Willdan Group, Inc.
Q1 2015 Earnings Call Transcript

Published: 15 May 2015

[Operator:]

Good day and welcome to the Willdan Group Incorporated First Quarter 2015 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Nii Tetteh, Business Analyst. Please go ahead, sir.

[Nii Tetteh:]

Thank you. Good afternoon everyone and thank you for joining us to discuss Willdan Group's Financial Results for the first quarter ended April 3, 2015. With us today from management are Chief Executive Officer, Thomas Brisbin; Chief Financial Officer, Stacy McLaughlin; and Mike Bieber, Senior Vice President, Corporate Development. 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, 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 it is important to note that 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 filed for the year ended January 2, 2015. The Company cautions investors not to place undue reliance on the forward-looking statements made during the course of this conference call. Willdan Group Inc disclaims any obligation and does not undertake to update or revise any forward-looking statements that made today. With that, I will now turn the call over to Chief Financial Officer, Stacy McLaughlin. Stacy?

[Stacy McLaughlin:]

Thanks, Nii. I’d like to add my welcome to those joining us on today’s call. In addition to GAAP financial results, we also provide non-GAAP financial measures that we believe enhance investors’ ability to analyze our business trends and performance. Our non-GAAP measures include revenue net of subcontractor costs and EBITDA. We believe revenue net of subcontractor cost allow us for an improved measure of the revenue derived from work performed by our employees. EBITDA is a supplemental measure used by Willdan to evaluate operating performance. GAAP reconciliations for both of these non-GAAP measures are included at the end of the earnings release we issued today. I’m pleased to share with you our strong financial results for the first quarter of 2015 and I’ll start with an overview of our income statement then our balance sheet and finally our guidance. Total contract revenue for the first quarter of 2015 increased 46.7% to $33.3 million from $22.7 million for the first quarter of 2014. In January, we made two acquisitions

[Thomas Brisbin:]

