Good day, and welcome to the Willdan Group Second Quarter 2019 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tony Rossi of Financial Profiles. Please, go ahead.

Thank you, Vicky. Good afternoon, everyone and thank you for joining us to discuss Willdan Group's financial results for the second quarter ended June 28, 2019. With us today from management are Thomas Brisbin, Chairman and Chief Executive Officer; Stacy McLaughlin, Chief Financial Officer; and Mike Bieber, President of Willdan Group. Management will review prepared remarks and we will then open up the call 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 Form 10-K for the year December 28, 2018, 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 provides non-GAAP financial measures that we believe enhance investor's ability to analyze our 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'd now like to turn the call over to Chief Financial Officer, Stacy McLaughlin. Stacy?

Thanks Tony. I'd like to add my welcome to those joining us on today's call. I'll start with an overview of our income statement, then our balance sheet, and finally our guidance. Total contract revenue for the second quarter of 2019 increased 75% to $104.4 million from $59.8 million for the second quarter of 2018. The increase was driven by growth in our Energy segment, primarily related to the contributions from our recent acquisitions. Net revenue, defined as contract revenue minus subcontractor services and other direct costs, was $46.8 million, an increase of 36% from $34.3 million in the year ago quarter. Within the Energy segment, net revenue increased by 60%. Within the Engineering and Consulting segment, net revenue increased by 2%. Direct costs of contract revenue were $73.2 million for the second quarter of 2019, an increase of 100% from $36.7 million in the same period last year. The increase was primarily related to the growth in contract revenue, resulting from the recent acquisitions. Additionally, we had disproportionately high project start-up costs compared to the revenue we recognized on those programs. Our direct costs of contract revenue were 70% of our total contract revenue in the second quarter of 2019, compared with 61% in the same period the prior year. The increase was primarily attributable to the impact of our recent acquisitions, which has programs that utilized a higher percentage of subcontractors and include a significant amount of material and equipment costs that are pass-through. General and administrative expenses for the second quarter were $28.4 million, compared to $19 million for the prior year period. The increase was primarily driven by higher salaries and wages, related to the personnel added through the last three acquisitions and an investment we are making in the California investor-owned utility procurement. The California proposal investment we made this quarter was approximately $2 million. The remainder of the increase was primarily due to $1.8 million increase in depreciation and amortization expense, largely due to increase in intangible assets resulting from our acquisitions. We also had an increase in stock-based compensation expense of approximately $600,000. Our second quarter results in 2019 included approximately $340,000 in acquisition costs. We generated operating income of $2.8 million for the second quarter of 2019, compared to operating income of $4.2 million in the second quarter of 2018. We incurred $1.2 million in interest expense in the second quarter of 2019 compared to $30,000 in the same period last year. The increase was due to the debt utilized to finance our recent acquisition. During the second quarter, we recorded an income tax benefit of approximately $70,000, primarily attributable to various tax deductions and tax credits. Net income for the second quarter of 2019 was $1.6 million or $0.14 per diluted share, compared with net income of $3.3 million or $0.36 per diluted share in the same period last year. On an adjusted basis; excluding stock-based compensation, intangible amortization and transaction costs; our net income was $5 million, or $0.43 per diluted share. Adjusted EBITDA was $7.6 million for the second quarter of 2019, compared with $7.3 million for the second quarter of 2018. Turning to the balance sheet. We had $27.6 million in cash and cash equivalents at June 28, 2019 which was up from the end of the previous fiscal year -- or quarter, excuse me. Our cash flow from operations was $12.5 million in the first six months of the year. As of June 28, 2019 we had $100 million term loan outstanding, but no amounts outstanding on our revolving credit facility or our delayed draw term loans. In the back half of the year, we expect revenue to accelerate and organic growth to increase due to work that we have already booked. This year, we will have increased funding from each of our four largest clients: Los Angeles Department of Water and Power, Con Edison, Duke Energy and the Dormitory Authority of the state of New York that will drive with the ramp in the back half of the year. We expect margins to rise significantly compared to the first half of the year. Turning to our outlook. I would like to update our financial targets for fiscal 2019. For the full year, we now expect; net revenue to range between $185 million and $205 million; adjusted diluted EPS to range between $2.40 and $2.50; an effective tax rate of approximately 24%; a diluted share count of 11.8 million shares; depreciation of approximately $3.5 million; amortization of approximately $9.3 million; stock-based compensation of approximately $11.9 million; and interest expense of approximately $5.1 million. I'd now like to turn the call over to Tom.

