Willdan Group Inc (WLDN) 2014 Q4 法說會逐字稿

Good day everyone and welcome to the Willdan Group, Inc.'s fourth-quarter 2014 conference call. As a reminder today's conference is being recorded and at this time I'd like to turn the conference over to Nii Tetteh. Please go ahead, sir.

Thank you. Good afternoon everyone and thank you for joining us to discuss Willdan Group's financial results for the fourth quarter and full fiscal year ended January 2, 2015.

With us today from management are Chief Executive Officer Thomas Brisbin, Chief Financial Officer Stacy McLaughlin and from Corporate Development Mike Bieber. 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 made today.

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

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

In addition to GAAP financial results Willdan will 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 cost and adjusted EBITDA. We believe revenue net of subcontractor cost allows for an improved measure of the revenue derived from the work performed by our employees.

Adjusted EBITDA is a supplemental measure of operating performance 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.

I'm pleased to share with you our strong financial results for both the fourth-quarter and full-year 2014. I'll start with an overview of the fourth quarter and then I will discuss our full-year results.

Total contract revenue for the fourth quarter of 2014 increased 34.2% to $30.2 million from $22.5 million for the fourth quarter of 2013. No acquisitions occurred in 2014. That 34.2% represents Willdan's organic revenue growth rate.

The increase in revenue reflects Willdan's success in expanding its footprint outside of California as well as winning contracts in new areas of expertise in order to create a diversified portfolio. Tom will provide further details shortly.

By segment revenue from energy efficiency services grew 59.4% to $15.3 million. Engineering services contract revenue increased 22.8% to $11.3 million.

Revenue from public finance services was $2.6 million and Homeland Security services revenue was $1 million. Revenue net of subcontractor costs increased 43.5% to $25.4 million compared with $17.7 million for the year-ago quarter.

Direct costs of contract revenue were $17.9 million for the fourth quarter of 2014, an increase of 31.9% year over year. The majority of the increase was a result of higher direct costs within the engineering services segment and energy efficiency services segment, both of which generally utilize a higher percentage of subconsultants than Willdan's other subsidiaries.

Gross margin was 41.1% for the fourth quarter of 2014 compared to 40% for the fourth quarter of 2013. General and administrative expenses for the fourth quarter were $10 million compared to $8.4 million for the prior-year period. G&A expenses as a percentage of total contract revenue improved 450 basis points to 33% from 37.5% for the fourth quarter of 2013.

Operating income increased to $2.4 million for the fourth quarter of 2014 compared to operating income of $0.6 million for the fourth quarter of 2013. Adjusted EBITDA was $2.6 million for the fourth quarter of 2014 as compared with $0.9 million for the fourth quarter of 2013. Net income for the fourth quarter of 2014 was $2 million, or $0.26 per diluted share compared to net income of $700,000 or $0.09 per diluted share for the fourth quarter of 2013.

Now I'll discuss our financial results for the full year ended January 2, 2015. Total contract revenue for 2014 increased to $108.1 million, up 26.4% from $85.5 million for 2013 and far exceeding our targeted annual year-over-year contract revenue growth of up to 15%. All of this revenue growth was organic.

Higher revenue was due primarily to an increase of 46.9% in contract revenue for energy efficiency services to $52.9 million and an increase of 15.9% in revenue from engineering services to $40.8 million. Energy efficiency services revenue accounted for 48.9% of total contract revenue for 2014 compared with 42.1% for 2013. Engineering services revenue accounted for 37.7% of total contract revenue for 2014 compared with 41.2% for 2013.

Contract revenue from public finance services was $10.6 million and Homeland Security contract revenue was $3.7 million. Revenue net of subcontractor cost increased 26.9% to $87.2 million for 2014 compared with $68.7 million for 2013. Direct costs of contract revenue were $63.8 million for 2014, up from $48.9 million for 2013 primarily due to an increase in subcontractor services and other direct costs used by energy efficiency services segment.

Gross margin for 2014 was 41% which was within our target range of 40% to 45%. Total general and administrative expenses increased by $2 million to $36 million for 2014.

G&A expenses as a percentage of total contract revenue improved 640 basis points to 33.3% for 2014 from 39.7% for 2013 which reflects the steps we've made to prudently manage expenses. Operating income increased to $8.3 million for the fiscal year ended January 2, 2015 compared to operating income of $2.6 million for the fiscal year ended December 27, 2013.

Adjusted EBITDA for 2014 increased to $8.9 million from $3.5 million for 2013. Adjusted EBITDA margin was 8.2% which more than doubled from 2013 and is well within our target range of 5% to 10%.

