Willdan Group Inc (WLDN) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by for the Willdan Group Inc. first-quarter 2014 conference call. At this time, all participants are in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions)

I would now like to turn the conference over to Nii Tetteh. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us to discuss Willdan Group's financial results for the first quarter ended March 28, 2014. With us today from management are Chief Executive Officer Thomas Brisbin; and Chief Financial Officer Stacy McLaughlin. 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. 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 December 27, 2013, filed on March 25, 2014. 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 made today.

With that, I will now turn the call over to Chief Financial Officer Stacy McLaughlin. Stacy?

Thanks, Nii. And I would like to add my welcome to those joining us on today's call.

In addition to GAAP financial results, we are providing 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. We believe this allows for an improved measure of the revenue derived from the work performed by our employees.

We also are providing adjusted EBITDA, which removes the impact of certain nonrecurring income and expense items from our operating results. GAAP reconciliations for both of these non-GAAP measures are included at the end of the earnings release we issued today.

A brief overview of our financial results for the first quarter. Total contract revenue increased 6% to $22.7 million from $21.4 million for the first quarter of 2013. Engineering services contract revenue increased 8.1% to $8.9 million for the quarter. Energy efficiency services grew 4.2% to $10.4 million, due to an increase in the installation of energy efficiency measures. Revenue from public finance services was $2.5 million, and homeland security services was $945,000. Revenue net of subcontractor costs for the first quarter of 2014 increased 12% to $18.5 million, compared to the first quarter of 2013.

Direct costs were $13.2 million for the first quarter of 2014, compared with $12 million for the first quarter of 2013. The majority of the increase resulted from greater infrastructure costs related to self performance by Willdan Energy Solutions. Adjusted EBITDA for the first quarter increased $900,000 to $1.5 million from $600,000 for the same period in the prior year.

General and administrative expenses for the first quarter declined 8% to $8.2 million, compared with the prior-year period. Net income for the quarter was $1.3 million, or $0.17 per share, which compares with net income of $399,000, or $0.05 per share, for the first quarter of 2013. We reported cash and cash equivalents at March 28, 2014 of $12.7 million, which is an increase of $4.5 million from $8.1 million reported at December 27, 2013.

Our primary sources of liquidity are cash generated from operations and a revolving line of credit with BMO Harris Bank.

I would now like to turn the call over to Tom.

Thanks, Stacy. Good afternoon. We are pleased to report on a solid quarter of financial and operational performance. It has only been about 45 days since our last call. Therefore, the updates today will be brief. Then I will open the call to your questions.

Beginning with engineering, we are well-positioned in this business as cities are outsourcing more services and we continue to benefit from the ongoing recovery of the residential housing market. As Stacy discussed, revenue from engineering grew 8.1% year over year. This increase is due in part to more services being provided under our contract with the city of Elk Grove. As I have mentioned in the past, this is the largest staff outsourcing project in California.

We see good potential in providing outsourced services to cities. Many cities downsized during the recession years and are now understaffed. We are benefiting from a steady flow of new contracts for a broad range of work in stability and safety, traffic engineering, planning, inspection and construction management. For example, we recently signed contracts with the cities of Tracy, Beaumont and San Bernardino for an array of city services.

Most of our contracts with cities are small, and we have been adding Willdan staff in modest numbers as cities outsourced positions. That said, these numbers add up, and we have already hired about 50 new employees since the beginning of the year. Also, as we've previously discussed, we expect to have another large city under contract in the second half of 2014.

Moving on to the California high-speed rail project, which we always get questions on, we don't have much new to report since our last call. We continued our initial work on this project. It's under a limited notice to proceed. We will be bidding on the next two segments of this project with that joint venture partner, Tutor Perini/Parsons, in June. We expect the next segment to be awarded sometime during the second half of this year.

We are also looking for ways that we can collaborate to capitalize on certain opportunities. For instance, our engineering team, along with our homeland solutions group, recently submitted a proposal to FEMA for a project aimed at helping cities reduce risks related to natural disasters. We expect to hear back on the proposal sometime during the second half of this year. We are confident.