Thanks, Stacy and good afternoon, everyone. We delivered another strong quarter of revenue growth. We would have done better, but a few programs did not ramp until June approximately five months later than we anticipated. We have experienced this before. Now that the program funding and scoping is finally renewed, we are back on track. Not only for the remainder of this year, but the next few years. Generally, we go two years to three years of increase in organic revenue growth because of our major clients are not subject to transitions. These transitions have accounted for the minus 7% organic growth in the quarter. We expect low double-digit positive organic growth in the second half. I have said previously that our growth is like a step function and we are on the step right now and the stairs are going up. As Stacy indicated our overall look -- our overall outlook for the year remains very positive and guidance remains the same. We're pleased that our largest four clients as Stacy mentioned: LADWP, Duke, Con Ed and DASNY are running well and adding additional work. Unfortunately for our people we end up scrambling to deliver more in less time although these are better problems. Our people have been working diligently pursuing the California procurements. The new team members from acquisitions have been invaluable with their capabilities and experience. Willdan is a much stronger company today. As we indicated on our last call we had been short-listed for all 11 of the programs that we initially submitted abstracts on. We're in the process of preparing full proposals there during this summer. PG&E is due on August 2; that's tomorrow. San Diego Gas & Electric due on August 23. Southern California Edison is due on October 23. And hopefully we will start to see awards by the end of this year. In addition to those 11, we have also submitted an abstract for a new construction program been administered statewide by PG&E. Prior to our acquisition of The Weidt Group, we would not have been able to pursue this opportunity. But with The Weidt Group's expertise in new construction and Willdan's 50-year history and track record in California we believe we have the qualifications to effectively compete for this substantial program. California is a once-in-a-generation-type opportunity and we're highly focused on winning as much as possible. Our business development efforts related to the California procurement opportunities also let us to the recent acquisition of Onsite Energy. As we have mentioned in the past our preferred method for identifying acquisitions is through joint project work and bidding opportunities. We get to know each other and understand our capabilities and synergies. It is also very important that they review our culture, strategies and objectives and believe that they can grow not only themselves but Willdan overall. We had partnered with Onsite Energy in submitting the abstract for an industrial program and we're both determined that their firm will be an excellent addition to Willdan. Onsite is an energy efficient services and project implementation firm working at industrial facilities. This is part of the energy efficiency market that we didn't previously address. The industrial energy efficiency market is larger than the commercial market. It can be less competitive than commercial. So from our perspective it's a very attractive market. Onsite has built a strong track record in California working with industry for example telecom, cement, aerospace, refrigeration, petrochemicals and data centers. With our broad geographic presence, we believe we will be able to take this expertise nationwide and substantially expand our addressable market. We're also seeing good momentum in the municipal utilities, which is adding to our pipeline of work. We've been able to leverage the strong results generated from the LADWP program to win other municipal programs in California. These will start in Q4. We have other opportunities to expand our work with LADWP as Los Angeles continues to prioritize energy efficiency and close fossil fuel generation. From a longer-term perspective, we continue to build our track record in microgrid development. We're doing a great deal of work around the country from feasibility studies to conceptual development for communities. Utilities are integrating microgrids as part of our efforts to enhance resiliency and deal with natural disasters such as fire, storms, earthquakes that impact the grid. We're also finding new ways to apply our software and data analytics. We feel that our team has the capabilities to serve utilities, developers, and cities in their quest to deploy assets for de-carbonization. Before I wrap-up today, I want to say a few words about the progress we have made in positioning Willdan to be a leader in the next era of energy efficiency. The industry has undergone enormous change in a very short period of time and we have made significant investments to ensure that we remain at the leading edge of innovation. The impact of the new technologies isn't fully understand within the industry and that presents an enormous opportunity for Willdan. We have leading-edge programs that will lead to more success for Willdan. With that, I would now like to turn the call back to the operator for Q&A.

Thank you. [Operator Instructions] And we'll go first to Craig Irwin with Roth Capital Partners.

