Willdan Group Inc (WLDN) 2014 Q2 法說會逐字稿

Good afternoon, everyone, and thank you for joining us to discuss Willdan Group's financial results for the second quarter ended June 27, 2014. With us today from management are Chief Executive Officer Thomas Brisbin and Chief Financial Officer Stacy McLaughlin. Management will review prepared remarks and 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 Form 10-K annual report 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. 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 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 second quarter. Total contract revenue increased 31.6% to $27 million from $20.5 million for the second quarter of 2013. Energy efficiency services grew 86.9% to $13.7 million from the prior year. Engineering services contract revenue increased 9.7% to $9.5 million for the quarter. Revenue from public finance services was $2.7 million and homeland security services was $1.1 million.

Revenue net of subcontractor costs for the second quarter of 2014 increased 24% to $21.2 million compared with the second quarter of 2013. Direct costs of $16.3 million for the second quarter of 2014 compared with $11.4 million for the second quarter of 2013. The majority of the increase was the result of greater demand for services performed by our energy efficiency services group, which generally utilizes a higher percentage of subconsultants than other Willdan Group subsidiaries.

General and administrative expenses for the second quarter were $8.7 million, a 4.7% increase from the prior-year period. G&A expenses as a percentage of total contract revenue declined to 32.4% from 40.7% for the second quarter of 2013. Net income for the quarter was $1.9 million or $0.25 per diluted share, which compares with net income of $688,000 or $0.09 per diluted share for the second quarter of 2013. Accounts receivable days outstanding for the second quarter was 76.

Turning to financial results for the first six months of 2014. Total contract revenue increased to $49.7 million, up 18.6% from the first six months of 2013. Higher revenue was due primarily to a $6.1 million, or 34.1% increase in contract revenue for energy efficiency services to $24.1 million. Energy efficiency revenue accounted for 48.4% of total contract revenue for the first six months of 2014 compared with 42.8% for the first six months of 2013.

Engineering service revenue increased by 8.9% to $18.4 million and represented 37.1% of total revenue compared with 40.4% of total revenue in the prior year. Revenue from public finance services was $5.2 million and homeland security was $2 million. Revenue net of subcontractor costs for the six months grew 18% to $39.7 million compared with the first six months of 2013. Direct costs of contract revenue were $29.5 million, up from $23.5 million a year ago, primarily due to the increase in services performed by energy efficiency group.

Gross margin as a percent of revenue for the first six months of 2014 was 40.6%. Adjusted EBITDA increased to $3.5 million from $1.5 million for the first half of 2013. Adjusted EBITDA margin was 7%. Total, general, and administrative expenses for the six months declined by $328,000 to $16.9 million. Net income for the first six months of 2014 was $3.2 million or $0.43 per share. This is a $2.1 million increase from net income of $1.1 million, or $0.15 per share for the six months of 2013. Accounts receivable days outstanding for the first half of 2014 was 74.

We reported cash and cash equivalents at June 27, 2014, of $12.1 million. Our primary sources of liquidity are cash generated from operations and a revolving line of credit with BMO Harris Bank. Today we are affirming the financial targets that we introduced on our press release issued on June 20 of this year. These targets are as follows. One, contract revenue growth of up to 15% annually. This includes both organic and acquisitive growth. Two, gross margin in the 40% to 45% range. Third, adjusted EBITDA margin of 5% to 10%. And fourth, accounts receivable days outstanding of 70 to 75.

I'm pleased to report that we are on track with all of these targets for the first half of 2014. I like to turn the call over to Tom.

Thanks, Stacy. Good afternoon and thank you all for joining us. I will begin with the expansion of our Con Ed program. Next, I will provide an overview of our second-quarter results and key developments in each business unit. Then I will open up the call for your questions.

Regarding today's news, I'm pleased to report that Con Ed of New York has expanded our energy efficiency services contract under its small business direct install program by $23 million. This brings the total value of our contract to $61.3 million. Under the amended contract we are expanding our services to Manhattan, Staten Island, and Westchester County. We are now responsible for the entire Con Ed SBDI service territory. We believe this contract expansion speaks directly to Willdan's strong capabilities and performance in this energy efficiency program.

