Willdan Group, Inc. (NASDAQ:WLDN) Q1 2024 Earnings Call Transcript May 4, 2024

Willdan Group, Inc. 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 First Quarter 2024 Financial Results Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Al Kaschalk, Vice President, Investor Relations. Please go ahead, sir.

Al Kaschalk: Thank you, Kevin. Good afternoon, everyone, and welcome to Willdan Group’s first quarter fiscal 2024 earnings call. Joining our call today are Mike Bieber, President and Chief Executive Officer; and Kim Early, Executive Vice President and Chief Financial Officer. This call builds on our earnings release we issued after market close today. You can find today’s earnings release in the press release section of our website at ir.willdangroup.com. A copy of the slides that accompany today’s call are located in the Events and Presentations section of the website. In addition, our Willdan Investor Report is available under Stock Information section of the same website. 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 include non-GAAP measures. A more detailed Safe Harbor statement is on the cover of our first slide and in our Annual Report on Form 10-K. I will now turn the call over to Mike Bieber, Willdan’s President and CEO, who will begin on Slide 2.

Mike Bieber: Thanks, Al. We had an excellent start to 2024 with solid performance across the Board. Revenue was up 19% organically year-over-year to $123 million. Adjusted EBITDA was up 12% year-over-year to $11 million. We converted our strong Q4 revenue into cash as Q1 cash flow from operations was up 56% year-over-year to $27 million. These metrics are all company records for the first quarter and these were delivered against a tough comparison a year ago when we also had record performance led by a large software license. Kim will go into more detail on our financial results. Today, you’ll hear us talk about new data center load driven by artificial intelligence processing that is adding demand for electricity far faster than most predicted.

This trend is a new catalyst for Willdan’s services. Solid performance over the last 18 months has rapidly deleveraged our balance sheet and puts us in a strong position to pursue strategic acquisitions. I’m proud of our team for delivering another great quarter. On Slide 3, for those less familiar with our business, Willdan helps transition communities to clean energy and a more sustainable future. We have about 1,600 employees comprised mostly of scientists, engineers and other technical professionals. We have 53 offices across North America and help clients avoid 7.7 million metric tons of greenhouse gases. Our customers on the right are about evenly split between government and utilities, while commercial customers make up only 7% of our work.

In Q1, government customer demand for our services remained healthy, continuing the trend we saw last year. We are submitting new proposals to government customers at a record pace for us as new federal funding is beginning to flow to our state and local customers. These clients are also issuing us new work to demonstrate progress to voters in advance of the November elections. On Slide 4, our upfront policy and data analytics work informs Willdan’s strategy. In our upfront work, we see that customers are beginning to rapidly prepare for new electric load on the power grid. I’ll give you some examples of this in a moment. In engineering, we saw strong demand for our municipal services. We picked up new programs that designed for transportation electrification, small local solar generation and municipal building efficiency.

In program management, we entered the year with around $200 million in funded backlog and did a good job of executing here early in the year. I’ll note that at Willdan, while revenue is skewed towards larger program management projects, our profit is delivered about equally from each of the three phases of work. On Slide 5, we had several notable wins this quarter. We added two new Confidential LoadSEER software customers in Q1. One is a major IOU on the East Coast and the other is an IOU in the Western U.S. Building on our work performed for New York City, we added a Comprehensive Regional Climate Action Plan for the city of Chicago this quarter, beating out highly qualified competitors. This study is funded through the Federal Inflation Reduction Act, IRA and is similar to IRA funded climate action plans we’ve recently won in Hawaii, Idaho, New Mexico and the State of New York.

We use data analytics to advise clients on ideal locations for new data centers, optimizing electricity availability, price and other factors. We had a new project this quarter from a large real estate investment firm that is trying to sight new data centers. We also have a group within Willdan, about $10 million a year that provides energy efficiency at data centers across the U.S. We’ve had this group for years. We picked up a new contract with AT&T, one of our long-term customers, providing this service. And in California, we were selected by the Pasadena Department of Water and Power to develop a carbon-free electricity strategic plan. On Slide 6, recent headlines nearly everywhere point towards the rapid electricity load growth caused by AI data processing.

