Willdan Group, Inc.

Greetings and welcome to the Will Dan Group first quarter fiscal year 2025 financial results conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. Now I'd like to turn the conference over to Al Kastrock. Thank you, you may begin.

Thank you, Matt. Good afternoon everyone and welcome to Will Dan Groups first quarter 2025 earnings call. Joining our call today are Mike Beaver, President and Chief Executive Officer and Kim Early, Executive Vice President and Chief Financial Officer. Our conference call remarks will include both GAP and non-GAP financial results. Reconciliation between GAP and non-GAP measures can be found in today's press release and in the presentation slides, all of which are available on our website. Please note that year over year commentary on variances or variances on revenue, adjusted EBITDA and adjusted EPS discussed during our prepared remarks are on an organic basis. We will make forward looking statements about our performance. These statements are based on how we see things today. While we may elect to update these forward looking statements at some point in the future, we do not undertake any obligation to do so. As described in our SEC filings and actual results may differ materially due to risk and uncertainties. With that, I will hand the call over to Mike. We'll begin on slide two. Thanks Al. We

had a strong start to 2025, delivering record first quarter results for revenue, adjusted EBITDA and EDS. We surpassed both analysts expectations and our internal forecast. Contract and net revenue each grew 24% year over year, adjusted EBITDA rose 31%, gap diluted EPS increased 52% and adjusted diluted EPS was up 58%. These comparisons were all against a strong Q1 last year. Performance was strong across all business lines, driven by consistent execution. In the quarter, we completed two more acquisitions that expanded our geography and our electrical engineering capabilities. As electric load increases, WLDAN's differentiated capabilities and consistent execution, decision as well for long-term growth. Earlier this week, we expanded our credit facility from 150 to $200 million, a key milestone to scale our business. Turning to slide three, WLDAN delivers a broad range of energy and infrastructure solutions to utilities, customers and state and local governments. Topulated on a pro forma basis for 2025, our commercial customers are forecasted to comprise 15% of our revenue, double the percentage of last year. State and local government customers are forecasted to be 44% while utilities are forecasted to be around 41% of our revenue. Demand remains healthy across all customer groups. Our commercial work is increasingly centered around electricity usage at data centers where AI driven load growth is creating significant demand. WLDAN is helping technology clients navigate energy constraints, optimize infrastructure and meet aggressive power requirements. We see strong momentum in this area and intend to pursue acquisitions that further expand our capabilities and relationships with commercial customers. Our utility business continues to perform well. Most of our utility contracts are multi-year in nature, funded by rate payer fees and continue to provide a strong foundation of recurring revenue. On the public sector side, our work for state and local governments continues to grow organically at a double digit pace. Demand remains solid and the outlook is positive. It's worth noting that WLDAN has minimal exposure to direct federal contracts or federally funded programs. As a result, recent federal spending cuts have had little impact on our backlog or near term visibility, just like I said last quarter. Most of our public sector work is funded through user fees and municipal bonds, which have remained stable. Last week, we released our 2024 sustainability report, highlighting meaningful progress. Notably, we help clients avoid about 100 times the GHG emissions that the company emits. Our energy segment makes up more than 80% of our revenue, while the legacy part of our business makes up the remainder. We work out of 55 offices across North America and ended the quarter with 1,770 employees, primarily scientists, engineers, and technical professionals. On slide four, our upfront policy and data analytics work informs WLDAN strategy and helps us navigate market change. In our upfront work, we're seeing particular demand for integrated resource planning and asset valuation on projects associated with data center electricity flow. Those market changes have led us to acquisitions that provide solutions to these clients. In engineering, we saw strong execution and growth, particularly with municipal customers. Program management, we performed above our plan on utility programs and building energy programs for cities. We put this model to work. For the last 25 years, we've performed upfront financial planning and on-call civil engineering work for the city of Fairfield, California. Then in Q1, we were awarded a new $30 million program management energy savings and modernization contract that provides EV charging stations, solar arrays, central plant, and other electric infrastructure upgrades. On slide five, we have a strong pipeline of opportunities that we are converting into contracts. Here are just a few examples we converted since our last conference call. I already talked about the city of Fairfield, California example. Then for the Paramount Unified School District, that's another example of cross-seller. We won an $18 million design and management contract for solar arrays and EV charging stations. For National Grid in Massachusetts, we were awarded a new $20 million multiple award contract providing energy efficiency services to small business. And for Warner School District, we were awarded a new $11 million contract. We were also awarded an important recompete to provide the California Public Utility Commission, CPUC, with integrated resource planning technical support. That $9.8 million award supports analysis of a resource stack necessary to achieve California ISO's requirements. On the last call, I mentioned winning the expanded recompete with the Los Angeles Department of Water and Power, LADWP. The new $330 billion five-year contract delivers more complex energy efficiency measures to a broader set of commercial and government clients. We don't expect significant revenue from the LADWP program until the fourth quarter of this year, but ultimately think it will become one of our largest programs annually. On slide six. From 1970 to 2005, the US experienced several decades of sustained electric load growth, followed by 15 years of relative flatness. Today, we're seeing a return to meaningful load growth, marking a structural shift in the energy landscape. This shift is creating significant new opportunities for Will Dan, and we believe it will be a powerful tailwind for our business in the years ahead. Key drivers include the electrification of cities, buildings, and transportation, reshoring of industrial manufacturing, and the rapid rise in electricity demand from data centers powering AI. Electricity demand in the US is expected to increase by 50% between now and 2050. We set a fair amount of effort this quarter discussing and preparing for the uncertainty created by terraforges. This new uncertainty has had little immediate impact on Will Dan. However, we and our clients are watching carefully for price increases in the specialized equipment we use on our projects. We are inserting more flexible contract terms with our customers, and we are working to identify alternative product suppliers that could be cost effective if tariff risks persist. If a recession occurs, Will Dan should be better positioned at most due to our clients' funding sources, but we would not likely be immune to a broad economic slowdown. Turn to slide seven. The graph on the left depicts the strong margin execution the team has delivered over the last five years. Several years ago, we laid out a goal of 20% operating margin, measured as adjusted EBITDA divided by net revenue. We've significantly improved our operating margin over the last five years, reflecting disciplined execution, more efficient cost absorption, and a shift towards higher value work. The 20% EBITDA margin in our industry represents best in class performance and is associated with a highly differentiated customer solution. This year, Will Dan estimates that it will be around that 20% margin goal. Q1 is typically our lowest margin quarter, so we're right on track for this year. On the right, and reflected over the same five-year period, we've continued to increase revenue per employee, reflecting higher productivity and the growing value our teams are delivering to clients. This consistent improvement, alongside our expanding operating margin, underscores the scalability of our model and the strength of our operating leverage as we grow. Kim, over to you. Thanks,