Thanks Stacy and good afternoon. And let’s start off with a question on or it’s a question investors may ask. And the question is, can we stay in this exceptional growth rate? I would now like to take a few moments to discuss why we can. We’re off to a good start for 2015 and I would like to reflect a bit on why Willdan is in a much better position and why I believe we will continue to grow. By position, I mean financial, marketplace, employees, customers, and then group of investors that are taking note us of where Willdan is headed. It was about 2008 that I spoke on a conference call that Willdan was not going to wait for the recession to end. We’re not going to wait it out until our base business of engineering for California studies returned to a robust days of subprime loans. We’re going to face the recession and are nearly 70% loss of business as the new reality. Given the new reality, as a new public company, Willdan have much to do. We decided to enter the Energy Efficiency market. Energy Efficiency is important to the nation for many reasons, political, economic, environment, and security and it’s not going away for many years to come. California has been a leader in energy efficiency and the rollout across the country was just beginning. Willdan elected to enter the Energy Efficiency business for several reasons. It was synergetic with our California customer base. It provided a diversification though as independent of the recession. It allowed for geographic expansion. It is a highly fragmented industry with a large growth potential and five. It played well with the technical expertise of the Willdan team. It was not a big stretch for engineers, scientists, and economists to grasp. That being said, we acquired an $8 million firm in 2008 that led to nearly 60% of revenue and our geographic expansion across the country. This growth engine is supported by our base businesses of engineering, financial management, and security. Some highlights of what we have accomplished are the following. At a corporate level, we need to be prepared for rapid growth. Nearly three years ago, we focused on cash, project profitability, and systems to support a rapidly growing organization. A culture has been created to drive DSO consistently down. From a high – I maybe should say this, but from a high of nearly 144 days to the year-end 2014 of 65 days. The cash that Willdan puts in the bank allows us to begin to fund strategic tuck-in acquisitions that help to catalyze our growth. Next we reduced our operating cost everywhere to focus on margin improvement. Free cash flow and DSO are metrics we lived by. We automated every part of corporate to prepare for growth. In human resources, or HR, prepare for the Affordable Care Act. We automated most paper transactions and outsourced to ADP. In marketing, we developed a team that can write a proposal that can compete with any major firm in the nation. We’re also using the IT application sales force to enhance our seller capabilities. In accounting, we’ve recently changed to Dal-Tech to give our project managers better visibility and prepare Willdan for federal opportunities. Our IT capabilities have been continuously updated to service a nation-wide footprint rather than in just California. Our management team has a very good grasp of what we are doing and most importantly where we are going. All this has been accomplished over the last three years to prepare Willdan for a substantial and profitable growth. Once you really see the G&A rate going down while revenue is growing. Our corporate support is in a much better position than three years ago. Our corporate team also includes our bank, BMO Harris, who is acting like a real partner and where Willdan wants to go. We are fortunate to have them on the team. Our new auditors, KPMG, which Willdan started with in 2006, just completed 2015 first quarter and they are committed to ensuring that Willdan rises to the top as a public reporting company. We also have McGladrey and Moss Adams for stocks and taxes. Again, these are excellent team members. I want to take a moment to welcome our two new board members, Dr. Mohammad Shahidehpour, he is a Bodine Chair Professor in the Electrical and Computer Engineering Department at the Illinois Institute of Technology in Chicago, where he also serves as Director of the Robert Galvin Center for Electricity Innovation. In the addition, I would like to welcome Dr. Steven Cohen, who has served as a senior advisor to Willdan over the past seven years and he is a recognized expert in the field of sustainability. Dr. Cohen is Executive Director and Chief Operating Officer of Columbia University’s Earth Institute. Dr. Shahidehpour and Dr. Cohen have well established relationships in the respective markets of New York and Chicago. We are excited to have them both on the board and believe they will be significant contributors to Willdan as we continue to grow our business and expand energy efficiency practice and national footprint. Our corporate team has made a lot of progress taking on the growth and preparing for much more. Now, let’s turn to operations. Growth, excellent product, profit, DSO and delighted customers are the metrics for operations. A few years back, a very [indiscernible] and recognized successful investors said Willdan had a tough challenge ahead. Simply stated, change what you do and where you do it. Since that day, we have done exactly what he said. 60% of our business is in energy efficiency and more people are out of California rather than in it. We worked for 18 utility programs across the country, these 18 utility programs allows us to touch nearly 8,000 end-users per year. These end-users are hospitals, schools, lodging, laboratories, data centers, municipalities, commercial and industrial. Strategy wise, we needed to move our capabilities to service these end users, often the end-users want more than utility incentivized savings like lighting. The utilities and the end users want to go deeper into their energy usage. They want to look at boilers, chillers, pumps, refrigeration, controls, weatherization, renewables and storage to name a few. Our future opportunity is driven by these 8,000 end-users. Willdan needs a deeper mechanical and electrical engineering expertise. These engineers also have to grow up in an environment of energy efficiency and customer driven infrastructure upgrades. With our January acquisitions of 360 Energy Engineers and Abacus Resource Management Company, we took an important step in expanding our capabilities and our geographic footprint to capitalize on these opportunities. The founders of 360 Energy Engineers, Scott McVey, Joe Hurla and Aaron Etzkorn in Lawrence, Kansas are hard driving, intelligent, experienced, useful and very business minded team. 360’s approach to sales is unique and successful. Their dedication to excellence comes from many years as a large performance contractor and their desire to do things better. Abacus is similar and yet a bit different. The founders have been around a little longer and their experience goes back before energy efficiency, performance contracting or ESCos for common vocabulary. The founders Mark Kinzer and Steve Rubbert have built energy engineering firms before. We’re delighted they want to build another one as Willdan. Their approach to the market is a bit different from 360, but for Willdan that sees many potential consumers different approaches are good. We have already used our combined resources to win the State of Pennsylvania, the State of Washington, three microgrids for New York price, the New Jersey utility for M&V and retro-commissioning as well as expansion into Colorado and Minnesota for our Texas based utility. Acquisition success is very important. Organic growth is more important. We will not loose our focus on organic growth. Acquisition success can be defined as the firms rapidly grow their presence. That is the goal. Just as we grew the first acquisition from $8 million to $57 million, this