Now, turning to our second-quarter performance. I am pleased to report that we delivered very strong financial results. Revenue increased nearly 32%, and each one of our divisions generated top-line growth and profitability. These results reflect the steps we have taken to manage our operating expenses and project delivery. Our net income for the first half of 2014 has already exceeded net income for the entire year of 2013.

Based on our strong financial performance we're now in a position to reward employee performance. In the second quarter we began accruing for bonuses that will be paid in 2015. We are coming out of some very lean years at Willdan and bonuses will be performance-based.

Turning to a review of our business units. I'll begin with engineering services, which accounted for 35% of our second-quarter revenue. Revenue from engineering services grew nearly 10%. The demand for outsourced city services continued to increase in response to the sustained recovery of the residential housing market. During the recession, many cities downsized and now they are understaffed and looking for efficient and cost-effective ways to meet increased demand.

Some cities, such as Elk Grove, have adopted a fully outsourced staffing model and we are seeing more opportunities to serve cities like Elk Grove. As we mentioned last quarter, we continue to position for these types of opportunities. Much of our growth in engineering services is coming from cities that are adding Willdan staff, one or two people at a time, as they rebuild their building and construction departments. After a long hiatus, we are also starting to provide services under existing master service agreements that have been renewed for decades. These contracts allow us to provide services to cities on an on-call, as-needed basis. Taken together all of this growth is making a nice contribution to our top line.

You have heard us say before that one core component of our growth strategy is to leverage our established client relationships. To that end, we recently began work on an energy efficiency contract with the city of Elk Grove to replace 14,000 city-owned street lights with LED fixtures. This project is one of the largest citywide LED streetlights conversion projects in California, and will result in significant savings on energy and long-term maintenance costs.

Moving on to the California high-speed rail project, late last month a state appellate court cleared the way for moving forward with the next segments of the project. We will be bidding on those two segments, and with a successful prime contractor, Tutor Perini-Parsons. We have already been working with Tutor Perini on the first phase, which is a limited notice to proceed, and we expect the next segments to be awarded sometime later this year. It's important to note, while we don't expect the high-speed rail project to generate significant revenue for Willdan, it is a strategically important project and one that provides us with a foothold in the Central Valley.

While historically we had a strong presence in this region, we closed nine offices along the Highway 99 corridor during the recession. We view our work in the high-speed rail as an opportunity to reestablish Willdan Group's presence in the Central Valley. For example, we have just won a bridge preventative maintenance program for 52 bridges in Mariposa County, just east of Fresno, where we are operating on the high-speed rail.

Overall, our engineering business is performing well and we expect it will be a key contributor to our 2014 revenue.

In our Homeland Solutions business, we are designing and developing a full-scale exercise to test the San Francisco Bay Area's ability to respond to a bioterrorist attack. We also continue to work with the city of San Diego to design and develop an emergency operations center to test this city's earthquake preparedness.

In our financial services business we are making good headway in diversifying projects and expanding into new geographies. We recently hired four consultants for our Orlando, Florida office and won a contract from the New York City Energy Efficiency Corp. We are also targeting new utility rate projects in Colorado and California.

Now turning to energy, which was 51% of our second-quarter revenue. This segment generated very strong year-over-year revenue growth of 87% in second quarter. These results provide a much better reflection of the strength of our energy efficiency business relative to the past few years, which were impacted by changes in our Con Ed contract that occurred in April 2013. These changes included the split in the Con Ed contract between Willdan and another consultant. We are now self- performing some of that energy contracts and, going forward, it will be much easier to evaluate our results on an apples-to-apples basis because we are showing you revenue less subcontractors.

The Con Ed contract will continue until July 2016. All told, we are executing well on our energy efficiency programs, and most importantly we are meeting energy savings targets for the customers. Our strong performance has resulted in expansions of existing contracts in New York, California, and the Midwest; has also led to new energy efficiency engagements. We recently signed some smaller strategic contracts, and we are working on others that we hope to announce soon. The strategic contracts are very interesting, and you'll find them in our next press release.

Our energy efficiency business is poised for continued strong growth, driven by high energy costs, growing environmental concerns, increased social awareness, and adoption of green buildings. The public sector continues to look for solutions that comply with legislated energy reduction mandates, and the private sector is self imposing energy efficiency goals. Willdan Energy Solutions has now amassed a significant technical expertise and direct experience working on some of the most high-profile projects, including Con Ed New York, Southern California Edison, San Diego Gas and Electric, NYSERDA, and others.

