Good day, everyone, and welcome to the Willdan Group Second Quarter 2020 Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Al Kaschalk, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Telari. Good afternoon, everyone, and welcome to Willdan Group’s Second Quarter Earnings Call. Joining our call today are Tom Brisbin, Chairman of the Board and Chief Executive Officer; Stacy McLaughlin, Chief Financial Officer; and Mike Bieber, President of Willdan Group. The call today builds on our earnings release, which was – we issued after market close today. You may find the earnings release and the Willdan Investor Report Q2 2020 that accompanies today’s call in the Investors section of willdan.com. 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’s 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 for the year ended December 27, 2019 and subsequent quarterly reports on Form 10-Q. The company cautions investors not to place undue reliance on the forward-looking statements made during the course of this conference call. Willdan Group disclaims any obligation and does not undertake to update or revise any forward-looking statements made today. In addition to GAAP results, Willdan also provide non-GAAP financial measures that we believe enhance investors' ability to analyze the business trends and performance. Our non-GAAP measures include net revenue, adjusted EPS and adjusted EBITDA. We believe net revenue allows for an improved measure of the revenue derived from the work performed by our employees. Adjusted EPS and adjusted EBITDA are supplemental measures of operating performance, which removes the impact of certain expense items from our operating results. GAAP reconciliations for all of these non-GAAP measures are included at the end of the earnings release we issued today. With that, I’ll now turn the call over to Stacy to provide financial details, who will be followed by Tom who will provide a business update, including commentary on COVID-19 activities and related business outlook for our company before our Q&A session. Stacy?

Thanks, Al. I’ll start with a brief recap of our business and provide financial details on the second quarter, including our income statement, and then discuss our balance sheet. The COVID-19 pandemic and efforts to limit its spread negatively impacted our business during the three and six months ended July 3, 2020. But overall, our performance was better than we expected at our last quarterly call on May 7. In California and New York, the states in which we have historically derived a majority of our revenue, mandatory shutdown orders were issued in March. In California, Phase 3 openings began in May 2020 and were subsequently curtailed in July 2020 as a result of the resurgence of COVID-19 cases. In New York, Phase 3 openings began in June 2020. Total contract revenue for the second quarter of 2020 decreased 20% to $83.5 million from $104.4 million for the second quarter of 2019. The decrease was driven primarily due to decreased contract revenue from our direct install for small business programs in our energy segment, combined with decreased revenue from our engineering and consulting segment, partially offset by an increase in contract revenue generated from government projects in our energy segment and incremental contract revenue from the acquisitions of Onsite Energy Corporation and Energy and Environmental Economics, also known as E3. Net revenue, defined as contract revenue minus subcontractor services and other direct costs, was $43.2 million, a decrease of 7.7% from $46.8 million in the year ago quarter. Within the energy segment, net revenue decreased by 10.2%, which was due to decreased contract revenue, partially offset by increases in revenue from government projects and the contribution of our recent acquisitions. Within the engineering and consulting segment, net revenue decreased 1.8%, which was due to the decrease in contract revenue. Direct…

Thanks, Stacy, and good afternoon, everyone. During our call this afternoon, we will provide an update on how we are managing the company during this pandemic, highlight our second quarter activities and business development update. Early to mid-March 2020, about 40% of our business slowed or came to a halt. This 40% was primarily our utility direct install business where we assist the utility customers across the nation with energy efficiency. We interface daily with commercial, industrial, multifamily and public sector customers, conducting sales, energy audits, installations and construction inspections. This customer interface came to a rapid halt as utilities, cities and states locked down to prevent the spread of COVID-19. Fortunately, 60% of our work was not affected by the lockdown, and our employees were able to work from home. It should also be noted that most of our state and local work was identified as essential. As a company overall, we were faced with a difficult situation. We had to match our costs with a declining revenue environment. It was like an all-hands on deck meeting. The ship was not sinking, but we took a hit. The company, its dedicated employees and customers responded quickly and professionally. To reduce costs, we had furloughs, nearly 350; layoffs, 80; reduced salaries for all indirect labor, up to 75%; reduced work hours; more fees suspended; suspension of 401k match fund; and all discretionary spending was stopped. The company took all appropriate actions to limit the effects of COVID-19’s financial impact. We also took measures to ensure the health and safety of our employees. We kept the health benefits in place for all layoffs. We expected this COVID environment would last 60 to 90 days, basically all of the second quarter. In addition to revenue and cost challenges, we were anticipating a…

[Operator Instructions] We’ll take our first question Moshe Katri with Wedbush.