putting Willdan in the energy business. Let me make one more important point. We’ve added a lot of smart people to help drive this company in the right direction. Looking forward a bit, our overall M&A strategy is to pursue selective tuck-in acquisitions that can expand our geographic footprint, broaden our service offerings and improve our competitive position. We’re seeing an abundance of smaller scale deals and opportunities due to the highly fragmented nature of the marketplace. We’re focused on identifying the opportunities in three key areas. First is the acquisition of businesses that can expand our east coast engineering and planning practice. We’re specially focused on companies that enhance our capabilities and reputation for the technical and consulting work we do with public agencies. Second, we planned to acquire companies that offer a gateway into the federal marketplace with the goal of providing energy management services to the federal government. Our management team has a great deal of federal experience, which we believe can be leveraged to enlarge long-term contracts, down enhanced revenue visibility. Third, we are pursuing the opportunities that give Willdan greater exposure to larger scale contracts, what we called c-suite consulting opportunities. These include policy and regulatory consulting for public utility commissions and electrical engineering for utilities. This is where the market is headed and where we plan to capture a strong share of this business. With a dedicated M&A effort, we are now in a position to act on these opportunities and we expect to be reporting on a steady flow of acquisitions as we go forward. Now, I will provide a brief update on our business segments since our last earnings call just six weeks ago.Energy Efficiency Services was a key contributor to our strong first quarter results. It is important to note that these initiatives are being driven by the increased demand for electricity and correlating the higher cost, and not by the price of oil. For the tremendous growth potential, we see our Energy Efficiency Services that we see with our Energy Efficiency Services, we are intent on building a business that is both national and scope and ready to address the rapidly changing landscape of how our nation buys, sells and uses energy. We have already begun to expand our scope of work outside utilities, which is the next part of our growth story. Our initial work of large utilities such as Con Ed and So Cal Edison has translated into new business, they brought group of end markets including hotels, hospitals, data centers, and financial service firms to name a few. Another new avenue of growth for Willdan in energy efficiency is the rapidly emerging area of microgrids. In short, microgrids are local energy networks that can separate from large electrical grids during extreme weather events and provide power to individual customers and critical public services such as hospitals and water treatment facilities. Currently, New York and other East Coast states want to establish microgrids in the wake of superstorm Sandy, a few years ago. We believe microgrids are the waiver of the future for distributor generation, renewables and battery storage. One of our new board members, Dr. Shahidehpour is an acknowledged expert in the field and is wildly regarded as the father of the modern microgrid. There are number of potential microgrid projects in our pipeline and we look forward to sharing more detail when we can. We believe our deep expertise combined with our strong relationships with the largest utilities in the U.S. gives us a strong competitive position to win important projects in this area. On a separate note, President Obama signed the Energy Efficiency Improvement Act of 2015 on April 30. That law aims to cut energy used in commercial buildings, manufacturing plants and homes. While the move toward greater energy efficiency as government mandated, we are seeing a definite shift towards demand being driven by the customer. In consumer whether it business, institution, municipality or an individual wants more control over how they use energy more efficiently. Since I updated you on our products a short while ago, I will give you a quick review of progress in the first quarter. We continue to execute on our important contracts with Con Ed, So Cal Edison and [indiscernible]. For Con Ed, we began work last August to reduce the low pocket for communities in Brooklyn and Queens, New York and received another $5 million contract this year to continue our work. For New York City Energy Efficiency Corp, Willdan Energy and Willdan Financial were jointly retained for the first six months of 2015 to identify new loans for energy efficiency, renewable energy and other clean energy projects. We ramped up the market surveys and we are currently training [indiscernible] staff that will be performing this work following contract completion. For our new direct install project with San Diego Gas & Electric, we are currently negotiating the measure mix and pricing ahead of the project to start up this summer. We also have begun work on our $4 million contract with a global financial services company to provide lighting and other energy efficiency upgrades at various facilities. Now turning to engineering services. We continue to carry the momentum from 2014 to Q1 with contract revenue up 22% year-over-year. During the quarter, we continue to execute on recent project wins mentioned on our last call such as the contract for the City of South Gate, which includes street traffic and landscape improvements and our contract for on call engineering services for the City of Winters in Northern California. Our pipeline for opportunities remain strong in building the safety, construction management, inspection and municipal engineering. In summary, the cities are recovering and construction is starting up again in California. Moving now to Homeland Security Services. We successfully completed our Bro-terrorist response in the San Francisco Bay area. We believe our work on this contract could lead to similar work in California as well as Hawaii and Arizona, also in the Bay area we continue to plan the 2015 Urban Shield Yellow Command, Full Scale Exercise to test the Super Bowl 50, communication and information management plans and finally in Public Finance Services. Year-to-date we have secured over $4.5 million in new contracts for 2015 with approximately 20% of our new projects wins coming from agencies, outside the State of California. One of those is in Florida where we recently won a contract to conduct a wastewater rate study for the City of DeLand. We continue to see a marked increase in our RFPs in this business in particular the ongoing drought in California and other states as an increased need for water utility agencies, municipalities to analyze their service cost and update their water rate schedules. Overall, we believe we are well positioned for continued growth in geographic expansion. In April, we acquired Economists.com, led by Dan Jackson. They are a leader in economic and financial analysis, utility, cost of service studies and regulatory representation and litigation support. This acquisition is an outstanding complement to our Public Finance Services and gives us regional offices, specializing and utility management consulting in Florida, Texas, Colorado and California. This expanded presence takes us from a regional to a national level professional service firm in public finance. Economists.com also delivered 30 secured contracts that are in process and an additional $1 million in targeted projects that we are pursuing through the Dallas headquarters. So in summary, overall we had a strong first quarter across each of our businesses and we are well positioned for another year of growth and profitability. I would now like to open the call to questions. Operator, please go ahead.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Al Kaschalk with Wedbush Securities.

