Good day and welcome to the Willdan Group Second Quarter Fiscal Year 2021 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Al Kaschalk, VP, Investor Relations. Please go ahead, sir.

Thank you, Jenny. Good afternoon, everyone, and welcome to Willdan Group’s second quarter 2021 earnings call. Joining our call today, are Tom Brisbin, Chairman of the Board and Chief Executive Officer; Kim Early, Chief Financial Officer; and Mike Bieber, President. The call today builds on our earnings release we issued after the market close today. You may find the earnings release and the Willdan investor report that accompanies today’s call in the Investors section of our website willdan.com. Management will review prepared remarks, and then we will then open the call up to your questions. Statements made in the course of today’s conference call, including answers to your questions, 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 annual report on Form 10-K filed for the year ended January 1, 2021. The Company cautions investors not to place undue reliance on the forward-looking statements made during the course of this conference call, which disclaims any obligation and does not undertake to update or revise any forward-looking statements made today. In addition to GAAP results, we’ll then 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 EBITDA and adjusted EPS. We believe net revenue defined as contract revenue, net of subcontractor services and other direct costs, allows for an improved measure of the revenue to it from the work performed by our employees. And adjusted EPS and adjusted EBITDA are supplemental measures of operating performance, which removes the impact of certain expense items from our operating results. GAAP reconciliation for each non-GAAP measure is included at the end of the earnings release we issued today. After Tom’s prepared remarks, Kim will provide a review of our financial results, we will then take your questions. Tom, over to you.

Thanks a lot, Al, and good afternoon, everyone. During our call this afternoon, I will provide an update on the current operating environment and Kim will review our second quarter financial results. Our second quarter results met our expectations, given we are still in transition from the pandemic. The restart of LADWP was June 21, 2021, our largest contract. We also have PUC approval on all California IOU programs. Companywide we are not under any COVID restrictions that impair our ability to do work. Of course, the ramp up are challenging, but we are completely back to work. We are then pleasantly surprised by how well our Engineering segment has done during the pandemic. We expected some affect but we have seen steady performance and currently there’s growing demand. California construction is accelerating and our municipal customers are trying to catch up. In our Energy segment we have resumed all programs and have approvals on the total $786 million California IOU programs. The programs in status are PG&E Pacific Gas & Electric, the new construction program valued at $98 million. It covers all new commercial facilities. We have PUC approval, a notice to proceed and the duration is five years. For PG&E Public programs, value is at $90 million. It covers K through 12, all government facilities, federal state and local, we have PUC approval, a notice to proceed and the duration is four years. For San Diego Gas & Electric. The small commercial program. Its value is $42 million. It’s for all facilities under 24 KW. We have PUC approval, a notice to proceed and the duration is three years. For SoCalGas, we have the large commercial program valued at $12 million, we have PUC approval, the notice to proceed and the duration is four years. For Southern California…

Thanks, Tom, and good afternoon, everyone. Our second quarter results reflect the transitory phase from the COVID pandemic suspensions to the resumption of key programs and the preparation and the start of the expanded opportunities under the new California IOU programs. Gross revenue for the quarter was essentially flat with the same period a year ago, but net revenue net of subcontractors, materials and other direct costs was up 9.4%. While our direct install revenues recovered substantially from the suspensions put in place a year ago, those gains were partially offset by reductions in performance contracting revenues as those activities were transitioning from completed projects to new projects, which should start to show anticipated increases beginning in Q3. Gross profit margin increased to 36.7% in Q2 of 2021 compared to 35.4% in the quarter a year ago, reflecting the change in the revenue mix and the results of efforts to improve productivity and margins across our direct install businesses. G&A costs were $4.6 million or 13.7% higher in Q2 2021 compared to the year ago quarter. Last year’s second quarter G&A costs reflect the wage and staff reductions implemented during the early stages of the pandemic suspensions. This lower base period accounts for a majority of the $3.4 million increase in salaries and wages compared to a year ago, along with some increased staffing and nonchargeable labor in anticipation of the new California IOU contracts and other organic expansion opportunities. Higher stock-based compensation and other G&A costs were partially offset by lower depreciation and amortization to account for the change in total G&A costs. The higher SG&A costs were partially offset by the higher margins and net revenues, resulting in adjusted EBITDA for the quarter of $3.3 million, down from $7.2 million in Q2 of 2020. Our adjusted earnings per…

Thanks, Kim. Do we have any questions in the queue?