Overall, our engineering business is performing well. We expect this business will be a key revenue contributor in 2014.

Now turning to our energy segment, our first quarter of revenue grew by 4% on a year-over-year basis. This is notable given the re-compete and the split of the Consolidated Edison contract between Willdan and another consultant last April. In addition, we began self performing our energy contract. Our revenue growth in the energy segment was due primarily to energy efficiency measures from audits in New York and California. It is gratifying to report that Con Ed -- this is our biggest one -- is pleased with our work. We exceeded our goal during the first quarter in the number of kilowatt hours saved and expect to continue on this high run rate throughout the year.

We recently won our first contract under the California Clean Energy Jobs Act, Prop. 39, for energy savings programs in California schools. As I have mentioned before, the state of California has allocated a lot of money, $2.5 billion, over the next five years, and we expect to continue to pursue this work.

As a final note on energy efficiency, I would like to mention that we are again working with the New York Power Authority on a contract that had been inactive. This is a new assignment provided under an existing contract and a great example of an opportunity to grow this business.

In the homeland solutions business, we continue conducting training under contracts for urban area security initiatives -- states, cities, transit authorities. Also, as I mentioned last quarter, we have secured a key speaking role at the National Homeland Security Conference being held later this month. This is a premier industry conference that addresses solutions to the nation's most pressing security concerns.

Our financial services business is doing well, and we are making good headway on our efforts to diversify projects and expand into new geographies. About 25% of our revenue for financial services is now outside of California.

Looking at 2014, we see ample opportunities for growth through both organic growth initiatives and for strategic tuck-in acquisitions. We believe we are well-positioned to capitalize on these opportunities, given our strong balance sheet. We plan to manage expenses very carefully throughout the year. We expect 2014 to be even more profitable than 2013.

Finally, I would like to take this opportunity to thank our employees and clients as we celebrate Willdan's 50th anniversary later this month. This is an important milestone and a testament to our team's high-quality work and excellent client service. Our longevity positions Willdan for a long-term growth for our established relationships.

I would now like to open the call to questions.

(Operator Instructions) Al Kaschalk, Wedbush Securities.

Good afternoon. And a solid job on the quarter. You mentioned -- I won't ask about the high-speed rail, given --

Thank you, Al.

(Laughter) Can you talk, though, about the size of the energy and homeland security approach to FEMA on risk reduction? What --

FEMA? Yes.

FEMA. Yes, sorry. Maybe my pronunciation is not quite clear. But could you talk a little bit about that?

That's a long-term contract if we get on it. Any natural disasters that occur in the Western part of the United States we will be doing engineering services on. So it's really a scalable thing -- no disasters, no work; disasters, work. So I'm not going to predict a lot of disasters, but on average there are 61 natural disasters in the United States per year where a team is called out. So we got a pretty good chance of doing work on it. I can't predict the revenue, though.

Great.

We are probably six months out, if we win, from actually signing a contract. And then there is five years after that. But it's a great contract to have if we get it, and we are in a good position to get that.

Okay. What's the -- what are they looking for there? Engineering services -- is it traditional Willdan services, or what --

Yes, yes. If you go out with a -- let's say it's an earthquake. Willdan did a lot of work on earthquake damage assessment on Northridge when it happened, was that 15, years ago? 20? So if you go out and do damage assessments, you fill out reports as to why there were failures, and FEMA reimburses, and you've got to do all the work for FEMA from an engineering perspective.

If you have a fire and there's housing burned down, we had a contract for state FEMA where we helped expedite permits so people could rebuild. Actually set up trailers on-site so they could get their permits expedited and start rebuilding. So it's that kind of thing, Al.

Great, okay. Second, the balance sheet looks incredibly healthy -- [30-year] market caps and cash. I think you mentioned something about strategic acquisitions. Could you give us an update on plans for growth, given what you have done in terms of getting the business turned around?

