Good day, ladies and gentlemen, and welcome to Willdan Group's Second Quarter 2023 Financial Results Conference Call. Our host for today's call is Al Kaschalk. [Operator Instructions] I would now like to turn the call over to your host. Mr. Kaschalk, you may begin.

Thank you, Martin. Good afternoon, everyone, and welcome to Willdan Group's second quarter 2023 earnings call. Joining our call today are Tom Brisbin, Chair and Chief Executive Officer; Kim Early, Chief Financial Officer; and Mike Bieber, President. The call today builds on our earnings release we issued after market closed today. You may find the earnings release and the Willdan investor report that accompanies today's call in the Press Release and Stock Information section of our Investor Relations website. Management will review prepared remarks, and then we'll open the call up to your questions. Statements made in the course of today's conference call, including the 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 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 December 30, 2022. The company cautions investors not to place undue reliance on the forward-looking statements made during the course of this conference call. Willdan disclaims any obligation and does not undertake to update or revise any forward-looking statements made today. In addition to GAAP results, Willdan also provides 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. I will now turn the call over to Tom Brisbin, Willdan's Chair and CEO.

Thanks, Al, and good afternoon, everyone. Our second quarter performance was strong. This continues the momentum we started last year. Net revenue grew 17% in the second quarter. For the first 6 months of this year, we grew net revenue by 20%. All of the growth was organic and across the entire company. The Willdan team is converting this net revenue growth to profit and cash flows. For the trailing 12 months ended June 30, EBITDA was $37.9 million, the highest level ever at Willdan. Our backlog is solid, and we are seeing many new opportunities. These opportunities replace the annual reduction we saw from the SCE contract. These new opportunities include $40 million with NYPA, that's New York Power Authority, $120 million for one of the nation's largest school districts, $30 million plus from Southern California Edison, $20 million from PG&E in a program called CF [ph] and $10 million from the San Diego Gas & Electric. Our Policy and Planning group, E3 remains very strong. They provide energy consultant to the entire country, helping develop the framework for the clean energy transition. In addition, E3's asset valuation and market price forecasting practices are growing rapidly. Large private infrastructure funds are pivoting their portfolios to clean energy investments. These investments support Willdan's other capabilities, such as city engineering, utility programs, grid distribution, data analytics, design and construction management. Recently, we supported Blackstone Infrastructure Partners on their $2.15 billion equity investment in the Northern Indiana Public Service Company. Cross-selling is working. We were recently selected by a major health care provider with over 1,200 facilities. The problem we are working on is how much of their capital budget is allocated to their decarbonization roles. To solve this problem, we are using our financial consulting services, E3, along with our utility…

Thanks, Tom. Good afternoon, everyone. As Tom mentioned, Q2 continued the stream of strong performance driven by our growth in our utility programs, additional software licenses and the strength from our Municipal Whole Services segment as well as expanding revenue from our direct-to-customer construction management businesses. As a result, we generated $18.1 million in adjusted EBITDA and $18.9 million in cash flow from operations over the first half of 2023. The improved earnings provided the fuel to continue to delever the balance sheet, bringing our leverage ratio to 2.4 times adjusted EBITDA and putting us in a position to resume pursuit of strategic M&A opportunities. In fact, we recently closed on a small addition to our Municipal Engineering segment that broadens our service offering, and we're actively seeking additional acquisition opportunities. Q2 gross revenue was up 16% and net revenue was up 17% versus Q2 in 2022. We saw double-digit growth in both of our segments with the revenue increases distributed widely across our service lines. Q2 gross profit was 29% higher year-over-year as our gross margin improved to 34% in Q2 of 2023 versus 30.8% a year ago. Higher margins reflect the restructured California IOU contracts, strong growth in our municipal engineering revenue and additional software licensing revenue. Q2 G&A expenses were up modestly versus the same period a year ago, primarily due to higher employee incentive compensation resulting from the improvement in income from operations. Interest expense more than doubled to $2.2 million in Q2 of 2023 due to the unfavorable impact of higher SOFR interest rates. Our income tax rate was 38% in the second quarter compared to a credit of 28% in the second quarter of 2022. So for the second quarter, net income was $397,000 or $0.03 per share versus a loss of $4.3 million…

[Operator Instructions] Your first question comes from Craig Irwin with ROTH MKM. Your line is open.