Thank you. [Operator Instructions] And we will go to our first question in the queue from Craig Irwin of Roth Capital Partners.

Good evening. Thanks for taking my questions. Tom, we all understand the COVID transition. And I guess everybody in L.A. is kind of breathing a sigh of release now that there’s a little bit more normalcy. So that’s obviously a good thing and great to be back at work at LADWP. Can you clarify for us whether or not there was any California revenue in the quarter or in the first half? And I don’t know if you can approximate or estimate the contribution, but the numbers you tossed out earlier, I think $10 million in the fourth quarter was one of them. Can you just confirm if that’s entirely LADWP or California or a mix of contracts?

We have not – there’s no California IOU in our first half. We don’t expect to...

Not from these program.

Not from these program.

Yes, the new programs.

The new programs, yes. I think that was this question also. Correct? And the $10 million will come from, hopefully, $10 million will come from the California IOU. That’s not from LADWP. That I referred to.

Okay. Understood. So, with the COVID headwinds off, is it fair to kind of amortize the scope that you won or the duration of the contract and say that that’s going to get us to an approximate run rate in 2022 that’s reasonably accurate? Or will these programs sort of build up into the final year of the programs?

I would say it’s going to build towards the end of 2022. It’s going to be bigger than 2023. It’s going to be probably a bigger 2024. And hopefully, when the program five years from now starts there – starts to – or it looks like it might come through an end, we don’t want to just hit a wall or the most – the greatest run rate, we would like to be ramping down in that fifth year, not too much because we anticipate there’ll be a recompete and if our performance is a plus, we will be in there fighting to continue for another five years. You also got to think about, Craig, that we are at about – and you know these numbers better than I do, probably 30% to 5% to 40% outsourced. And over – by 2025, they got to get to 100% outsourced. So with good performance, we anticipate these programs to now continue when to recompete, but grow up five years up.

Understood. Understood. So, I’m kind of hoping that we’re still ramping in 2025. That it will be the additional program. So my question really is...

Wait, wait, Craig, I can’t say that because the utilities would think that we think that will help us. We’ve got a plan for our contracts as you may or may not win. So you don’t want to be sky high your ramp in the fifth year, you want to be some reasonable number.

Yes. Understood. Understood. So, there’s still quite a lot of business to be outsourced, correct? And you have one an outsized share to date. The awards have been quite late, which all of us expected in the first place. Do you think it’s likely we see material movement on the next round of awards before the end of the year? Where can you say you are in the RFP, RFQ process for those incremental opportunities? And just given how the time line has come together for the work that you were awarded this year, would you expect those projects to be in full excision mode before you see the next round of awards made?

Yes. We – I mean, I don’t think we’ll see the beginning of what’s called abstracts, RFPs, orals and awards, I don’t know, the end of 2022 end of 2023. I mean, everybody is trying to wrap their head around this, including the utilities, there might be specialty programs, but in terms of the overall large programs, I would say the end of 2022, 2023 to meet a 2025 goal, something like that, Craig? It could even be into 2023 before we start to see something on California.

Okay. And then the potential scope, right, if we do some back of the envelope math and we say a little bit better than third was handled, and they were maybe 20% outsourced. We still got maybe half of the $1 billion a year in energy efficiency spending in California to be outsourced? Would you expect – I mean, we’ve been doing five-year contracts. Would you expect there to be procurements that could support a couple of billion dollars in future activity? Is that really the size of the probable procurements that we’ll see over the next two years?

