Q1 2024 Willdan Group Inc Earnings Call

Participants

Al Kaschalk; Vice President, Investor Relations; Willdan Group Inc

Michael Bieber; President, Chief Executive Officer, Director; Willdan Group Inc

Creighton Early; Chief Financial Officer, Executive Vice President; Willdan Group Inc

Moshe Katri; Analyst; Wedbush Securities Inc

Craig Irwin; Managing Director, Senior Research Analyst; Roth Capital Partners LLC

Presentation

Operator

Hello, and welcome to the WorldGate Group First Quarter 2024 financial results conference call. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation and you may be placed in the question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded.
And it's now my pleasure to turn the call over to Al Castro, Vice President, Investor Relations. Please go ahead, sir.

Al Kaschalk

Thank you, Kevin, and 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 Hurley, 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 dot dash group.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. Forward-looking statements involve certain risks and uncertainties and include non-GAAP measures, a more detailed set of detailed safe harbor statements 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 Beaver, Williams, President and CEO, who will begin on Slide 2.

Michael Bieber

Things that 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 financials. Today, you'll hear us talk about new data center loaded, driven by artificial intelligence processing that is adding demand for electricity far faster than most predicted. This trend is a new catalyst for Willdan services. Solid performance over the last 18 months has Rockford 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 will then help transition communities to clean energy and a more sustainable future. We have about 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 in forms Willdan 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 efficiencies and 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 I will Dan. 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 load SEER software customers in Q1. One is a major IOU on the East Coast and the other is an IOU in the Western US 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 our 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 in 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 added a new project this quarter from a large real estate investment firm that is trying to site new data centers. We also have a group have been whittled down about $10 million a year. It provides energy efficiency, add data centers across the US. We've had this group for years. We've picked up a new contract with AT. and 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 a higher 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 a I have 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 for data over the past year, grid planners nearly doubled the five year loan growth forecast. Main drivers, our investments in new industrial manufacturing and the data center facilities. The map on the right shows that certain pockets in the DC area, Southeast Midwest and West Coast are projecting far more rapid growth than average areas load electricity transfer capability between these regions is a key risk for reliability. If load growth outpaces deployment of new generation in certain areas since these forecasts were filed with Spark will then customers like Puget Sound Energy, Duke Energy, Dominion and TVA have stated that their load expectations have grown even higher due to data center. This indicates that the current firm load forecast is likely to be an underestimate electricity prices last year increased about 18% in California and increased 10% in New York will then 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 markets and we look forward to adding even more capabilities through M&A in the quarters ahead.
Kim already.

Creighton Early

Thanks, Mike, and good afternoon to 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-over-year increases across all our service lines as demand for energy and municipal services remains strong. Double-digit percentage 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 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 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 $0.07 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 $0.4 per share versus $0.32 a year ago 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 higher cash balance, debt 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. 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.

Question and Answer Session

Operator

So I will now be conducting a question-and-answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. One moment, please while we poll for questions. Our first question today is coming from Moshe Katri from Wedbush Securities. Your line is now live.

Moshe Katri

Thanks.
Nice results, guys. So as all the metrics are moving in the right direction, obviously, I wanted to talk a bit about the deal pipeline, both for software and services. Maybe we can talk about.
Yes, directionally, I'm assuming it's higher, but what do we have in terms of near term software and services and then six to 12 months from now? And is there any way to kind of quantify that?

Michael Bieber

A good question motion.
We've certainly ramped up those efforts and are actively in the marketplace. And I'm in negotiations, we have a pretty good pipeline. I would say at this point of both the services technical services we've mentioned we want to invest in and done some software companies we're looking at and they're really in, I'll call it four areas, first, waste to energy where we have a good customer base, but no capabilities right now electrical engineering, where we subcontract a lot of that work out and done our light on that technical capability, the front end consulting where our last acquisition was E. three and as you mentioned the analytical software space, those are the four areas that we're looking at and data looks pretty good except fractured market. There are a lot of opportunities and we're picking through them to find the right match for Willdan.

Moshe Katri

Understood. And then was there any software contribution during the quarter in terms of revenues?

Michael Bieber

There was a motion. We had two software sales I've pointed out, there's one on the East Coast and one on the West Coast. They're both confidential clients, so they didn't wishes to release their name. That's why we didn't press release them and it's good contribution and we didn't break out the revenue number, but a good contribution just like we saw actually a year ago last year where we had that big Exelon contract.