Thanks, guys, and congrats on strong execution in a tough environment. I just want to start just to go back to some of the commentary. I think the press release indicates that right now, roughly about 20% of the business is still impacted by the lockdown. I think you mentioned LADWP. Can you get some more color in terms of where else? Are we still seeing some of these issues beyond LADWP? And I have a couple follow-ons.

I’ll start with it. As of today, LADWP is the only closed utility contract. And it’s only partially closed, as I said. They’re doing their work at schools rather than small businesses. And we’re waiting for them to open up small businesses in the LA territory. Other than that, all other utility contracts across the nation are open and running. So with regards to the 20%, I think that was part of your question, Moshe?

That’s correct.

Mike, would you like to take that part? We’re in separate rooms, so we have to direct traffic.

Sure, Tom. The utility contracts are ramping up at this point. And so our estimate of 20% represents that impact that getting back up to speed on a run rate basis as we saw prior to COVID. So to give you a couple examples, Duke Power, for instance, throughout seven states in the Midwest. While the contract is open, a lot of the small business customers that we approach are not. So we may have signed up a project before then and delayed the implementation of that project until their business reopens. So that’s happening. Sales in general have been very strong, but actually getting access to the business sites is certainly factored into that 20% of delay. So those are the types of things that we’re actually seeing right now, Moshe.

Okay. That’s helpful. And then obviously you’ve been adjusting your – you’ve been aligning your cost base to some of the pressures you’re seeing in revenues. So I guess if we look at it the other way, how quickly do you think you can ramp in terms of hiring and bringing back some of those people that are on furloughs to be able to execute when things kind of open up?

I think we’ve brought at this point, Moshe, and Mike might have a more current number, of the 350 furloughed, I think we’re right around 50 are still furloughed. Do you have a more recent number, Mike?

No, that’s my number.

Okay. Again, we’re in different locations, so we can’t look at each other.

Okay. So basically it’s –

Our ability to bring them back has been very good. But go ahead.

Okay. No, that’s great. That’s good. I just – there’s always a concern once we start aligning costs, it always takes time to ramp. But it seems that you’ve been ramping back pretty quickly. And then you mentioned California, the four public utilities. So are we still going with the actual schedule on a quarterly basis in terms of the percentages of the work that needs to be outsourced? Remember there was a whole schedule. Is that still going on, or that’s been kind of changed or updated?

It’s still going on. They still on schedule. It’s just a matter of when it becomes public to the world. So what we know versus what’s been published are two different things. I told you what’s been published. We have active negotiations, though, with all four of the IOUs. And until those are going – until those negotiations end, we can’t really say anything, or until they’re public.

Okay. Yes. And then can we look at the second half, what’s the – we’ll try to go through our model. What can you – obviously, what should we think about when we’re modeling our Q3 and Q4 numbers on the income statement?

Mike you want to take that?

I would look for increased revenue in Q3. I would look for margins, which haven’t fully recovered yet, to maybe improve slightly from where they are. And that’s adjusted EBITDA as a percent of net revenue, which about 16.7% this quarter. Should be a little higher next quarter. And then Q4, which is a little more of a wildcard, revenues typically come down in the fourth quarter. That may not happen this year. It may be more flat Q3 to Q4. We just don’t know. That depends on the pace of reopening. And margins should remain high in the fourth quarter.

Okay.

If you need more color on your models, Moshe, we can talk the call.

Sure. Yes. And then follow-up question. Any color on where we are on the integrated analytics software business in terms of the pipeline, wins for the quarter, how does the second half look like, et cetera?

You’re doing great, Mike.

All right. I’ll take that one. So we had a couple of small wins in the second quarter. We have not had any large wins thus far this year. The pipeline looks good. We’ve had one project that I know of that has been delayed from this year into next year because of COVID spending. So that was one. I still think they will probably have a pretty good year this year. The pipeline really matures typically in Q3 and Q4, and we’re seeing that again this year. So we’re doing a number of demos, and we’re actually in negotiations on a couple of pricings, which are deployments that will start up late this year. So I think it looks pretty good, Moshe.

[Operator Instructions] We’ll move to Craig Irwin with Roth Capital Partners.

So if we can look beyond the immediate contracting opportunity in California and look at the opportunity for 2021 and 2022 as far as new contract initiations, how do you feel the utilities are prepared for the entire process? I mean, are we going to be reinventing the wheel again the way we did for this process that’s I guess largely held up by the commission at this point? Or will the processes and procedures developed over the last two years be something that gives us a smooth path to progress?