I’m not speaking from utilities, but I mean we think there could – we could grow the value we’re looking at now by 50% by the end of 2025 with excellent performance. But what the utilities are going to do? You know the mandate as well I do. If it’s a 40% number and they got to hit 100% number by 2025, do the math. 2.5x times the $100 million gives you $1.5 billion. A little bit more, $1.8 billion. I got my CFO saying I can’t add. He always yells at me for that. So yes, there is significant work left to be done. Are you still there, Craig?

Did you have something else for Craig?

No. I just wanted to let him know that we also see this type of growth in other parts of the country. I mean I alluded to the fact that this subject is heating up and our pipeline is good in New York and other parts of the Midwest. So you’ll see announcements over the next few months. I mean we’re doing quite well on our backlog and pipeline. But that’s for Craig and we’re on to the next question.

And yes, we’ll go to our next question from Moshe Katri of Wedbush.

Thanks for taking my question. Hope, you guys are all good? Good shape. I’m less worried about the pipeline and my worry is more about the sustainability of the flow of business that’s coming through, given the nature of this pandemic in – especially given what California may be kind of forcing people to do or not down the road. So your thoughts on what could – what – I mean how are you guys kind of getting set up for this, especially with the LADWP contract in terms of in-person installment, that’s number one. All focus continues to be more on the operational side, as you indicated, the challenge of being able to kind of deliver these contracts on time and on budget. Maybe you can talk a bit about some of the lessons that you learned during the pandemic, how are you getting set up. And then maybe we can talk about wage inflation and what sort of wage comp increases do you have set up or actually embedded in the model, looking into this year or next year, given the elevated kind of nature of wage inflation across the board. Thanks a lot.

There’s about three parts there. Mike will do a wage inflation and other parts. I’ll try to take on some of the lessons learned during pandemic, which is virtual selling, virtual audit, do-it-yourself installs, but that’s not going to cover all of what we’ve got to do. So if we did get shut down again completely, we would experience the same thing. We have no magic bullet. We might be able to pick up 20%, but there’s no magic bullet to do 100%. We are – we don’t anticipate that now. I mean, Moshe, do you know something we don’t know?

Not exactly.

I mean, are you expecting that LA will close again? To the extent that on...

I don’t know, unless it would happen again. No, I’m overnight in Australia. So I don’t know.

Yes. Well, I don’t have an answer for that other than we have learned lessons how to do some virtually. I’m sure that if we get shut down again, we can pick up enough to get through it again. Unfortunately, we won’t hit those growth rates that we would love to hit with where we’re looking at now, but I’m just being very candid that you can’t hit – you can’t deliver the backlog we have closed.

I know. Yes. And how about wage inflation and what’s embedded in the models?

A lot of our clients – a lot of our contracts have escalators in them. We are seeing wage inflation. It’s coming in on the new hires. We are hiring quite a number of people right now. You can see we’ve got more than 100 open positions on our website at this point. So we are rapidly staffing up. And we’re seeing more than 5% wage inflation overall and that varies by the type of talent you’re trying to hire and other things. We don’t hire typically at the lower or less educated levels. Most of our new hiring is done with advanced degrees or college degrees and so in some parts of the country where you can see higher than 10% wage inflation. But in general, we are able to pass on those costs through our contract mechanisms, Moshe.

Okay. That’s helpful. And then if we – obviously, with things coming back and assuming the trend continues, can you kind of give us some – maybe just some broad guidance, I don’t know, long-term view in terms of what do you think the non-GAAP margin in the business could be down the road, assuming that things pick up and we don’t have any issues with kind of people sitting on the bench and underutilized, et cetera? Can we kind of go back to somewhere in that high-teen level, maybe a bit higher?

That’s exactly right. We were at 18.5% pre-COVID. And that’s adjusted EBITDA as a percent of net revenue, which is the metric you’re referring to. We would expect to, at this point now, return to pre-COVID levels, so in that 18-ish percent, and then grow from there because that number was partially being driven over the last several years by back-office cost absorption. And now we have the backlog to drive this well beyond $500 million per year, which we’ve never experienced. That would be record revenue growth. And so I would expect the margins to slowly creep up from that pre-COVID level of roughly 18%.