The swift commercialization of AI requires massively more electricity than most people expected. A recent study by the International Energy Agency, IEA, shows the combination of AI and cryptocurrency processing will double data center energy consumption by 2026, just two years from now. On Slide 7. According to the Federal Energy Regulatory Commission, FERC data, over the past year, grid planters nearly doubled the five-year loan growth forecast. The main drivers are investments in new industrial manufacturing and the data center facilities. The map on the right shows that certain pockets in the D.C. area, Southeast, Midwest and West Coast are projecting far more rapid growth than average areas. Lower electricity transfer capability between these regions is a key risk for reliability if low growth outpaces deployment of new generation in certain areas.

Since these forecasts were filed with FERC, Willdan customers like Puget Sound Energy, Duke Energy, Dominion and TVA have stated that their load expectations have grown even higher due to data centers. This indicates that the current FERC load forecast is likely to be an underestimate. Electricity prices last year increased about 18% in California and increased 10% in New York, Willdan’s largest two markets. This compounding effect of higher electricity prices and higher electricity load is providing a new catalyst for Willdan solutions. We’re clearly excited about the energy transition capabilities that we’ve assembled here; planning, software, energy efficiency and engineering. We are in the right market and we look forward to adding even more capabilities through M&A in the quarters ahead.

Kim, over to you.

Kim Early: Thanks, Mike, and good afternoon, everyone. We’re happy to report that our key metrics continue to move in a positive direction. For the first quarter of 2024, contract revenue was up 19% over Q1 2023 to $123 million and net revenue was up 12% to $69 million. The higher revenue reflects year-to-year increases across all our service lines as demand for energy and municipal services remained strong. Double-digit percent increases in program and construction management activities and strong performance in our utility programs were the primary factors behind a 21% increase in revenues in the Energy segment, while revenue from the Engineering and Consulting segment also increased a healthy 13%, reflecting continued strong demand for our services.

Between net revenue and adjusted EBITDA, G&A expenses increased but at a lower rate than the revenue growth. They increased 13%, primarily due to higher wage, employee benefit costs and incentive compensation in support of the expanding revenues, but were partially offset by lower depreciation and amortization compared to a year ago. Interest and other expenses declined by 38% over the prior year quarter to $1.4 million in Q1 of 2024 due to the lower interest rate spread on our credit facilities and interest income earned from the higher cash balances generated from the continuing profitability and improved working capital ratios. Our income tax rate was 25.1% in the quarter compared to 44.8% for the first quarter of 2023. Thus, for the first quarter, net income tripled to $2.9 million or $0.21 per diluted share versus net income of $0.9 million or $0.7 per diluted share a year ago.

Adjusted EBITDA was $11.0 million or 16% of net revenue, up from $9.9 million in the first quarter of 2023. And adjusted diluted earnings per share increased 25% to $0.40 per share versus $0.32 a year ago. It was a record first quarter for Willdan revenues and earnings. Turning to the balance sheet. Slide 9 highlights some of the more important metrics reflecting the continuing strength of our financial condition. Net debt was reduced from $75 million at year-end to $50 million at the end of the quarter as a result of the higher cash balance. That reduction and the strong EBITDA performance enabled us to reduce our leverage ratio from 1.6 times at the end of 2023 to 1.1 times in just three short months. We generated $27 million in cash flow from operations and $25 million in free cash flow for the quarter and ended the quarter with $47 million in cash on the balance sheet to accompany our $50 million unused line of credit.

The first quarter cash flows benefited from the strong earnings and a reduction in working capital due to improved DSO performance in our operating units and the sequential decrease in revenue from Q4 of 2023 to Q1 2024, consistent with the prior year effect. Moving to Slide 10. This solid first quarter performance reinforces our confidence in our 2024 full year financial targets. Net revenue in the range of $270 million to $280 million, adjusted EBITDA of $48 million to $50 million and adjusted diluted earnings per share between $1.80 and $1.87. These targets do not include any potential future acquisitions. Operator, we’re now ready for questions.

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