Moshe Katri

Right.
And then final point, obviously, there's going to be a lot excitement about your commentary related to incremental data center load due to AI data processing and crypto, is that already kind of resulting in incremental kind of deal flow coming through?
Well, Dan, or this is something that happens down the road around those results. Kind of those trends kind of reflect and better kind of deal flow.

Michael Bieber

I'll say are already starting to occur.
One of our technical people was at a conference just two days ago where utilities were contesting the load growth they are already seeing on their networks. So this has started. I met with two utilities over the last two weeks and also had that kind of discussion about increased load growth and how they need to reconfigure their programs, their forecasts of some of their software, all to prepare for this pretty rapidly changing environment. So it's starting to occur, and I don't think it was expected even several months ago.

Moshe Katri

Understood.
Thank you.

Operator

As a reminder, that's star one to be placed in the question queue.
Our next question is coming from Craig Irwin from Roth and Kim, your line is now live.

Craig Irwin

I think you have my congratulations. And now on another solid quarter here, it's nice to see this this trajectory, 19% growth organic growth in the quarter is a really solid number. So you did mention the CI. two unnamed contracts from Integral Analytics. But can you maybe talk us through anything that went extraordinarily well this quarter or are we looking sort of mid 10s organic growth as something that might repeat this year? And then I guess as a last part of this question. You know, you guys have been conservative about your guidance for the last several quarters and what are your what are your feelings or what would you need to see to acknowledge a growth rate that might be a little better than the top end to 80, like you suggested in your forecast for the net revenue?

Michael Bieber

Yes, great question, Craig hub First, organic growth, it was a little higher than even we expected and it was good across the board in addition to those software sales, really all of the units did a little better than we than we expected, and it was right out of the gate. It wasn't from any one contribution that we saw this kind of performance I would say right now that our guidance does not reflect that kind of growth rate, and we're going to stick with our guidance at this point. We had a great Q1 it's still just early in the year. That's all because only a couple of months ago when we announced guidance to you. So we'll see how the year unfolds. But we really started out well, it was across the board. We've got good business drivers and we'll revisit guidance again next quarter.

Craig Irwin

Excellent. Excellent. And then my second question is about hiring and training. Of new employees with this with this nice organic growth that you've had with the of the strength you're starting to show again in software business. And, you know, it's not just Integral Analytics, but C. three, it's multiple things that are working for you. You know, what's your experience out there as far as I'm hiring employees with the necessary skill sets and the opportunity to bring them in and train them. I mean, do you need to maybe increase your hiring and plan for and necessary employment levels over the next couple of years?

Michael Bieber

We are increasing our hiring consistently hiring, but it has not been a major impediment to our growth. We have a good reputation and we're a good place to work. We are attracting a lot of new graduates, especially out of graduate schools who want to join us. We're attracting a lot of people from private equity firms who don't like that kind of environment. We're hiring directly from our competitors that way, and I don't know of a number of people who joined us just this past quarter and fall into both of those camps we've also been able to hire directly from our customers in both out of the government and out of the utility. So all three of those sources are where we're finding our people hasn't been an impediment, and I think we're in a good spot to be able to continue to recruit recruit that kind of talent to keep up with this growth.

Craig Irwin

Excellent. And last question is cash flow, right? Your cash from operations, almost $27 million in this quarter. You take a look in the ancient history to see if there was anything ever this high in the first quarter, but I doubt it.
And can you maybe talk about cash needs for this year? Do you see investments in working capital or other items or is this new sort of discipline that you're bringing to the whole organization, just squeezing the balance sheet for cash and giving you an opportunity maybe operate a little leaner.
While we're certainly trying to do that.

Creighton Early

And we've had some success in that. We've been working at that for a while and we're able to reduce that DSO level that we've got invested in it. So so we have been able to squeeze some extra cash out of the thing when we look at what we expect, I guess, for cash flow from operations for the year. We're certainly hoping that we can approximate to something close to the EBITDA targets that we're going to achieve. And we're expecting the CapEx numbers to be in the $10 million to $12 million a kind of range for the year. And so we certainly think you know that our revenues are going to ramp up from this first quarter number during the course of the year that's going to need some working capital, but thankfully, less than what we have used to in the past, and we expect it to end the year with it with the cash from operations, something something close to the target EBITDA numbers.

Craig Irwin

Excellent. Well, congratulations on another solid quarter. I'll hop back in the queue.

Operator

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Michael Bieber

I'd just like to thank everyone for your interest in Willdan and the interest in our Q1 call, and we'll talk to you again next quarter.
Thank you.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.