Evening, guys. Congratulations on a really solid quarter here. So my first question is really about gross margins. You mentioned a few differences in there that are working for you. Can you maybe sort of list them in order of priority as far as margins? And any color you could share as far as whether or not these factors are likely to sustain over the next couple of quarters or maybe even build from here?

Well, I would say in order of magnitude of the impact on the improving margins, of course, the software revenue is a big factor in that, had strong first half, and that's a strong contributor to the higher gross margin that we realize. And we do have a strong backlog of opportunities in that business. So we expect continued revenue growth in that area. I think the second impact was the restructuring of some of the California IOU contracts compared to a year ago provide additional gross margin that we're able to achieve and that's probably the second biggest factor. And then third, overall, I think it's just the expanded volume and kind of a productivity increase across a lot of our municipal engineering and the planning and analysis work. Those are - that's probably third in order of rank of the impact on that higher margin.

Okay. And then as a follow-up...

Yes. Yes. Just to answer the question about whether or not that's sustainable. I believe that it is all sustainable. In fact, some of that volume increased. As we mentioned, this is going to be - the second half of the year is going to be our busiest time. We expect on that T&M service-oriented business, those margins that continue to improve.

Okay. Excellent. So then just to continue on the line of software, right, as being the largest impact in the first half, SMUD and the LoadSEER contract was the only press release contract in the second quarter for Integral Analytics. Can you maybe give us an idea on the materiality of this contract? Is this sort of a small fish or big fish? Just something incremental? How would you...

The small contract, you mean? Yes, Mike.

That was a small fish [ph] Craig. We had a big fish in the first quarter that we press released. We didn't announce the name of it because that was confidential, but we have that in the first quarter. So the big fish was in the first quarter, the small fish was in the second quarter, and we have a very good pipeline of software opportunities in the back half of the year and going into '24.

Excellent. That's really good to hear. So then a follow-up question. Investor perception out there seems to look at Willdan as largely benefiting from utility spending on energy efficiency. Your comments on the call and some of the meetings we've done, give me the impression that, that is not the case, that utilities are actually a minority of your drivers right now, but yes, those are great contracts to have and great customers. But you're finding a lot of activity in other markets. Could you maybe update us on mix and markets that are maybe working for you in a big way versus markets that are sort of incrementally improving?

Sure. State and local is actually a little larger percentage of work for Willdan overall than even utility contracts. Those are similar in size and then a very small part, about 8% to 10% is commercial. So in order of the state and local work where we do a policy analysis, a lot of data analytics, a lot of our software is sold there, we also do different types of energy upgrades for infrastructure is very strong. State and local business is very good right now, and that's the largest customer segment. Utilities are also good. That's kind of a steady earning business. So that's the size. But we're really being driven by spending at the state and local level, which those customers have a lot of confidence right now.

Thank you. So you also mentioned in your comments that some of this work preparing for the IRA money is benefiting you at the moment as different state and muni entities look to plan and position themselves to participate in those programs. Can you maybe describe for us whether or not there's a follow-on opportunity after the consulting engineering is done as far as addressing the pinch points in the grid or the other needs in a local geography?

Yes. To be clear, the IRA money does not really hit our marketplace. A lot of customers are paying us to explore how to receive those funds though and what to do with them, how to prioritize projects that will help decarbonize and help with the energy transition for that particular customer. So that study work is the work that we're seeing right now. It's not the actual work funded by IRA. Later on, there is a follow-on opportunity though. This work will lead to infrastructure projects later on, which positions us well for that type of follow-on work, which might occur over the next several years.