Net income for the full-year 2014 was $9.4 million, or $1.22 per diluted share compared with $2.6 million, or $0.35 per diluted share for the full-year 2013. This included an income tax benefit for the full-year 2014 of $1 million compared with income tax expense of $132,000 for the full-year 2013.

At the end of 2014, we had state operating loss carryovers of $4 million. The losses expire through 2033.

There are no remaining federal NOLs. Accounts receivable days outstanding improved to 65 days at January 2, 2015 which was below our target range by 5 days.

Turning to our balance sheet, we reported cash and cash equivalents of $20.4 million at January 2, 2015, up from $13.4 million at the end of the third quarter and up from $8.1 million at December 27, 2013. Our primary sources of liquidity are cash generated from operations and a revolving line of credit with BMO Harris Bank.

At January 2, 2015 we had not drawn against the revolving line of credit. Also of note on our balance sheet was the $4.9 million increase in accrued liabilities during the year primarily due to accounts payable and employee bonuses.

Turning to guidance, we anticipate that contract revenue will grow more than 20% this year as a result of completed acquisitions and additional organic growth. We anticipate our annual tax rate to be approximately 40%.

Our three-year financial targets are as follows. Annual contract revenue growth of up to 15%, gross margin in the range of 40% to 45%, adjusted EBITDA margin of 6% to 10% and accounts receivable days outstanding of 70 to 75.

I'd now like to turn the call over to Tom. Tom?

Thanks, Stacy. Good afternoon and welcome everyone.

We had an excellent year in 2014. Our annual revenue growth outpaced our guidance for the year primarily due to the strength in our energy efficiency and engineering business. And our improved operating efficiencies drove more profit to the bottom line.

We get to say this again because it's good news. Net income was $1.22 per diluted share for 2014 compared to $0.35 for 2013.

At the beginning of 2014 we outlined our strategic plan for continued growth and profitability and our financial targets. Key components of this plan included, first, continued diversification of our service offerings and geographies; second, a focus on driving organic growth in our energy efficiency and engineering service business; third, pursuing strategic tuck-in acquisitions that would expand our geographic footprint, broaden our service offerings and improve our competitive position; and fourth, reducing operating expenses to drive profitability. I'm pleased to report that our team did an outstanding job executing on all of these strategic initiatives.

We closed 2014 with a well diversified mix of business. Energy efficiency led the way accounting for roughly half of our contract revenue followed by engineering services at 38%, public financial services at 10% and Homeland at 3%.

During the year we also expanded into a number of new geographies outside of California. In fact we performed about half of our work east of the Mississippi. I'm being a little -- let's go into Illinois -- maybe a little bit on the west side.

A lot of our work is in New York and we also have operations in Florida, Illinois, Kansas, Oregon, Texas, Colorado, Arkansas, Washington state and Washington, DC. We are pleased with the progress we've made in diversifying our revenue sources and our geographic presence.

In January we announced our strategic acquisition of 360 Energy Engineers in Lawrence, Kansas and Abacus Resource Management Company in Beaverton, Oregon. These acquisitions are an additional step in expanding our capabilities and our geographic footprint.

In addition both companies focus on larger turnkey projects that generate higher margin than Willdan's traditional business. We are excited about these acquisitions. We expect on a combined basis they will add more than $20 million to our 2015 revenue and will be accretive to earnings per share on a GAAP basis in 2015.

In 2014 we continued to improve our operating efficiency. We kept our overall general and administrative expenses relatively stable while revenues increased by 26%. As a result income from operations as a percentage of contract revenue was 8% for 2014 compared to 3% for 2013.

Now I will provide an update on each of our business units. I'll begin with energy.

Our energy efficiency business continued to benefit from growing demand. Business grew organically about 47%. The schools program for SCE was ramped up and reached its goal in 2014 and we are waiting to see what SCE will do in 2015.

In total the energy efficiency projects we completed for small businesses in 2014 resulted in 92 million kilowatt hours in savings. This demonstrates our ability to perform well and exceeded our goals creating additional opportunity for us.

Just for a note that 92 million kilowatts saved represents about 6,700 small businesses audited and changed. All of our contracts have been extended into 2015 including the high profile ones such as Con Ed, SoCal Edison and NYSERDA.

Last August we began a sizable project to reduce a load pocket in Brooklyn and Queens, New York. To date we have already delivered 6 megawatts of the load reduction. That's about 5,200 homes.

This year we will receive another 5 million to increase savings from 5.6 megawatts up to 12 megawatts. Also in New York for the New York City Energy Efficiency Corp we continued our joint project with Willdan Energy and Willdan Financial Services in funding renewable energy. In the fourth quarter we finished our initial contract for market surveys and project identification and I'm pleased to report that we have been retained for continued support in 2015.