Well, I can’t really answer for the utilities, but early indications are in New Jersey in that there’s a little bit of confusion, and we hope they straighten it out. The other states that we’re tracking are asking some very good questions that we feel are favorable to what we do. And that’s about all I can say on that. So it’s state by state. And nothing could be worse than California, let me just say that. I shouldn’t say that. I should say that in the middle of the –

Let’s hope the governor isn’t listening.

No. But it’s been – Craig, it’s been five years.

Oh, it’s insane. It is completely insane. But the commission was right. Fundamental utilities are not motivated to eliminate the use of their primary product, right? That’s just not what they do. Of course they’re going to squander money. I probably shouldn’t say it quite like that because that may make the utilities cringe, but it’s true. So your execution this quarter was obviously much better than we or anyone else expected, so congratulations. I know you all in the executive team took large pay cuts and really participated in the downsizing that was done to deliver a good quarter, but maintain the loyalty of your employees. Is there a specific set of hurdles or goals or milestones that you would look at for reinstating compensation levels of employees working at different levels in the organization? And can you tell us what the visibility is? Is this something you think happens maybe by next year? And is there a defined policy by the board yet?

I’ll let Mike handle that one. He’s closer to where we are across all the operations of reinstatement.

As a general comment, Craig, pay has been restored to pre-COVID levels with limited exception. And the limited exceptions are businesses that are particularly impacted by COVID for one reason or another, and that’s not much of our business. So in general, pay has just been restored here in the last I think week or two. 401k is a discretionary expense we will look at in Q3, thus far has not restored. As well as board expenditures, who the board met two days ago and elected to suspend their pay for this quarter, and they’ll reinvestigate that next quarter. So that’s the current status. We’re returning to normal flow again.

Thank you for that. My next question is on the corporate opportunity, right? So Onsite brought you a different type of sort of industrial customer that you can service over the next several years. With this current environment, one would expect that the activity on the corporate side could potentially increase greatly given the motivation to save money. And that’s what you guys do. You help people reduce their energy costs and provide them equipment upgrades that are sustainable and long term for those returns. Are you seeing much of an uptick for the industrial customers that you’re pursuing through Onsite and some of these other pieces of the organization? What should we think about that as an opportunity as we exit this calendar year and look at 2021?

Go ahead, Mike.

You’re right, Craig, in your thesis. And this is brand new information, so we’re watching it closely. But it does appear that industrial customers are increasing their spending with us significantly. And I’ll go to one of our largest customers, AT&T. We’re going to do as much work as we possibly can for AT&T. And they’ve just simply asked us – they’ve opened the gates and said, how much can you get done for us this year? That’s partially being driven by corporate sustainability goals. It’s partially being driven by our performance relative to other players in the industry. We’re performing very well in that area for industrial customers. And you’re right; I think there is this overwhelming focus on cost management of which energy is a significant input, and that’s driving that market. So we’re ramping up significantly in the industrial sector.

Great. And then last question, if I may. The traditional engineering side of the business, it seems to be hanging in a little bit better than the unemployment numbers would suggest, right? 40 million unemployed is a very scary number, and I definitely feel for all of the families impacted. But it seems that your core customer base is continuing to spend money on a very similar trajectory. I guess there’s optimism in there that COVID is over soon, so I share that optimism. But can you maybe describe for us what the conversations are these days with your engineering and consulting customers? Do you feel that revenue can stay flattish there over the next number of quarters?

Craig, all indications at this point is, to our surprise, that they’re not impacted. It’ll be flat or maybe even improving. Now we’re primarily focused in California. And there’s no indication from the city or development that anything is going wrong. And we’re usually the first to know about because we’re out there doing the permitting part for the cities. But we thought we would have seen it by now. The cities don’t indicate that anything’s wrong. So it’s kind of – I wouldn’t say we could look too much past two or three quarters. That’s like predicting a recession. But as of right now, we haven’t seen anything.

That’s really good to hear. Do you think that’s because Willdan has a track record of giving local governments much broader access to technical services and your engineering capabilities for far less than they would spend to develop this internally? It’s a way for talents to share resources indirectly through Willdan and just get the best talent to solve their problems. Is that really what this is, or is it just local government kind of still facing forward and marching to the music?

I think they have turned to Willdan a lot to supplement their staff. A lot of their staff couldn’t get in the field, couldn’t do things and they turn to Willdan. And construction hasn’t slowed down. So that’s about all I can say at this point.