Good evening, and thanks for taking my questions. So I wanted to ask about the five projects you mentioned that had delayed startup in the quarter. Can you maybe give us a little bit more color on whether or not this was in a certain geography? Or if this was concentrated among certain of your largest customers? Or was this something that just happened in different areas of the country that you might have wished had a little bit more color on for us?

I'm glad, I write this down Craig, because I said, we have done better but a few programs did not ramp-up in June. And I restated that, June approximately five months later than we anticipate so I said a few and a few were LADWP and Duke.

Okay. Excellent. So LADWP and Duke really are number one and number two customers. Taking care of them and executing impeccably is always a focus. Can you maybe describe for us what's involved in the startup of the program? What sort of preparation goes in? Whether or not you saw increased cost for the startup of these programs? And whether or not the time line was – what the customer had expected?

Mike. Mike, they're waiting for your question. Here you go.

Sure. On Duke, we were adding three states. We were previously in North and South Carolina only and it was a lighting-only program. And now it involves HVAC and they have added the states of Ohio, Indiana and Kentucky. So we hired approximately 20 new people new staff, to ramp-up those new geographies and completely configured – reconfigured the program for the new measures. So now we've had a much better June, April and May were pretty weak in terms of sales. Sales has ramped up now and you typically have costs about 60 days prior to actually recognizing the revenue. You'll sell our program, you'll install the measure and then you'll recognize the revenue about 60 days after you do the work. So if you look from a month-by-month standpoint, we really ramped up effort in April and May and then started recognizing that higher level of revenue in June and that will continue we think throughout the remainder of the year. And the same thing is going on at LADWP also. We added the LAUSD the school system that is about in excess of $20 million in new work that they've added to the program and that is ramping up and will provide a big revenue boost in the back half of the year.

Excellent. Thank you for that. Next thing I wanted to ask about was the cross-selling of Lime. So you obviously already have good traction cross-selling with both Duke and LADWP. But there were a number of other geographies, where you were optimistic there might be an enhanced opportunity; New York, New Jersey a couple international markets. Can you maybe update us on the number of additional projects that you're seeing the potential scope, the potential for this to be additive in 2020 as maybe some of these projects start to kick-in?

I'll address New Jersey. We don't expect to see that adding revenue until 2021. That's where that stands right now. As far as – we've added a few municipal. Lime is one municipal utility turned California, which is a big plus beyond LADWP. You mentioned international. We are looking at energy efficiency in some countries yet to be mentioned that we have started work on. Mike, you got anything else on cross-selling?

I think the future opportunities for 2020 in mid-Atlantic states are something that procurements won't come out till about nine months from now, but we're doing the work, the upfront work right now.

Yeah.

Excellent, excellent. That's good to hear. And then the investors I talked to all of your investors, everybody is really thinking about the time line for potential awards from California. We know there's a tremendous amount of activity and project development and effort put into the review cycle that's beginning to take shape right now. Can you maybe give us some color on the time line for us to see scope come out of the RFAs that you've responded to? And when can we start to get a clear view on what your capture rate is of the enhanced California opportunity?

Okay. Schedule wise, which we didn't have the last time we spoke last quarter is the RFAs like I said have all been submitted. We submitted 11 or selected for a proposal phase for all. The proposals for PG&E are due tomorrow. And we think that's real progress. They're leading the pack right now of the California IOUs. So the next will be San Diego Gas & Electric proposals now. So you can look at this as Phase 2. Phase 1 was the abstract. Phase 2 were the proposals. Then we don't know if they're going to have interviews questions. We don't know what's going to happen next. And then there's going to be an award. So we are in Phase 2 of the proposal stage. San Diego Gas & Electric is due August 23, which is 23 days from now and the SCE is due around October 23. And as I stated hopefully, we'll see some type of award, let's say, and it probably won't be public, because it will be a long-term negotiation by the end of the year. So by the time, it's public first quarter next year the beginning of the awards and if PG&Es continues to lead the way, we think we'll be there by the first quarter next year.

Excellent, excellent. And then just another question along the same lines. So as you move from abstract to proposal obviously the utilities have up selected certain contractors. Can you share with us approximately how much the field has narrowed, and is it accurate you've basically been up selected on essentially everything that you were looking to chase for the California opportunity?