For AEP Ohio which is a public utility serving customers in Ohio Willdan delivered over 14 million kilowatts in energy savings from nearly 50 data center projects. I am pleased to report that AEP Ohio, Willdan and one program customer received the Uptime Institute's 2014 Brill Award for efficient IT. We are honored to be selected as the winner for this prestigious international award in a competition that received hundreds of entries.

As mentioned last quarter we were selected to administer Southern California Edison's new healthcare -- this is a long one -- healthcare innovative technology energy efficiency program aimed at reducing energy usage by small- to medium-sized hospitals, medical buildings, specialty clinics, assisted-living, etc. For another SCE hospital program we met the program goal of over 13 million kilowatt hours installed and this contract has been extended into 2015, further demonstrating our ability to consistently exceed stated contract goals and expand upon original contracts.

I'm pleased to report an important new direct install win similar to our work with Con Ed Edison in New York. We have been notified of this new win by San Diego Gas & Electric. We're excited about this win and look forward to sharing more details about it.

Another win so far this year in our energy efficiency segment includes a $2 million two-year contract to implement a data center energy efficiency program for CenterPoint Energy in Texas. We expect our energy efficiency business will be a key driver of growth in 2015 and beyond.

I'd like to remind everyone that growth in our energy efficiency business is not related to oil prices. I add that in because I get a lot of calls. It's related to the increased demand for electricity which will continue to drive higher electricity cost and energy conservation initiatives.

Now turning to engineering services, the improvements in the national economy and city budgets positively impacted our 2014 results and engineering services. Contract revenue increased 15% for the year primarily due to greater demand for our city engineering services in Southern California as well as our built-in safety services and our construction management.

Fourth-quarter project wins included a contract for the city of South Gate in Los Angeles County for street, traffic and landscaping improvements; also a contract for on-call engineering services for the city of Winters in Northern California. Our water and wastewater programs for the cities of Beaumont and Sacramento are moving forward as planned and so are the civil infrastructure projects for the Navy in Central California and San Diego. We expect continued momentum in this business.

And 2015 and by the way I think that's the first time I've said that in seven years. So that was a good job for engineering.

Moving now to Homeland Security services, in Homeland we focused on opportunities where we can expand our practice outside of California. For example we are competing on contracts for training, exercise and contract services for a broad spectrum of threats in both the state of Maryland and Miami-Dade County Florida.

Amtrak awarded us a Phase 2 training program for 10 regional exercises across the US for emergency action plan testing. This was a competitive win and important from a strategic standpoint because it highlights our ability to perform well on existing contracts and again win more business.

In the San Francisco Bay Area our contracts for testing for bioterrorist response was renewed for 2015 and expanded to a 13-county urban initiative. Also, San Francisco will be hosting Super Bowl 50 next year. So the broadscale readiness process for that city is underway and we look forward to playing an important role in the preparations.

Finally, public finance services. We continue to make progress in exporting our public finance expertise to new end markets and geographies. In the fourth quarter we won water and wastewater projects in Brentwood, Tennessee and Cobb County, Georgia as well as utility agency contracts in Oklahoma.

These wins demonstrate good traction for our growing water consulting practice and our ability to win in states where we have never worked before. I'd like to point out that projects typically pick up in the first half of the year and we expect continued momentum in 2015. We have already secured some contract wins for the first quarter.

Now in closing the new year is off to a great start and our outlook for 2015 is strong. We are well-positioned for another year of double-digit growth and profitability. M&A will continue to be an important part of our growth strategy and we will be evaluating a number of opportunities.

I'd now like to open the call to questions. Operator?

(Operator Instructions) Al Kaschalk, Wedbush Securities.

Good afternoon everybody and congratulations on a strong year. First question I want to talk about the integration on the acquisitions, how they are proceeding and importantly they were structured a little differently so can you address how those maybe have started to generate leads in terms of existing customers as well as new customers?

Let me -- how are they proceeding and how are they structured a little differently were the two questions I believe.

Yes, with the integration and how that's proceeding

Yes, we're 60 days into it and it's proceeding fine. It's really a little early to answer that question but I know there's a lot of cross-selling going on.

I know the leaders of both organizations work across the whole country now with all of energy. I know that we have submitted and already won procurements with their qualifications.

I didn't announce them because they are outside that, they are not official yet but it is working already. We are now able to bid on a whole new host of activities so the integration is off to a reasonable start. Your second --

Tom, is your intention -- is your intention to have these reports underneath the particular subgroups or are they reporting the acquisition businesses reporting to you? How is that -- what's the plan there?