Excellent. Another question I want to ask is about IA. Within the last nine months, you added a number of sales people in there. I guess I should say a few sales people in there. And then we went into sort of this no-fly COVID zone we’ve all been dealing with. Can you share with us what the pipeline looks like at IA? Have the conversations continued to mature? Do you feel that these new sales employees are able to fully show their value to the company and participate in deal capture in this current environment? And do we still have hope that that’s potentially a large contributor to the bottom line over the next couple of years?

Go ahead, Mike.

I would describe it this way, Craig. We have opened up at least two new sales channels for IA products and technology. Brand new sales channels we didn’t have at the beginning of the year. The first one is to work with E3’s consulting services and E3’s front line where these types of technologies are needed with customers. And there’s a good communication and regular exchange of information between E3 and IA. That’s worked out well. It’s still early. The sales cycle takes a while, but that’s a new sales channel for us working. And the second is working with the rest of the EE business. We have some new technologies, which I won’t bore you with on this call, but new exciting technologies, we believe no one else in the world has right now. And we intend to launch this to the world and optimize energy efficiency in ways that have never been done before. And we’re starting to talk about that with our customers. At one point I’d like to give you a demo, actually. And this is brand new for us. It’s a new sales flow for IA technology. And that is something that we also hope will bear fruit. We’re just starting, but will bear fruit over the next 12 and 24 months. So that’s how I’d describe it.

Excellent. Well, thank you for taking my questions, and I should say congratulations to the whole Willdan team for executing in a very difficult environment. It really takes a team pulling together, and you guys have done a great job.

And next we’ll move to Marc Riddick with Sidoti.

Wondering if we could talk a little bit, and forgive my – I’m sorry if I missed this. I wasn’t sure if I heard this. But I was wondering if you can touch a little bit on the – given the long-term acquisition goals of the company, I was wondering if you could sort of touch a little bit on maybe what you’ve seen out there as to attractive targets going forward? And maybe whether or not that pipeline – how different that pipeline may look today versus maybe six months ago or pre-COVID. So wondering if you could sort of just give a general overview as to what that opportunity set looks like to you now versus maybe what it looked like going into the year?

Well, rather than – go ahead, Mike. It’s just easier.

All right. John and I were just talking about this with the board. We had a line, a well-developed pipeline of targets before COVID. And we’ve suspended all activity on those. But some of those have come back to us and said, even where they weren’t sure that they wanted to join Willdan, they’ve come back and indicated that they now want to enter into those types of discussions with us. We will do that cautiously and slowly over the next quarter or two. So don’t look for any transaction certainly in Q3. Maybe not in Q4, I don’t know. But the pipeline has gotten better because recessionary pressures and concerns about the economy. In addition, no one else is doing any acquisitions. So none of our target or companies that we were engaged in discussions with have sold during this period of time. So I think it certainly looks better, and I hope that pricing looks better when we get back to acquisitions.

Do you have the sense that – that’s certainly encouraging from a long-term perspective. And that’s kind of where I was going. Not necessarily what you might do between now and the end of the year. But I was kind of thinking about from that standpoint, that certainly is encouraging from a longer-term perspective. I was also wondering from a sense of what it looks like from your vantage point as to the desirability of those particular targets. Have the priorities of maybe what types of targets you’re looking at or what types of verticals that are most attractive to you, do you get the sense that that has changed very much given what we’ve seen year to date? How that maybe has shifted, or how should we think about? Or is it fairly similar to where things were at the beginning of the year?

Tom, why don’t you address how the industry is changing and how EE is becoming more integrated, the integrated solution that utilities want.

I think we’ve talked about this a little bit. Historically, they just generated and matched whatever load was out there, kind of like we build highways. We continue to build highways to match whatever traffic’s out there. So if there’s a traffic jam, our solution has been more highway. What they’re trying to do going forward is instead of just more and more generation, they’re trying to get a control on the load, which would be the users of electricity, and manage that. So as that balance takes shape, this is a primary thing that has to happen. We have to use the least amount of energy and use it and balance it between generation and load. So what happens next then, if you can optimize that, then you can start to use renewables with storage. And then you can start to reduce your carbon footprint. And that is where everyone is headed. And that is right in the middle of where we’re headed. So EE, as we do today, is just like a first step. All the things that E3 does, IA does, our engineering people do all are based on the total solution that the country’s headed to. And that’s what Mike referred to as an integrated approach. Does that answer your question, Marc?

That’s certainly helpful.

That does conclude our question-and-answer session. At this time, I’ll turn the call back over to our speakers for any final or additional comments.

Yes. Thank you all today for participating. We appreciate you being a shareholder of Willdan, and we’ll see you next quarter.

That does conclude our conference call for today, everyone. Thank you all for your participation. You may now disconnect.