We believe that our demonstrated track record of successful program implementation and outcomes positions us well to compete for new and noteworthy projects in this space. Looking at 2014, we are confident that we will reach our 15% revenue growth target. Our business does have some seasonality and historically our second and third quarters are our strongest. We expect our final financial results for the second half of the year to be similar to our first-half performance.

Our 15% revenue growth target includes both organic growth and strategic acquisitions, and we have strong balance sheet to support both. With regard to acquisitions, we are focused on selective tuck-in acquisitions that strategically expand our geographic footprint, broaden our service offerings, and improve our competitive position. Before we take your questions, I'd like to let you know that Stacy and I will be presenting at the IDEAS Conference in Chicago on August 27. The presentation will be webcast and posted to our website.

I've now like to open the call to your questions. Thank you.

(Operator Instructions). Al Kaschalk, Wedbush.

Tom, you mentioned some new engagements to be forthcoming. I think they were New York, California, and Midwest territories.

Yes.

Are those -- if you are successful in those new engagements, are those 100% -- do you have to staff those with new employees? Or are you able to leverage some of what's already in those particular markets?

We've won them with existing employees, and then will bring on new ones to support it.

Okay.

But we don't have to --.

Go ahead.

You win them based on the people you have.

Sure, but I was just trying to -- right. And therefore you will know the profitability to staff them, I guess is what I'm getting after.

Yes. The reason I didn't announce them yet is they are not all signed, but there's three or four hopefully we will have for the next quarter that are anywhere from $1 million to $5 million, that are very strategic in terms of the type of work they are. We are very happy about it, but I just can't talk about it now.

Right. So maybe I can transition into the financial targets. I think you are already up this year around 18%, 19% top-line growth. With some of these strategic opportunities, do you think that impacts the margin profile? Or how should we think about the new work that does come online?

I think we're at about -- what? 7.8% margin? Where are we, Stacy? For the first half.

40.

Margin?

Yes, 40%.

That's gross? Net?

Yes, you just asked gross margin.

Net. I'm getting it for you, Al.

I don't know what you're asking.

First half's net margin. I think we had about 7%.

Adjusted EBITDA 7%, yes.

7%. So is your question, Al, is it going to go up from 7%?

Well, I guess what I'm saying is you have had tremendous success. You are looking to make further strategic investments on new contracts in key vertical markets. And I guess I'm just trying to set expectations here that should that on the margin come in a little bit lighter than what you delivered year to date, or no, it in theory should be at least at the midpoint of your financial targets.

The midpoint of our financial targets would be 7.5%, and we'd certainly like to increase our margin as the year goes on. And the new contracts coming in will not certainly take them down. It will only go up.

Excellent.

(Multiple speakers) Al, that doesn't mean we want do something wrong and our margin won't go down, but I'm just telling you the contracts that we're bringing in are helping us.

Yes. No, I understand. Do you have any contracts that are high-margin that are rolling off?

No.

In terms of Con Ed program, probably one that you could anticipate, could you elaborate on how much you are self-performing or versus subcontracting at the moment?

Okay. We went into self-perform. We increased our self-performance to about 60% to 65% on our existing contracts. Then we got this amended contract. The other consultant was using primarily subcontractors. So over the next approximately -- what's July 16? So, over the next 18 months, let's say, we're taking on their territory and their work, so we generally have on the $22.4 million or $22.2 million, we have to ramp up our self-perform again into that territory. So there will be a ramp up. It will go somewhere from 10%, 15% self-perform, in that territory, to hopefully by the end of the time to 50%, 60%, 70%.

Does that answer your question, Al?

Yes, that's fine.

Can you picture what's happening there?

I can.

Okay. That's a tough one, because it doesn't quite put us back in the same situation we were in five years ago, where we were using all subcontractors, because we still have the self-perform, which is good. We are making money on it, and it does allow us to -- there's things that are going to be happening that will help us on the subcontracting as well.

But in general you always prefer to self-perform?

In general, we are doing real well self-performing.

Yes.

We're making margin, but the ramp up on this is so big, we can't ramp up that fast. Con Ed wants the job done; we stepped up to it, and we will get it done. As you can see what we've done for them already has allowed them to say we'll give you the entire service area to you.