That is accurate. We have been upscale what do you say?

Up selected.

Up selected. Up selected for -- okay. Sorry, Craig. Up selected for all 11. How many have not been selected that would be an estimate, because we don't know, but we do know of let's say, how I say it competitors that have not been up selected. I don't have a percentage on that. And if I did I probably couldn't say it. Your other question?

And then once you move into the proposal stage is it likely a winner takes all kind of scenario where if you were to win one certain proposal you would get all the business and someone else would get all the business of another proposal? Or is this something where they will likely be maybe a couple contractors awarded scope off a proposal for a certain program?

Well, if I was talking to the utilities if they were listening to this call, I would say you should award it all to Willdan, but the reality is I believe they'll be not -- we had 120 contractors three years ago. I think you're going to see that really, really go down to a few contractors. And so I do not think there will be a single award. I think there will be multiple awards, but will probably be in the area of one, two, three, maybe four per segment where there were 15 or 20 before. So that's my best guess.

Excellent. And then last question if I may. Engineering and Consulting, I was pleasantly surprised by the growth there. Can you share anything that might help us understand the sort of short to intermediate-term trajectory there? This kind of suggests that the local municipal budgets are not quite as constrained as people were thinking? How should we be looking at this business?

So, it was up 2% organically in the quarter. Good performance. We thought it might be down. It has been down in previous quarters. The leading indicator in that business is the number of building permits that we're processing and we check each quarter about that. And that has remained high and has not been reducing. We're still cautious about that business. We think it will be flattish for the year but they had a good quarter.

Great. Thanks for that. I'll hop back in the queue now.

[Operator Instructions] And we'll go next to Moshe Katri with Wedbush Securities.

Hey, thanks for taking my question. So, this is the second time this year that we'll be seeing delays in, I guess, project starts. Is there anything specific in terms of trend here? Is it the function of the fact that these are larger deals that are taking longer to structure or for the client to get comfortable with? Maybe you can give us some -- a bit more color on that just given the fact that it seems like a recurring kind of phenomena at least this year and then I have another follow-on. Thanks.

The first part of the question about the second time it's not the second time. It's still -- we're still operating on what happened in the end of last year actually and it's continued until now. So, the funding on LADWP has increased immensely. And the deeper measures in more states on Duke which Mike said, we're still dealing with the same two issues in this transition from the funding reauthorization on LADWP and their award of more states and new measures for Duke. So, it's not a new delay, it's the same delay. We're just -- as I said we--

So, it's just extended delay?

Yes. We thought we'd be out of it by now. And I said we're -- it went five months rather than a couple months. And we're now seeing progress in June and so we believe we're out of it and we won't say it again.

Okay. And then you spoke about the fact that margins are going to be up nicely during the second half. Can you kind of quantify it for us in terms of levels? And I'm assuming a lot of this is a function of utilization rates just people getting billable at this point?

Yes. We would expect the adjusted EBITDA margin to be around the mid-20s for the second half of the year. So, for the entire year we would be around the low 20%. As far as utilization a lot of our programs are based on kilowatt savings. So, it's not just a direct result of the utilization of our employees.

Okay. And then can we get some color on Integral Analytics where are we in terms of the sales cycle on the pipeline? Thanks a lot.

Sure. First Integral Analytics is contributing nicely to all of our utility programs in energy efficiency. So, we're integrating them well there. They had no major sales this past quarter, but they do have a robust pipeline of opportunities and some larger opportunities that we expect some will mature in the back half of this year.

Thanks.

And we'll go next to Andrew Gordon with EF Gordon Capital.

Hey good afternoon guys and thanks for taking my questions. And the first one I have for you was as you noted in your opening remarks your net revenue margin is weaker over time which I believe is due to I'm guessing Lime's approach to using subcontractors. And I wondered if this is something that you might get margin expansion from over the next let's say couple years or so by possibly through your approach.

It is not a result of Lime's bigger use of subcontractors because we report margin as a percent of net revenue which removes subcontractors. Our EBITDA margin was I think 16% this quarter--

No, no. I'm sorry. I think maybe I wasn't clear. I meant your net revenue margin, your margin versus your gross contract revenue, the portion that's been given to subcontractors?