Mike, and good afternoon, everyone. On slide eight, we delivered a strong start to the year, exceeding expectations as our teams continue to execute at a high level. We also completed two additional strategic acquisitions while expanding and extending our credit facilities. With low leverage and strong liquidity, we're well positioned to invest in future growth. In the first quarter of 2025, contract revenue increased 24% year over year to 152 million. The acquisitions of Eneka, Alpha Inspections, and APG contributed 6.0 million to the contract revenue in the quarter. Net revenue also grew 24% to $85 million. The recent acquisitions brought 6% of that growth, and a 14-week week in the quarter represents another 6% increase, resulting in an -to-apples organic growth rate of 12% for net revenue in the quarter. Contract revenue growth was strong in both of our segments. Revenue in our energy segment rose 25%, led by double-digit increases in program and construction management activity and continued strength in utility programs. Engineering and consulting segment revenues increased 20%, reflecting strong demand and continued geographic expansion. While gross profits increased 22% over the period, over the prior year, GNA expenses increased only 20% in the quarter, compared to the 24% net revenue growth, reflecting the operating leverage we've been experiencing as we grow. The -over-year increase was primarily due to increased wage and incentive costs consistent with the earnings growth, as well as higher stock-based compensation resulting from the increase in stock price. Intangible laborization expenses increased by 600K, reflecting the impact of our recent acquisitions, while interest expense decreased by 300,000 to 1.8 million on our reduced leverage. The growth in revenues and the discipline cost control resulted in a 32% increase in pre-tax income and a favorable .75% effective income tax rate resulted in net income of 4.7 million for the first quarter of 2025, up 59% from the $2.9 million Q1 2024 bottom line. The favorable income tax rate was a result of discrete benefits from the vesting of stock compensation in the quarter, as well as the expected energy efficiency tax incentives. We continue to expect a full year tax rate of approximately 16%. Adjusted EBITDA was 14.4 million, or .9% of net revenue, up 31% compared to 11.0 million in the first quarter of 2024. Gap earnings per share were 32 cents, up from 21 cents per share a year ago, while adjusted diluted earnings per share increased 58% to 63 cents per share compared to 40 cents a year ago. This was a record first quarter for WillDan in terms of contract revenue, net revenue, adjusted EBITDA, and earnings. On slide nine, we present some key balance sheet and cash flow metrics that reflect the continued strength of our financial position. Net debt was $49 million at quarter end after deploying $32 million in cash for two acquisitions. Total leverage was a modest 0.8 times adjusted EBITDA. Free cash flow was $40 million over the trailing 12 months, or a robust $2.74 per share. We ended the quarter with $38 million in cash and access to an undrawn $50 million line of credit, resulting in total liquidity of $88 million at that time. Turning to slide 10, earlier this week, we amended and restated our credit agreements, expanding it to $200 million to enhance financial flexibility, reduce costs, and extend our maturity by five years. The new structure includes a $100 million revolver, under which we've drawn $38 million. The new term loan A has been reduced to $50 million and supplemented by an additional $50 million delayed draw term loan feature, which remains unused at this time. The term loan A will be amortized at $2.5 million per year over the five-year term. Interest rates spreads over SOFR or prime were generally reduced by 25 basis points, with the spread varying depending on the leverage ratio for any given quarterly period. The expanded and extended credit facilities, along with future cash flows, provide the resources necessary to drive growth and expand our service capabilities and strategic markets through acquisitions while maintaining a strong balance sheet and conservative leverage. On slide 11, based on our strong performance to start the year, we're raising our 2025 financial targets. We now expect net revenue for the year to be in the range of $325 to $335 million, adjusted EBITDA in the range of $65 to $68 million, and adjusted diluted earnings per share in the range of $2.75 to $2.90 per share. These targets do not assume any future acquisitions.