[Operator Instructions] And we will go next to Marc Riddick of Sidoti & Company.

Hi. Good afternoon.

Hi, Mark.

So I wanted to circle back to sort of the path you seem to be setting with commentary around the potential for order flow and some other areas that are looking promising. And I was wondering if you could talk a little bit about to what extent, if any, of that is driven by sort of state local funding mechanisms being supported federally or if that’s part of those conversations or if – without getting into too much detail, but what you could sort of share as to maybe some areas that you’re positive about as far as being able to build the pipeline. And then I have a follow-up after that.

We have, Ryan, considerable new work that we’ll be announcing. And let’s just call it, housing, multifamily housing, low-income housing that will benefit tremendously from any federal stimulus type package, both in just infrastructure upgrades as well as energy. That is new. We’re not completely new, but it’s growing within Willdan and you will see announcements in the, when you think, next month or two – next month or two. And then with that work, which has already got more work behind it and the stimulus comes, it’s something that we didn’t think we would benefit from six months ago. And now we’re more optimistic on that money. It’s focus and it might actually get to the people who need it.

It’s very encouraging. Thank you for that. I was wondering if we could shift gears, I know that certainly – and first of all, thank you for all the detail that you provided in your initial commentary and sort of where you are. It certainly seems as though I you’re going through that process of transitioning to the opportunities, it’s going about as smoothly as one could ask for. I was sort of curious as to is it possible to think about the prospects of looking at potential acquisitions down the road? Or are there some service areas that you think that would be complementary to those opportunities? Or how should we think about that.

We won’t resume our positions until sometime in 2022, we’ll get the leverage down and get these California programs up and running first. But we are starting those conversations. We’ve had a few of them now. There are several areas that we would like to add. The last is to pick up where we left off. We acquired one company in the industrial space, which is 40% of the market, but less than 5% of Willdan. So that space is wide open for us. There are a number of good opportunities out there in the industrial space, which would also help diversify us a little bit and hedge against the utilities, which is now creeping up at over 60% of our portfolio. So industrial first. Electrical engineering second, that’s a good area. We’re able to hire electrical engineers. It’s been tough to find the right-sized business in that area. There are a few out there. We would like to make an acquisition there. And lastly, I’d point we’re getting to a size where we would also like to make an acquisition in the federal space. The other area that I would say we would like to follow-up on actions we’ve already taken is in the policy space. We’ve acquired E3 right before the pandemic in October and there are a number of other opportunities there on the policy advising space as well.

It’s very encouraging. Thank you very much.

And we’ll go to a follow-up from Craig Irwin of Roth Capital Partners.

Thank you. So I guess this is a question maybe for Kim, right? Modeling is always difficult for Willdan. I guess it’s really a function of the nature of the business. But if you look at the analyst models and the consensus numbers for the third and fourth quarter, obviously at least my take is that there needs to be an adjustment. Can you maybe help us think through what the appropriate revenue expectations would be, what the major puts and takes are for us to get numbers right, given that we are basically starting up in California, that there are expenses related to that with that that don’t have margins with them yet and the other basic puts and takes to get our models a little bit more precise?

So I’m not sure how to answer that, I guess.

I guess, directly, Mike, maybe you’ve got some guidance.

So, Kim’s turning to me because I think I have your model in front of me, Craig. So let me see what commentary I can provide. On the net revenue side, the models are a little higher than our internal plan, but not that far off. The Q4 earnings number is higher than our internal plan. And I think that is because people are modeling in or modeled in the contribution of the new California IOU programs in terms of earnings in Q4. And that won’t actually hit until sometime in 2022. The California programs won’t contribute in earnings. They will not contribute to earnings in this fiscal year. They’ll be a drag on earnings because we’ll have start-up costs. But then you’ll see that pretty rapidly roll over in 2022 and drop straight to the bottom line. That would be earnings and cash flow. So I think the disconnect is probably in this – when you had the California program starting in the basically three to six months later than most of your models and that Q4 number is probably the one that you need to take a look at.