Yes. We would like to use that cash on strategic acquisitions, small tuck-ins, similar to what happened with the energy one where it was an $8 million a year business and we grew it to about -- today it's $42 million; it peaked at $57 million. $57 million was reported subcontractor costs. The real peak would have been around $40 million.

So if we can take a Company at about $8 million, grow it to $40 million in a relatively short amount of time, that's our objective, to look for those type of acquisitions.

And do you feel good about the pipeline visibility?

Of tuck-in acquisitions? Or we have (multiple speakers) --

Yes, affordable tuck-in acquisitions.

Yes.

All right. The final question I had was more -- it doesn't sound like there has been much change on the positive cadence about outsourcing by cities and your expectation to sign a second large one -- or your second large city outsourcing later this year. Can you add any color to that timing-wise, size? What does that imply?

I can't. I could tell you that it's good. But with cities, you never know what's going to happen. We're in good shape. I expect it to happen, and it's just a matter of the city.

Is that more of, yes, we are looking at --

We are not competing. It's just a matter of the city going forward and doing the hiring.

Great. Okay, and then finally --

The competition is over, Al. We've won.

What's over?

The competition to get that job is over. We've won.

I see. So now it's just a matter of the city deciding that they wanted to follow through with what they said they were going to do?

Right. That's as much color as I can give you.

Okay. And is that -- what is that, a June -- July 1 or October 1?

Put it three months out from now.

Okay. All right, I think that's all I had. Excellent job -- well, one more. I've obviously got to sneak one more in. On the profitability here, obviously it was clearly very strong. How is -- are we at a spot now where this is very sustainable?

You know, I bet Moira Conlan, our IR consultant, if she's listening, I bet her this question would come up.

I hope you won.

Well, it came up and I won.

Okay. But could you add some color about your confidence in continuing the [87] consecutive quarters of profitability? But more importantly --

I was going to give this question to Moira to answer. We expect to continue to do well. Anything beyond that would be guidance, and we had a long talk about that. Okay?

Thanks for your time.

(Operator Instructions) Wyatt Carr, Monarch Bay.

Congratulations on a great quarter.

Congratulations on getting your phone call through, Wyatt.

Yes. It worked this time. Thanks.

Because you didn't come up right away. We said, oh God, he's got problems.

No, it worked fine. Just a quick question -- on the California Clean Energy Jobs Act, Prop. 39 -- and you have the first job? Is that in? You are performing on it? Or is that one that is --

We just now won it. We are not performing on it yet.

Okay. And of the funding in that act, how much of that has been actually let out?

I don't know the answer to that question. If you want an estimate, I'd say probably 10%.

Okay. So there's still lots to come?

That's a wag there, Wyatt.

Got you. The size of the large city that you have -- I don't want the amount. But is it larger than your largest city, which is Elk Grove?

Yes.

So that's a substantial contract. Has there been any pushback on the -- you increased your prices at the first of the year in the New York, I think in the Con Ed business.

Timeout, Wyatt. Go back to your last question. You were referring to outsourced cities on your last question, not Prop. 39, correct?

That's correct.

I see a (inaudible), and I just had our first [disagreement].

Uh-oh (laughter).

Just wanted to make sure we were clear, Wyatt.

Yes. No, I'm referring to cities like Elk Grove, where you are outsourced.

By the way, I was right.

Great! Anyway, has there been any pushback on the unit price increases or has that -- have you continued to gain share in that Con Ed business?

We did get increases in measures. It has helped tremendously. The fact that we are meeting our goals and exceeding our goals helps our negotiating position. Again, though, if Con Ed is listening, I can't say much more than we are going to do our best, and I hope Con Ed hopes that we do make money on the contract and we can continue to. So I can tell you that we are performing well, and they like it and they should let us make money.

Perfect. Okay. And on your EBITDA margins, obviously you have improved. And is there still room for improvement? I think you are at around 6.4%.

Is that where we came in?

I think that's correct.

We don't have that in front of us. But we are going to assume you're right -- is there room for improvement? A little bit, yes.