They'll be within energy.

Okay. And did I hear you correctly that you gave an outlook in terms of the revenue contribution in 2015 and did I hear you say it would be $20 million-plus or -- could you just clarify what --

$20 million is the number we gave maybe a little bit more. But I'd call it $20 million-plus.

All right. So how do we think about the organic or what you had in the hopper exiting 2014 going into 2015 in terms of so-called organic growth?

Somewhere we wrote take that $20 million, plug it in and we'll still grow on the $108 million I think 5% to 15%.

Okay. And that's how you get to the plus $20 million in terms of your --

Yes, because the original guidance, Al, we said up to 15% including acquisitions and organic growth while the acquisition has been made so we're going to carve that out and we still need to grow organically.

But the point is organic seems to be -- you seem to be getting succeeding in these new contracts and the new wins even without the acquisitions.

Yes.

It's good to see both. Just a housekeeping item.

You've highlighted ample resources, you highlighted you will be looking at acquisitions. Does that imply that you didn't look at anything the first three months to date or did your new corporate development guy have some activity going on?

I will let Mike answer that. He's sitting here and he's just been doing nothing, I mean he's already behind but I don't think that's the case.

No, the Company actually has generated a number of leads. We've already started evaluating acquisitions that could potentially close in 2015, Al.

Stacy, how much cash did you have at either some point here in the first quarter or if you ended the quarter, I don't know if you can give that. I think you said you are $20 million at the end of the calendar year.

You paid out some cash for the acquisitions. Maybe the best way to answer that would be post the year-end and the acquisition payout what's the cash balance look like?

After the year-end and the two acquisitions we're approximately around $12 million.

Okay. Any update on the revolver, I think that matures in 2016, that's probably inside of 12 months today.

We have $2 million drawn on the draw term portion of the $10 million and that was done at the same time as the acquisition. As of now the $7.5 million that's for operating is still it's stayed the same so far and it does mature March 2016 and we have already been in discussion on keeping that moving forward.

Excellent, excellent. Tom, just maybe a broader question.

I think 85% of your revenue was from energy efficiency and energy services in 2014 and with the acquisitions is there an optimal mix you want to have? Is 90% or do you care to stay in the other two businesses that really are progressing at inflation-type growth rates?

We were at 48%, Al. I think I said nearly half. I don't know where you got 85%.

I think it's 48%, 49%, 50%, somewhere in that area is energy. No, just energy.

I think he said -- Al, did you say energy and engineering or just energy?

I said both, Stacy.

That's where you got that number. All right, so your number is fairly close.

Well I guess the point is then if you look further the pricing provisions of each contract there's a little mix shift, unit and fixed-price and less time and materials. Obviously that goes along with this contract, the revenue mix.

And so I'm just aware of this being more fixed-price. Are there any concerns that are rising as you get more towards a higher percentage of fixed-price than you have in the past?

No.

And why not?

Well, I think your definition of fixed-price may be -- nothing's changed in 2014. Little will change in 2015 in terms of the way utilities do it. We didn't quite refer to it as fixed-price.

There were milestone-type things, events. Our reference to turnkey on the acquisition again are milestone events, they are not firm fixed-price lump sum hard money-type risk-type activities. So it's all how we negotiate the contract and payment terms but I don't look as going to large firm fixed-price contracts ever.

Okay. I'm just going off of the disclosures in the K in terms of how you classify it and that's so we can talk offline about that.

Okay, in summary it seems if I look at a snapshot of where you plan organic growth in the acquisitions coming in you have a fairly broad range on the guidance on the EBITDA margin but if I take a midpoint of that guidance range you have pretty good growth here in 2015 and into 2016. That's probably more -- there's probably a question in there but is that -- are you seeing the mix of the new business coming on at the upper end of that range?

The mix of the new business coming on as we stated should be better.

Better than --

Better than where we've been. So we've been at 8% -- 8.2%. We believe the acquisitions will do better than us.

Okay. My final and sorry the DSOs was very strong. I don't know if that's a timing issue, structural change -- I'm not complaining about it but is there room to get it even tighter, fewer days or are you bouncing up against structurally how your customers would pay?

We're bouncing up again -- we're getting close. We're going to look at it again. Our goal for the year is 70.

I remember when 75 was deemed impossible. We closed the year at 65 or something like that but 70 is our target.

70 is how we are going to structure our bonus pool. If you look at the best of the best when you get up against it is probably around 53.

So there is room for improvement. We will be going for that over the next couple of years but don't expect it soon.