Perfect. Perfect. And then just as a follow-up question. One of the other factors that contributed to significant lumpiness in EBITDA, EBITDA margins has been software sales from Integral Analytics. Do you have any software sales in your internal forecasts? Is it fair to expect one or two contracts by the end of the year? Or should we strictly treat that as upside? And I guess the other side of the question is, has the pipeline changed? And is there an update you can give us?

Integral Analytics has had a good year thus far and we think in the next six months is going to have an even better year. You’re right, I would expect another one or two deals thus far. We’ve factored those down in our internal plan, but I think there’s some upside there for all of us. That pipeline looks really good. They continue to gain traction with the big IOUs as more DERs are coming on and making the grid much more complex. You really just cannot do accurate forward forecasting on spreadsheets as most of the United States does at this time. And the way to get around that is to adopt Integral Analytics software. So the pipeline looks very good. It continues to improve and they’re going to have a great year.

Excellent. Thank you and congratulations on the final approvals of your California projects. Good luck in the next round, and we look forward to the progress next quarter.

And we’ll go to follow up Moshe Katri of Wedbush.

Thanks. Just to confirm if I heard it correctly. We didn’t really recognize any revenues from software sales this quarter, am I correct?

That is correct, Moshe. We had none in Q2. We had the software license of PG&A we announced in Q1, but nothing in Q2, correct.

And maybe you will see some signings during the next six months. And can you talk a bit about what’s going on there? I think you went through maybe a restructuring of the sales force last year. I don’t know, maybe you changed compensation, but the product looks great, but we’re yet to see any sort of meaningful results from that part of the business. Maybe you can talk a bit about that because obviously this will give you a pretty decent boost to profitability, which is something that we want.

Yes, Moshe, we’ve made a number of changes in the software business in the last 24 months. You and I have talked about some of those. You’re right, we’ve restructured not only sales but even development services. We’ve hired a number of new people in that business. We are trying to move from what was historically large lumpy deals to more compartmentalized for more annuity-based sales. And those would be smaller deals that are more incremental and less lumpy. And I think you’ll see some of that come in, in the back half of this year in a couple of deals we’re working with right now. We’re also doing a lot of collaborative development with E3. There’s a meeting going on today, in fact, on a brand-new service offering that they’re working on called short-term forecasting, which we’re excited about and hope to and have more announcements about, and that’s being discussed just today. So I believe that IA will have its first meaningful contribution to earnings for Willdan this year. It’s been a long time coming, and that we love the margins coming out of that business. We also love the technical differentiation. They do not have substantial competition in the marketplace. Competition is really from inaction. So we’re highly differentiated and it’s a great business. We’d like to invest more there.

Okay. And then final question on my side. As you’re ramping the business with the utilities or with California in general, should there be an impact on DSOs? Is there – are there – how are there kind of payment cycles relative to the rest of the business?

The new contracts are going to have a little more extended capability for – or requirement for working capital. So the terms are a little more complex maybe than in some of our earlier contracts with some of the parameters having a quarterly true-up. So the DSO is likely to go up. The working capital requirements are likely to go up a little bit, but not radically so.

Understood. Thanks.

And with no other questions in the queue, I would now like to turn the call over to Tom Brisbin, CEO, for any additional or closing comments.

Well, thank you for all your questions and interest, and thank you to the shareholders who are listening or will listen. And we expect post pandemic, if we’re really there, Moshe, if you’re still listening, and we live in the most closed city here in L.A., but we expect to really get going now and stay there and deliver to all of you what we promised over the last three, four years. So we hope this all comes to an end, the pandemic, and we can get back to work. So thank you all.

And so this concludes today’s call. Thank you for your participation. You may now disconnect.