Okay. And in the finance services sector, did you pick up both in California and outside? You said something about 25%.

I would say there's a little bit of pickup in California, but there's more outside because we are hiring key people in other states that take our financial services outside of California.

Okay. And is that a vertical you are really focused on? It's a small vertical now, but it's a high-margin vertical. Right?

Yes. It's a vertical we are really focused on because the type of people we are picking up now are true financial consultants to the cities. And the cities more than ever throughout the United States need advice on how to increase their revenues, given the fact they are all in dire need.

Okay, great. And last question, and that is on California rail. This got you into other areas, other rail companies. And have there been any additions in that, like, Metrolink and other things?

Well, I can tell you we have been on two jobs this year and lost. And that is not something you would want to report to a question like that, but it is our first shot at building our infrastructure group. And that's where we stand. So I'm just giving it to you straight.

Got you.

Normally, to build a business like that is a couple years. And we are hoping to make it this year with one good win.

Okay. With the magnitude of the work on the next -- I don't know what you would call it -- the next tranche of California rail that you are bidding, would be similar to past work that you've done?

No. From what I understand, there's four segments. We bid on the first one. The winning bid was right around $1 billion. The other segments, two, three and four, that were slated to come out -- they have combined segments two and three into one bid, which we're estimating will be each around $1 billion. So the next one that will come out in a combined, let's say, tranche, as you call it -- it's a banking term, I think, not an engineering term.

Right.

So if you say segment two and three will be combined, it should be about $1.8 billion to $2 billion for the next one, which will replace the one on the first one that we won. Whether or not they win are not, who knows. We hope so.

Keep our fingers crossed.

Right.

Thank you very much, and I'll get back in the queue.

Dan Zeff, Zeff Capital.

Is it a rising tide sort of environment that you are operating in? Obviously, it is. But the question is, are you taking share from other competitors more than you have in the past?

That's a good question. I would say it's a hard question to answer quantitatively because everything we take, we compete with at least 10 other proposers. So if you go back on the rising tide that started in 1996 that the entire country rode to 2006, that rising tide was so great that there weren't enough capabilities to supply the engineers to do the jobs. But over the past seven years that rising tide died so fast we did not lose to competition, we just lost to the market evaporating.

Now the question is we are going up again, and there's still so many people out of work and fighting for jobs I would say right now we are not -- although the rising tide is nice, we are still fighting for our lives for every job. Now I don't -- Dan, is it?

Yes.

Does that answer your question, Dan?

It does.

The rising tide is benefiting us. It's still a tough competitive world because there are so many people out of work. There are still so many people looking for jobs, both at the one-man level up to the major company. So I don't feel as that we are riding the rising tide yet. Housing would have to get back to the subprime loan bubble to get to those days.

And following on that, what is your long-term Board-level read, five-year plan? How big do you have to get? How many acquisitions do you have to do? Are you going to sell the Company at some point? Is this an industry where you can just keep fighting for business and doing this for several years, or is there an endgame?

If I could discuss that on the phone I would, but I can't. Our job is to increase earnings for the shareholders quarter to order for as many years as we can and as big as we can. That's the endgame.

Can you discuss the cash flow situation which was very strong in the first quarter? Can we expect cash to continue to rise if earnings are positive?

Well, yes.

In other words, there's not going to be any downward adjustments in the working capital situation from that first quarter moving forward?

I'll let my CFO answer that one. Are you saying will cash go down?

I'm saying will cash go up? If you (multiple speakers) net income?

(inaudible) good job on receivables, cash should go up. Yes.

Great. Thank you.

Ladies and gentlemen, that does conclude today's question-and-answer session. I would now like to turn the call over to management for any closing remarks. Please go ahead.

Well, I would like to thank all of you for participating on our call today and for your continued interest in Willdan. And thank you, and have a great day. And remember it's our 50th year in business, so congratulations to all the employees and clients that are listening. Thanks.

Ladies and gentlemen, that does conclude the Willdan Group, Inc. first-quarter 2014 conference call. You may now disconnect.