[Al Kaschalk:]

Good afternoon, Tom, Stacy.

[Thomas Brisbin:]

Hi, Al.

[Stacy McLaughlin:]

Hi, Al.

[Al Kaschalk:]

A very, very strong performance in the quarter, one of you focus first quickly on the acquisition, I believe you’ve disclosed $4 million of revenue in the quarter, in terms of annualized contribution what was that on the trailing basis doing above $20 million, so is this about derived case in terms of the historical business for 2015?

[Thomas Brisbin:]

Yes, we had 2.5 months of contribution Al and Q1 is typically the seasonal low quarter for these acquisitions just as it is in Willdan. The acquisitions tend to be a little more seasonal so $20 million is the right run rate approximately on an annual basis.

[Al Kaschalk:]

Thanks a lot. And then in terms of the integration seems like it’s going well, talk a little bit about the – to the expense you can about the calendar of business coming in based on the structures of the acquisitions and how you are progressing on that front?

[Thomas Brisbin:]

There is a lot of activity right now, where 4 months, 3.5 months since the acquisitions and we’ve won six to seven new contracts already, we’ve got an active pipeline that pursuits, there’s probably 20 different pursuits focused on the east coast and the west coast. It’s a good cross selling effort and we already been successful. So it’s a good pipeline now.

[Al Kaschalk:]

Okay, great. Stacy, just a clarification on the commentary about guidance, I think you said EBITDA will grow better than the revenue growth rate. Are we talking 30% revenue growth on an organic basis of – if we took the midpoint so EBITDA would be much better than that but could you frame the – what type of number you folks have in mind?

[Thomas Brisbin:]

We are trying to decide who should answer. Hang on a second.

[Al Kaschalk:]

And you can answer, I guess, not to give you free pass on this. But I mean 100% growth I think in this quarter here you did about a 100% growth of last year. So is that the type given the cost take out you have the type of work you were in, the margin performance, the other way to answer that I guess is net margin was about 4.5% in the quarter and I believe you’re tracking to get that towards to 6% to 7% overtime. But 2015 should be well above 5% from what I’m hearing.

[Stacy McLaughlin:]

Yes. Our calculation for the EBITDA growth is on an organic and acquisitive basis.

[Al Kaschalk:]

Okay. That’s really helpful.

[Stacy McLaughlin:]

I think that answered your first question. Did I answer all your questions?

[Al Kaschalk:]

Fair enough. No, I think you two actually going in the right level of – north of 5% in the net margin. And I’m going to focus on the two business opportunities. Tom, can you elaborate just on the microgrid side very interesting and exciting opportunity. But what type of ramp is that in terms of potential wins and they raised the contracts on that specific target area?

