for 2024. We’re expecting contract revenue of $525 million to $540 million and net revenue in the range of $270 million to $280 million. Adjusted EBITDA is expected to be in the range of $48 million to $50 million for the year and adjusted earnings per share is expected to be in the range of $1.80 to $1.87 per share, assuming the 25% tax rate and 14.2 million shares outstanding.

This guidance does not include any potential future acquisitions. Mike, back to you.

Mike Bieber: Thanks, Kim. In summary, solid execution in the fourth quarter has capped a record year for Willdan. We’ve broken through the $0.5 billion revenue mark and have strong momentum and backlog entering 2024. Demand for our services remains healthy as our clients try to navigate America’s energy transition. Strong operating results have now delevered our balance sheet, so we are resuming our acquisition program. We now have a growing pipeline of potential deals that we are cultivating. Willdan is in the right market and we now have the means and opportunity to build a multibillion-dollar world-class company. Operator, we’re now prepared for Q&A.

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Q&A Session

Operator: [Operator Instructions] Our first question today is coming from Moshe Katri from Wedbush Securities. Your line is now live.

Moshe Katri: Congrats on very strong and solid results. So maybe we can start by talking a bit about the pending deal pipeline. What are you seeing there in terms of maybe if there’s any way to kind of compare the current deal pipeline versus where it was a year ago, including software, obviously, and then maybe talk about the nature of the deal flow and visibility?

Mike Bieber: Sure. We’re continuing the momentum we built up in the back half of the year and especially the fourth quarter, Moshe. It looks really good. With respect to software, I specifically called that out. We just attended our big DISTRIBUTECH conference and met many customers that are in the pipeline that looks very good, and we’re optimistic that we’ll have some significant announcements there in the first half of this year. So that looks very good. The pipeline here continues to grow and I would say, it supports that type of 10-ish-percent type growth that we saw last year.

Moshe Katri: Okay. And then the nature of the deal flow, is there anything different in terms of what you’re being asked to do by clients?

Mike Bieber: The grid is becoming more complex. And as nuclear plants retire, especially coal-fired power plants retire, that complexity is causing them to choose a lot of software solutions, which are required. You can no longer analyze these problems with spreadsheets. And a lot of consulting services that are required. So those are the areas I’d point out. The other is that as the cost of energy goes up, the value of energy efficiency that we provide also goes up. So those programs are robust as well, as you saw from the big win that we had in New England.

Moshe Katri: Yes. Sounds good. And then just a couple of questions related to the guidance. What’s embedded in the model from the recent credit refinancing versus maybe some of the expenses before that?

Kim Early: Well, I’m not sure what you mean by that, Moshe. I mean, the interest rate table, I mean the spread provides us the opportunity to lower the rates, particularly over what the spreads were for us in most of 2023 and 2022. So, by reducing the leverage, we can reduce the spread over the SOFR numbers. But there isn’t a whole lot of difference in any of the costs related to the agreement beyond the interest expense.

Moshe Katri: And what’s the delta between what it was and where it’s expected to be in 2024?

Kim Early: Well, our interest rate here in the first quarter compared to the fourth quarter will be about 1% lower annually. In the course of the year, I’m expecting the interest expense, the net interest expense, to be probably at least $2 million lower than it was in 2023.

Moshe Katri: Okay, $2 million. And then how does the year look like in terms of first half versus the second half in terms of net revenue contribution?

Kim Early: Yes. I think this year, it’s about 60-40 back half to front half and it’s not quite as back-end loaded as 2023 was, which was closer to maybe 70-30 kind of a split. This will be a much smoother transition. It won’t have quite as steep a hockey stick into the fourth quarter as maybe we’ve seen in the past.

Operator: Our next question is coming from Craig Irwin from ROTH MKM. Your line is now live.

Craig Irwin: Congratulations on another impressive quarter. It’s something happening routinely now. So actually, Mike, I wanted to ask specifically about the character of the business. This past year, it seems that there’s been a fairly substantial shift the volatility or, I would say, the lack of volatility compared to what we saw over the prior couple of years. Can you maybe talk us through about what’s becoming more predictable, what’s working for you with your customers that eliminate some of this downside volatility that we’ve seen? I’m not saying that it can’t happen again, but you’ve repetitively surprised everybody to the upside with some very healthy numbers and healthy profitability. What’s changed that’s delivering this in the business?

Mike Bieber: Well, thanks, Craig. Willdan should be a very predictable business. And we were that from 2015 to 2019, very predictable. And that is because of the nature of our long-term engagements with clients and the funding sources that fund our projects. They tend to be very resilient and consistent. The difference was the volatility you saw with COVID and the start-up of the California IOU contracts. Barring those the events, we should be a very consistent producer results, and you saw the resumption of sort of our performance prior to COVID this year, and we’re expecting that to continue into next year.

Craig Irwin: That’s excellent news. So then, can you talk us through a little bit of the success with Integral Analytics this year? How has overall momentum for this business? And can you maybe share with us what the fourth quarter and full year contribution both on a revenue and EBITDA basis was from this business?