Operator, we're now ready for questions.

Great, thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to move yourself in the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment please while we pull for questions. First question is from Craig Irwin from Roth Capital Partners. Please go ahead.

Good evening and congratulations on another strong quarter and thank you for taking my question. Mike, top question our investors minds these days is actually tariffs. And I might've missed it, but I don't think you mentioned tariffs as far as the impact on building. It's creating a lot of confusion out there, but it sounds like your customer base is already committed to the projects. And I'm gonna guess that most of the equipment they're using is not at risk. Can you just address the tariff issue for us and tell us what you understand this week?

Sure, Craig. And you may have joined just a little late. On page six of the slide deck, it specifically addresses tariffs. So we go over that

again.

Really, you mentioned the risk is in the equipment that we specify on our projects. We're looking for price escalation.

It hasn't occurred yet, but it could. That's possible along with project delays if the equipment just becomes too expensive to be economical. What we're doing

about it is searching high and low for alternative equipment sources. Most of our suppliers have already front loaded equipment over the past quarter. And we have most of the equipment we need for the relations that we have this year because they front loaded and purchased that already. We don't know what's gonna happen next year at this point. We're also inserting more flexible contract terms where we can in all of the new contracts that address tariffs specifically. We haven't seen any short term impact thus far, but it may be too early. So that's what we can agree.

Excellent, excellent. And my next question is around the return to secular load growth, right? So it hasn't really found its way into your evaluation, but Will Dan seems like a really important part of the solution when transmission lines take many years to actually site and construct. New generation faces tremendous environmental hurdles, even in a republic administration for construction. And the idea of brownouts and blackouts is highly unappealing to different utility commissions. Can you say what the tempo of conversation is with your customers, both utilities and state and local government and how you're partnering with them to frame the long-term solution set, both things that you can execute quickly in a matter of months or years versus some of these other competing solutions that are much longer duration and gestation?

The market was good with just electrification driving load growth. And that was really the status of the world about 12 to 18 months ago. It was a very healthy market then, and they were talking about load growth for the next 25 years, just based on the electrification of buildings and the transportation networks, EDs and other things. Then about 12 months ago, the conversation changed with AI and data centers, piling on top. A lot of the high growth scenarios that had been modeled during those early days aren't even possible likely in the short term because there's not enough generation, there's not enough high voltage transmission. You can't site these facilities quickly enough. So customers have backed off those extreme growth scenarios and now we're seeing two plus percent growth per year or something like that, which is significant in the electric space when you consider this is likely a long-term trend, it's likely over the next 25 years. So there's conversations with all of our major customers about updating their forecasts, updating their capex spending, the lead times for new generation have become even longer, especially around gas turbines. So all of that is happening at once, and often part of the energy stack is energy efficiency as well, which was sort of our legacy market. So we're building a company that tries to serve those customers in all of those ways.

Excellent, then last question I made. The last couple of years, you guys have been pretty conservative around guidance. And I don't think I've ever seen you raise guidance in your first quarter, given that it's your seasonally sort of lowest quarter as you start the year. It's gotta be some really interesting things or high confidence things that you're looking at. Can you talk about what it is that has you be more confident now than maybe in prior years, even though you have executed very well over the last couple of years. And are there elephants out there? Are there things out there that could work to the plus side for you as we look at potential continued strength in the building and business book?