Right.

When you're in that situation you can't say, well, we've got to self-perform but --.

Right.

We're making the decision best for Willdan and our customer.

Finally, the financial performance is improving. The balance sheet is splendid. What do you see out there for expectations for shareholders about deploying that cash to higher return markets, maybe acquisitions? And if not, is there any consideration doing something different with that cash, such as a dividend or something?

I guess in order of priority, and I know there are people on the call that would re-prioritize this, but here at Willdan our priority would be acquisitions, because we want to strengthen our position. We see very good markets out there for other types of services related to energy -- or in energy, but just a little bit different than what we're doing. So that would be priority one, because we've got to get -- it would be nice to get another $8 million dollar firm and grow to $50 million very quickly. That's very good acquisitive growth.

The second priority would probably be is the stock, would be buyback. And I know why it's on the line. Our third priority would be dividends. Once we become a more stable, less growing, throwing off cash, I think dividends would be down the road.

I would encourage you to focus on the acquisition strength, given that that's probably the best to use of capital, given you've demonstrated here the ability to take existing business and at least operate the much more efficiently. So, that is my two cents. Thanks a lot.

Thanks, Al. Everybody's got an opinion on that one. I'm just -- right now we're going to focus on acquisitions, small ones. Okay, Al? Thank you.

Wyatt Carr, Monarch.

Congratulations. Great quarter. Just a couple of questions. In the engineering services, you noted that it moved up about 10%, but through the June half year, you did $18.4 million, and you did $9.5 million in this last quarter, so it didn't move up an awful lot. But still pretty good piece of growth there. But the energy efficiency services really expanded. Can you comment that -- was the -- one of the new, large districts having an impact there?

We have not started on those. That award announcement this morning and the new districts in New York we have not started on.

Okay.

So the energy ramp up, Wyatt, was primarily due to really a little bit of California, a big part in New York. The ramp up in self-install during the summer months. The program in New York is going very, very well, and that's why Con Ed believes we can take on all territory.

Sounds great. The question I had, though, when you are doing pass through and you were getting -- your margins came down a little bit when you did the self-servicing. And now you are operating at about, what did you say? 65% self-perform on the existing business. Now, the new business is going to be lower, but will that be higher-margin to start out with? And then gradually come down to the average of the business that you are doing is self-performing?

We've been able to take our self-performance -- let's just call it a learning lesson, when we switched over -- from zero rough around 8%, 8.5% now.

Okay.

On self-perform.

On self-perform?

Yes. The problem we had on subcontractors is there's no markup on pass-through. We are working on ways to be more involved in the subcontractor program to gain margin on that. And any way you look at it, we've separated revenue less subcontractors so you can see a truer picture.

Okay, great. In the public financial services segment, wasn't this one of the higher-margin portions of the business? And are you -- it looked like it was somewhat flat in the quarter. It was up like $200,000 sequentially.

Yes.

Go ahead.

We had an accrual for a lawsuit that we were planning for of a deductible on the insurance. It's in the report.

Okay.

And it was in the financial services part.

Right.

So I will just do it right, square between the eyes, that's where it is.

Okay.

It's in the report, isn't it, Stacy?

Yes.

Okay, and that is -- and I think you commented that it's covered by insurance.

We have a $250,000 deductible, $5 million in insurance. We didn't comment on anything more than that, but your question as to why the hit and the downswing in financial services was the accrual of the deductible.

Okay. And lastly, you have done of terrific job. Your margins now -- I thought you were doing well getting up to 6.5%. Now you're at 7%, and your goal is to get up to 10%. How realistic is that? How far away is that, given that the third quarter is also a strong quarter?

Do you mean if I hit it one quarter, or will I meet it quarter after quarter? Which question would you like me to answer?

(Laughter).

We might hit it higher in the third quarter, but the fourth might come down. But sustainable, we're shooting about 12 months out ahead of us to get sustainable up around 8%, 9%. How's that? That's our plan internally.

Okay, fantastic. Okay. And I think that that pretty much covers it. California rail, there was the court order but also there were some comments in the press recently, and I know that that just gets you into a lot of other business. But can you see some direct things coming out of California rail possibly in the third quarter?