53 meaning top quartile?

Top 10% probably is around 52, 53.

Okay. That's all I had. Excellent work and look forward to seeing more progress on these acquisitions.

All right, Al. Thanks a lot.

(Operator Instructions) J.D. Padgett, ALMAK Capital.

Yes, hi, great growth story here. Keep up the good work.

A couple of quick questions though. Is there the potential for you guys to secure other contracts that would be similar to Con Ed in the future?

Wouldn't that be nice. Let's see.

The answer is they are out there and there's probably about 10 of them on our radar but so your answer is yes. They exist.

They exist. What's the big challenge in securing those from your perspective?

The whole winning process. I should first of all say as far as we know there is no contract as big as Con Ed but if your question is are there others of large magnitude? Yes.

Do we know about them? Yes.

Are we following them? Yes.

Do we expect to win a couple of them? Yes.

So just the competitive process getting in front of the customers and selling them on what you bring to the table?

Yes. But having delivered Con Ed -- the amount we're delivering on Con Ed per month is bigger than most utilities or states per year.

So it's a really good reference now for us when we go after other contracts to show that Willdan has delivered the largest. I won't say the largest because I'm not absolutely positive but I'm pretty sure.

Okay, one other question related to that. Con Ed was surprisingly strong in 2014 for you. Will this continue at the similar run rates or maybe does that drift down a little bit now until you get a potential extension or some other new source of business through them or how does that work?

Through 2015 it will continue at the run rate we ended the fourth quarter with. We ramped up into the fourth quarter.

2015 is planned to pretty much stay at the run rate we're at because that's when we'll run out of capacity. Meaning they've met their goals with their utility commission.

And then after that point is there still more work to be done with them just in the context of a different type of engagement?

Well I can't say what they're going to do but if you look at their history they re-competed and they continue on with what they're doing.

Okay.

We're not sure what's going to happen in New York. Someone will have to pick up the energy savings. We think it will be Con Ed, we hope it will be Con Ed.

If not it will be NYSERDA which is our second largest contract but we work for both of them. And we're performing for both of them. But I can't predict what will happen to state policy.

Okay. But still opportunity to pursue energy savings programs in that territory?

Oh yes. New York is rich with energy savings programs.

Okay. Then I don't know if you mentioned in the script did Elk Grove did that get extended for until the end of 2015?

Yes.

It seems like that's been at a pretty stable run rate and that would be the expectation through this year as well then?

Yes.

And then the final question for me the acquisition --

Have we met? We're wondering have we met?

We have not.

We have not. Okay.

New to the story.

So you're new to the story. Okay.

New to the story. Well it's hard to --

Welcome.

Stay under the radar the way you have with the growth you're starting to show.

Stacy says welcome.

And the final question is just acquisitions particularly at 360 Energy they seem to be growing at a very robust rate. Is that something that sustainable and do you have enough experience there to yet comment what's driving that kind of growth for them?

They're just a bunch of good guys.

If it were just that easy.

They are. I mean they've done a really good job establishing where they are and they want to expand that footprint from Kansas to the whole country and it's Willdan's responsibility to open the doors for them.

It's their responsibility to grow that company beyond what they thought they could do in Kansas. And that's why the let's call it merger acquisition took place.

Is their structure similar? Do they work through utility contracts or are they just going out and trying to find energy-saving opportunities and working with customers?

They do not work through utilities savings contracts. So you're new to the table, we probably touch 4,000 let's call them private sector, sometimes we call them end-users, so it would be like a hotel, a hospital.

If you've heard us talk we go to all these hotels and hospitals and private sector locations on the utility job. Willdan has not been able to carry it through like 360 does.

They would go to a school and they would do -- they would look at the school more holistic, instead of just doing energy audit they would look at everything they have, their boilers, roof, windows, everything and help the school become more energy-efficient. Abacus does the same thing in the Northwest.

So these two acquisitions took place to not only expand what they are doing but to get synergies from all the other people we're touching and we can't take it any further. And they can. Does that make sense to you?

It does.

It says J.D. here. What's your name?

It looks like good acquisitions.

Do you go by J.D.?

I do.

Okay. Very good. That's the story.

All right. Thank you very much. I appreciate it.

Well, thanks for being new. Are there any others?

(Operator Instructions)

If Wyatt's out there and you're trying to call in you're not on the screen, Wyatt. Thanks for your attention and interest in Willdan and we look forward to keeping you -- Stacy interrupted me.

All right, so thank you for your attention and interest in Willdan and we look forward to keeping you posted on our achievements this year. Thank you all. Goodbye.

This does conclude today's conference call. We thank you all for your participation.