[Thomas Brisbin:]

Okay. There is probably that I know 7 to 10 pilot programs in the country. Here in California there is – you see Irvine the Department of Power and Water has a little bit daily funded pilot programs fully vested on your San Diego has one. Those were three in California I’m aware of Air Force Academy, Illinois Institute of Technology. On the east coast, there is a few universities, one down in the South east that have DOE funding to experiment with this. But what – your question is how bigger are they? When are they’re going to start? What’s your finding it’s the microgrid is primarily focused on reliability. So if you get a fall through, lightening storm or whatever you quickly shift your power from one area to another and keep critical infrastructure going. So any type of hospital, operating room, data centers, anything of that sort doesn’t like power failures. Historically, they’ve got back up generation, going forward microgrid may – is a better answer because you can switch very quickly to other parts of the grid, storage wherever and get your power rather than in starting up generators. There is a cost those big generators. So this is being proven out now. The opportunities we are looking at it is the state of New York came out with something called New York price and initially they talked about 35 that’s called feasibility studies in the state of New York. So if you have come forward with an area in New York that needed a microgrid because they were suffering from outages, let’s say. And you proposed on that the first six studies there were $200,000 each, Willdan was avoided three of them. If this study proofs that a microgrid is feasible for that area. The state of New York is going to provide $7 million for the community which put the microgrid in. So if we win three to five or six of these and we are very, very good, just in New York we could have, hey, it would be fantastic so we had three of them want the completion. If they would give us the capabilities and expansion in the nation that pretty much accept for Illinois Institute Technology is leading. So is that answers your question Al.

[Al Kaschalk:]

Yeah, that’s helpful. And then just switching over real quick, obviously the draw that initially here in California and the what are the utility commentary but how about the ramp in that activity in the skills that’s you currently have or do you need to go out and provide fined additional skill sets for you to be providing services in that area, just a little bit more talk on that.

[Thomas Brisbin:]

We are not going to go out and compete with the major infrastructure firms to convey water from the north to the south. When infrastructure upgrades may be preventing leaks or doing things at the municipal level, when that regulatory level comes down on our rate studies system, how to make people to pay for things through our financial group that’s where we’ll come in. We have those people in place. They’ve done this work before. So for us it’s a matter of when the states start to do something. We are not going to go chase in the big infrastructure, underground tunnels from north to south. We’ll only be effective when it comes to the cities.

[Al Kaschalk:]

But as you elaborated during your prepared remarks I think the message we should to be taking away is that the incremental business you’re picking up and what’s your focussed on and how the team focused on is driving a better marginal dollar level on your organic growth.

[Thomas Brisbin:]

It is but I won’t say it’s due to the water situation.

[Al Kaschalk:]

No, no. Is that was more of a broader portfolio question about book of business here going after?

[Thomas Brisbin:]

Yes.

[Al Kaschalk:]

Thank you.

[Thomas Brisbin:]

Okay.

[Operator:]

Our next question comes from J D Padgett with ALMAK Capital.

[J D Padgett:]

Hi, guys. Another great quarter, so congratulations on that. Just a couple of questions. In Q4 and Q1 did you have any acquisition related expenses that don’t continue?

[Stacy McLaughlin:]

There might have been some small ones but nothing material.

[Thomas Brisbin:]

Like $20,000?

[J D Padgett:]

Okay, not on huge to call out?

[Stacy McLaughlin:]

Yes.

[J D Padgett:]

Okay and another question would be when we look at the acquisitions. Is there any purchase accounting impacts on their contributions right now? In terms of revenue or profit you can really?

[Stacy McLaughlin:]

The amortization related to the intangibles, the purchase price accounting is not finalized at this point. But the amortization related to backlog trade name and non-compete. That will be recorded.

[J D Padgett:]

But nothing that impacts your ability to recognize revenue full year or anything like that?

[Stacy McLaughlin:]

No.

[J D Padgett:]

Okay. And then I know the performance that you guys put out in the 8-K for the acquisition will back show them acquired companies are having a pretty substantial combined operating margin, 3 months to 9 months of last year. Is that something that sustainable or do you think they were kind of running their business to lean to really deal that grow and we need to reinvest in that or how do you look at that?