Well, Q1 came in above our own internal forecast. It was just very strong. And it wasn't any one area, it was across the board. We're just performing very well. And some of our customers are looking at up-sizing the size of contract that we have on these legacy programs. So with that already completed, Craig, we just thought it was the right thing to do. And in good conscience, we needed to raise estimates modestly, which we did. That's what we attempted to do. Even taking into account, some of the tariff

risks maybe in the fourth quarter or something like that. We've got a great book of business right now and customers that wanna expand our programs. So that's why we did

it. Great, well, congratulations on another strong quarter. I'll go ahead and hop back in the queue.

As a reminder, if you'd like to ask a question, it is star one.

Next question is from Tim Moore from Clear Street. Please go ahead.

Thanks, organic growth was very strong, even excluding the extra week in the quarter and obviously pulling out the acquisition contribution. That was impressive. So I just thought, you mentioned it was very broad-based growth drivers. Are there, just thinking about the opposite side of the spectrum, I'm kind of curious, are there any pockets or end markets or consulting engagement types where maybe you're seeing any type of slowdown in demand since late last year or anything maybe not as compelling or accelerating? Just kind of curious on the opposite end.

Jim, I can't think of any headwind we've seen in the actual operations, can you? No,

not significant ones. No. A little less in the permitting field in a few places, but nothing worth mentioning really.

No, no,

the major

risk out there, Tim, is equipment risks and tariffs, and no one knows how that will occur. But the rest of the business is doing just very well across

the board. That's really helpful. I'm just out of curiosity, have you ever, I mean, this might be more of a project calculation, but have you ever kind of, on these larger contracts, let's call them 100 million plus multi-year contracts, I mean, equipment, if you're kind of quantified how much equipment is of that, I mean, we're talking like equipment's 10% of the project cost, something like that, so I mean, tariffs wouldn't drastically hurt you or harm you, you know, some price escalators in there.

Yeah, I think in the parts of our business where we're really working through the installation of equipment, and I think material and equipment costs are probably 25 to 30% of what the overall cost is, what the contract value would be, something like that, that's the exposure there.

Okay, that's helpful, and that's over multi-year contracts, such as the five year with the Los Angeles Water and Power. Yeah, that's right, that's right. And then just on that Los Angeles Department Water and Power, we talked about it last time we reported, it was a great renewal, but the timing of the renewal, there's a gap, definitely in the first half of the year. So now you're saying you think that it's really gonna start ramping in the fourth quarter. So how should we think about, I mean, the momentum's really good in the rest of the business, and it clearly overpowered any, whatever the sales gap would have been in the March quarter, whether it was seven or eight million, something like that. So should we just not, you know, things are going just so well, it's not even a blip, the way that that renews, and the timing of the start gap.

Tim, I

think you pointed out the biggest concern we probably had in Q1, without our biggest program up and running, you know, what was the result point to be, and we blew right through that, we overcame that headwind, and posted, as you mentioned, 12% organic growth, on a normalized basis, even better than that, actually. So, you know, that just shows the strength of the business, we were concerned about it also, we had no revenue for LADWP in the quarter, and I don't think we're gonna have any in Q2 either, or certainly not much. But by Q4, we've now received notice to proceed, we're working through the administrative hurdles of ramping up such a big program, and, you know, I think that by the end of the year, we'll start to see some real momentum, especially going into 2026, that things should be cracked up.

That's terrific, and I've got one last question, you know, the APG, the Alternative Power Generation Acquisition, seemed amazing, and, you know, really increased your sales exposure to data centers, if I remember correctly, maybe you might have 10 to 15% now, I mean, it's probably the bulk of the commercial exposure you have. I was just wondering, you know, have you thought about integrating the two, you know, from your previous kind of, maybe data center exposure team, you know, with the APG team, or are you gonna keep them kind of separate? I'm just wondering if they're gonna be cross-selling, or really kind of working together to really grow that business even faster.

They started cross-selling before we closed the transaction. They're in close communication, we're not gonna physically merge them, but we don't need to. We've already compared the customer lists, we're already probably executing projects at this point between the two

groups. So that's exactly the strategy. That's terrific, thanks, and that's it for my questions. As a final reminder, if you'd like to ask a question, it is star one.

If there are no further questions, I'd like to turn it back to Mike Bieber for any closing comments.

I just wanna thank our customers, employees, and investors for their interest in WillDan. You've got several upcoming investor conferences, so we'll see some of you in person soon. Otherwise,

we'll talk to you next quarter. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.