Okay.

That increased. Pass-through increase.

The pass-through you're right did increase. It's up to -- I think pass-through is 55% of our revenue now up from about 45% last year and that is a result of the Lime acquisition. So, you are correct. And so margin as supposed to gross revenue will come down, you're right, that's a result of the Lime acquisition due to the pass-through and it's primarily equipment pass-through. We reported to subcontractors and equipment, but it's primarily equipment.

I see. My impression is that in the past in your core business, you've been able to increase margin by a premier approach the use of subcontractors, so I was wondering if that was a source of opportunity going forward, but it…

Yes. It's a potential source of opportunity. What's happening right off the bat though is that we're better absorbing our back-office costs. Our corporate costs are not rising at the rate that revenue is rising. So that will also contribute to margin.

Got you. My next question is just, it sounds like you have pretty high conviction in your revenue -- your net revenue guidance for the rest of the year based on work in hand, and I'm just wondering whether you might comment on whether there are some moving parts as to how you might be better than that range, depending on projects that will be awarded or any other thoughts on opportunities?

Well, we're only halfway through the year and so let us get through Q3. It looks pretty good. We've got a lot of work in hand and our customers, our major customers as Tom mentioned have increased their budgets for us this fiscal year and going into 2020 as well. So let's see how much work we can actually get in and complete it this year. We'll update guidance next call.

Okay. Thanks so much.

And we'll go next to Tom Koch with Trancoso Partners.

Hi, everyone. Can you hear me?

Yeah. Long time, no hear.

Long time, no hear. Okay. Question. Hey, Tom, can you just clarify one of the previous questions I thought when a utility gives -- grants a program to a contractor like yourself be it hospitality, hospitals, schools that there’s kind of one person like Willdan in one of those verticals for one of those utilities, but I thought I just heard you say that there used to be like a whole bunch and now it's going down to four or five. Is it four or five -- going to be four or five or just one person?

Oh, boy. So now you're getting into competitive strategy. So I will…

No, no, no. Not the strategy. I'm just trying to understand when PG&E grants a hospitality program award and I'm using that as an example, I don't know if that's the case. When you go on the website it say Willdan is the provider of that. Usually there is only one there's not a whole bunch of people.

Right. So they have a whole bunch of programs; hospitality, hospitals, biotech, schools. They have 50 programs. And generally within that swim lane, they generally give it to one contractor. Now you can look bigger, Tom. You can break it into residential, commercial, industrial and public. And then under commercial there is where -- what we're talking about there's hospitality, hospitals, biotech, schools and on and on and on. So once you break it down to that level, yes you're right. There's usually one award. What they've asked for or what they have alluded to is a consolidation within a residential program like they might have been 10 programs within residential. They'd like to see consolidation in that. They'd like to see consolidation possibly in commercial. So within that as you go up into the categories, we believe there maybe some consolidation. Does that answer your question Tom?

It does. It does. It does. Okay. And the second question I was going to ask regarding Onsite, did you guys provide information such as the acquisition price and the revenues and the EBITDA for that?

We said in the press release that it was about $20 million in revenue. The acquisition price was not disclosed in the press release and it will -- the effect of that will be indicated in Stacy our Q3 balance sheet, is that correct?

Correct.

Okay. And is it profitable?

It is. Yes.

Okay. So when you are going through your guidance I guess that's not in the guidance yet because that deal has not closed yet, is that correct?

That deal has closed. We elected not to update guidance for the effect of that until we get quarter on down the line. These acquisitions are only moderately or only very slightly accretive in the first six months or so but they're accretive in the first year. So we didn't adjust guidance for that. We thought we would still perform within the range and we'll get to next quarter and reassess.

Okay. So approximately $20 million divided by two $10 million of revenues are in that guidance from Onsite?

Yes. Gross revenue, yes. Net revenue is much smaller number about one-third of that.

Okay. Perfect. So $20 million is gross revenue. Okay. All right. Thank you very much.

Thank you, Tom.

I show no further questions at this time. So I would like to hand the call back over to management for any closing remarks.

Okay. I like to thank all of you for participating on our call today and for your continued interest in Willdan and have a great day. Thank you.

All right. It does conclude today's conference. We thank you for your participation.