[Thomas Brisbin:]

I don’t think they run in too lean. They were running at – they hit to almost become part of Willdan. We have a larger fringe benefit, we have a corporate estimated that inline with how they were running. They were run and run in lean it means where products are reducing by 6%, 7%.

[J D Padgett:]

Okay. And that just kind of within the contact of your corporate structure about the offset is then ability to drive synergy across both companies and so forth?

[Thomas Brisbin:]

Correct.

[J D Padgett:]

How quickly do you think you could really move the revenue needle with that and the efforts in, what you are pursuing with the combined operations on the revenue side?

[Thomas Brisbin:]

In that, they’re poised to grow considerably. So…

[J D Padgett:]

So just benefiting from your customer relationships and vice versa?

[Thomas Brisbin:]

Vice versa, yes. I mean the part of the sale is that Willdan has to introduce them to our customer base, we have to close deals.

[J D Padgett:]

Right.

[Thomas Brisbin:]

I mean, they can do fine on their own, both of them, they were doing fine.

[J D Padgett:]

Right.

[Thomas Brisbin:]

To really benefit we need to provide customers to them. They have already helped us in winning jobs that we would not have won because of their resumes and past performance. So it’s just a little too early yet. I think I had written at one point that by the end of the year, we will have a pretty good handle on it. The projects – just the projects – if you look at a project from the timing, you know about the time that actually starts in this business, it’s 6 to 8 to 12 months. So we have to identify. We have to kind of down select, pursue and then the customer has to elect to go forward. So that’s a 6 – minimum 6 months to 12 months period of time.

[J D Padgett:]

So, there is kind of a sales cycle in there and hopefully by next year we’re really seeing the benefits of the synergies between companies?

[Thomas Brisbin:]

And just – for your information as an investor, there we put a cumulative earn outs because we think that ramp will not happen year by year, and it will – I don’t want to say hockey stick, but it won’t happen in the first six months.

[J D Padgett:]

Right. Okay, is – you can’t share any of the criteria around the earn out, can you?

[Stacy McLaughlin:]

Actually, it’s all in the 8-K that was filed in January.

[J D Padgett:]

Does it talk about the hurdles?

[Stacy McLaughlin:]

Yes, I believe it does in actual detail also attached are the agreements, which has it as well.

[J D Padgett:]

That’s a lot of good late night reading.

[Stacy McLaughlin:]

I do say it was exciting.

[J D Padgett:]

And then I guess just the final question on Con Ed. I think you mentioned a follow-on contract that you might have received there that I don’t know the necessarily press release, but is there just opportunity for a continued follow on business in that respect because I think the scope of the initial contract was like a $50 million or something?

[Thomas Brisbin:]

Yes, so you’re referring to the demand response portion, Brooklyn Queens load pocket comment I had.

[J D Padgett:]

Okay. And there is just additional business that you’ve been able layer on top of that with them as you prove yourself there?

[Thomas Brisbin:]

Right. So they modified our existing contract to give us demand response type work rather than direct install. I should say rather than but it’s as a direct install approach to demand response that’s a better way to say it.

[J D Padgett:]

Okay. Perfect, thank you guys very much.

[Thomas Brisbin:]

Thank you.

[Operator:]

[Operator Instructions]

[Thomas Brisbin:]

We’re waiting because we had a question come on late last time that we didn’t get to.

[Operator:]

Okay, we’ll pause for just another…

[Thomas Brisbin:]

We’ll give some extra seconds, so we don’t have that happen again.

[Operator:]

Okay.

[Thomas Brisbin:]

So, there are no further questions from the phone we can say operator…

[Operator:]

No, it appears there are no further questions at this time. And I’d like to turn the conference back to Mr. Tom Brisbin for any additional or closing remarks.

[Thomas Brisbin:]

Yes – so trying to tell me that – can you hear me, I know you can hear me. Thanks for your attention and interest in Willdan. We look forward to seeing some of you in coming weeks and keeping you posted on our achievements to this year. So thanks a lot.

[Operator:]

This concludes today’s conference. Thank you for your participation.