[Operator Instructions] Your next question comes from Moshe Katri with Wedbush Securities. Your line is open.

Moshe, if you're talking, we cannot hear you.

Your line is open

Sorry for that. I said let me add my congrats on results. You started by providing color on some new emerging opportunities that you love [ph] Is there any way to quantify the bid and proposal pipeline that you're kind of looking at, at this point? And I think you've done this in the past. And in that context, you also suggested that the software business also has very, very solid pipeline. Is there any way to quantify that as well? That's my first. Thanks.

Quarterly number or quantifying - still work strongly. So the decarbonization study or municipal or the private sector are just getting going. And we've landed on what we believe are two very important contracts in the country, that was New York City and a large health care system. Every Fortune 500 Company is looking at the same thing, how do I meet goals for decarbonization between now and 2050. That's just getting started Moshe. And we've landed on the early contracts that were very significant. So we are putting an effort into that. Utilities are growing at your typical pace, we're adding some services, but we don't believe that's where the future is. The utility work for us has been a great way to get to know their customers, a great way to put measures into their facilities, a great way that they - when we walk back on bigger projects, they know who we are. So going from there to software, which I'll let Mike address, we've consolidated software across the company. They're all working together, and we want to finish that one way.

They're set for a record year. Our best year ever was about $12 million in revenue from software sales external to external customers, and we're looking to significantly beat that this year. But we've got another 6 months to go, Moshe.

Yes. The other thing, Moshe, is the utilities are looking more at electrification, that's also getting started versus energy efficiency. And they're kind of going parallel where energy efficiency, I would say, is more mature with the utilities and customers where electrification is in a very early stage with utilities, probably first no first [ph] games, it's faster than that, [indiscernible] So that's a market that we have got toes into in both California and New York, just we did with energy efficiency back some 14 years ago. So does that help you at all?

Yes. And just a follow-up on this one. Are there any renewals coming up here that we should be aware of?

Yes, Con Ed, our proposal then is under evaluation, that's for the end of the year. LADWP, there'll be a recompete by the end of the year or it may be extended, we don't know. If you're just selling energy, [indiscernible] recompeted. Do you have anything, Mike?

Just for the large. Every year, we have 25% of our contracts that get recompete or so and that's true this year. Tom just mentioned the big ones.

Yes. Just so you know, we've had kind of bad about 2009. We've gone through four recompetes. We've had LADWP for about 11 years. There's been 2 recompetes. [indiscernible] there's been three recompetes. And that's also a 10 or 11-year history, and also the big ones for us. We had no other significant recompetes. We have a few new opportunities that were down to - we have not been selected yet, but we're in, what we call, best in final or we've submitted all our paperwork, we have not heard the decision, which we've never worked for before. And so we're waiting on the results.

In the first half of the year, we also had Mid-America recompete. They - our contract was due to expire and they elected because of our technical qualifications and internally developed software that they could procure that service no place else and they extended our contract with a new contract without getting that work. So...

And following on your - any kind of -- any guidance on how we should look at Q3 versus Q4? I appreciate the annual guidance, but just in general, how should we think about Q3 on the revenue side, net revenue side and some of the other metrics?

Yes. Well, we're expecting it to be better than Q2. And for that kind of -- it's probably kind of a straight line from the first half results to the guidance for the full year. If you take them in a straight line Q3 to Q4, you would probably get a pretty good ramp there. Q3 will be better than Q2. Q4 should be a little better than Q3.

Understood. All right. Thanks.

[Operator Instructions] It appears there are no further questions. I'd like to turn the call back over to Tom Brisbin for any closing remarks.

Just thank you all for participating on the call. I hope the good news makes you happy as it makes us. We feel like we're out of the woods a little bit or out of the dark and it's getting much brighter. So thank you all for sticking with us and being patient. Take care.

This concludes today's Willdan Group's second quarter 2023 financial results conference call. Thank you everyone for attending. Have a wonderful rest of your day.+