Not above what we're doing now, no. The next two segments that I referred to -- there's four segments. Tutor Perini won the first segment. Tutor Perini is the team we're on. They are bidding -- they combined segments two and three. It's about $2 billion award. Don't get excited about that. That's primarily construction. The engineering portion on $2 billion is generally less than 10%, and our part of that team is generally less than -- oh, geez. Half goes to disadvantaged business. By the time you get down to it, I think I gave you a number. If they were to win two and three, if we had 10, 12 people on it, we'd be doing great.

Super. Well, I think in the first quarter's call you outline the roadmap that could get you to $100 million it looks like in top-line revenues. It looks like you are on your way.

Well, if you multiply by two, and we're pretty close.

(Laughter). Congratulations. Thanks a lot.

Vincent Staunton, Wedbush.

This is Jeremy Zhu. Great job. The first question is really along Wyatt's earlier question about the engineering services. Is this just the start of the ramp up? Or do you see the growth accelerating? Or this is the pace that you are seeing in the near future?

(Multiple speakers) we're just starting. We're not -- things are just starting to get back where there's -- we call it new lumber around. You look around and you can actually see something being built. There's a few developments selling lots. Cities are starting to do plan checks, so it's just starting.

Well, that's good to hear. That business is to be close to a $100 million business. Do you think you'll ever get back to that stage?

No, it peaked at about -- the high for Willdan before the recession was $76 million.

Right, right.

You subtract $10 million out for financial, that takes you to $66 million. That was about the peak.

Right, which is still about 50% more than what you're doing now, right?

Correct. So if it got back in and started to grow -- and that's all we're asking of our people. Let's just get back to where we were before the recession. And that would be an uptick of, yes, about 50%.

So you can see that happening in the next couple of years?

Well, it took -- that's not fair, Jeremy. The last economic bubble started in 1996 and crashed in about the beginning of -- the end of 2006, so it was a 10 year ramp-up on the subprime loan. If you look at conventional housing, generally that increases 3% to 5% nationwide. What we saw over the 10-year period -- I can't remember the numbers, but it was 15%, 20%. So, I'm not an economist but they're not planning on another subprime loan bubble. So, I don't think will grow back as fast as we did that time.

(Multiple speakers) yes.

-- with the economy. We need to get ourselves outside the economy, do different things, and win different types of jobs so we're independent of the economy. And we haven't stopped looking at that at all. Like that announcement on that bridge inspection. Our bridge group that we started up in near Sacramento; they've got a lot of great things on the planning board.

We can't wait for the economy, Jeremy. We haven't, we won't.

Well, it doesn't sound like you are. You are improving your revenues despite the economy. Well, second question is staffing. What's your staffing level now, and how fast is it ramping up?

Stacy's got the exact number, I think, and what has changed since the first of the year?

Hi, Jeremy. At the end of the year 2013 we had a 534 employees. At the end of June 2014 we had 604 employees, so we had a net change of increase of 80 employees.

Okay. I noticed that your facility cost has gone up quarter over quarter from Q1 to Q2. Does that mean you are taking on more space to accommodate the new FTEs? Or are you opening new locations?

We are not taking out more space.

It's a decrease. Facilities from quarter over the quarter has decreased.

It is? Of?

Where are we?

Quarter for Q3 -- or I'm sorry, Q2 -- 2014, facilities was $1.1 million, and for 2013 it was $1.1 million as well.

Yes, I'm talking about quarter over quarter from Q1 2014 to Q2 2014.

Q1 2014 was $1.06 million and it's gone to $1.1 million. That small increase is due to couple additional new offices, but we are working on reducing space that we have in current offices. And those offices that we have opened are only due to new work in that area.

Understood, okay. And by the way just a comment from the other side of Wedbush, I guess. A shareholder would rather see you be very cautious about acquisitions and, quite frankly, we'd rather see them money get dividended out or hire new employees rather than the acquisitions.

Is that your side of the Wedbush?

That's my side of the Wedbush.

Oh, okay.

Thank you.

Thanks a lot, Jeremy. That's it for questions. Let me -- all right.

And that does conclude the question-and-answer session today, so Tom, I'd like to turn the call back over to you for any additional comments.

Okay. Thanks, Leah. I would like to thank all of you for participating on our call today and for your continued interest in Willdan. Thanks again and have a great day.

And that does conclude today's presentation. Thank you for your participation.