Good day, ladies and gentlemen, and welcome to the Willdan Group First Quarter 2023 Financial Results Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Al Kaschalk. Sir, the floor is yours.

Welcome to Willdan Group's First Quarter 2023 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 press release and Stock Information section of our Investor Relations website found at ir.willdan.com. 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 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 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 on 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 update or revise any forward-looking statements made today. In addition to GAAP results, Willdan also provide non-GAAP financial measures that we believe enhance investors' ability to analyze the business trends and performance. Our non-GAAP measures include net revenue, adjusted EBITDA and adjusted EPS. I will now turn the call over to Tom Brisbin, Willdan's Chairman and CEO.

Thanks, Al, and good afternoon, everyone. Two months ago, we communicated that we had overcome the significant headwind that were impacting our business and began our trend back to a growth company. Our first quarter performance continues that trend, enabling us to deliver our best first quarter ever. The continuing improvement in our financial performance and our strong backlog gives us confidence we can deliver the full year 2023 outlook. Let me share with you some additional details. Cities are important customer for us, and we have a 60-year long relationship in California. Our city services model provides us a unique opportunity to bring our energy and infrastructure capabilities to the municipalities. We expect the strength and demand for our engineering and financial services for city to continue. We do not see a slowdown due to inflation or a potential recession in this area. We expect the Inflation Reduction Act and the Infrastructure Investment and Jobs Act to help cities fund important new projects over the next several years. In addition, we see our cities struggling with the difficulty in hiring qualified engineers. This helps our outsourcing model. Our software business enrolled two new contracts for our distribution planning software during the quarter. The larger contract was for one of the nation's largest energy investor-owned utilities. We also signed a software contract with one of the largest municipal-owned electric service company. There are approximately 170 investor-owned utilities and 3,000 municipals. The software business pipeline looks good. And strategically, we see opportunities in both markets to support distribution grid planning and forecasting in both the near and midterm. This market is being driven by electric vehicles and electrification. The load is growing on the grid. Our software solution helps on plan and optimize the solution. Our New York Energy business is…

Thanks, Tom, and good afternoon, everyone. Much has been accomplished from a financial perspective over the past two quarters. The amendment to our SCE commercial contracts in Q4 and the completion of new software licenses in Q1, ongoing strength from our municipal services segment and the continued solid performance of the rest of our business units have enabled us to generate more than $22 million in cash flow from operations over the past two quarters. Our Q1 gross revenue was up 11.7% and net revenue was up 23% over the same period a year ago. All of that growth was organic. Gross profit was 32% higher as gross margin improved to 40.2% in 2023, driven by the same course as increasing our revenue. G&A expenses were essentially flat versus the same period a year ago as increased employee and tenant compensation on the strong earnings was offset by reduced stock compensation expense. Interest expense increased $1.7 million to $2.5 million in Q1 of 2023 due to the changing interest rate environment. Our income tax rate was a seasonally high 44.7% in the quarter, compared to a credit of 38.8% in the first quarter of 2022, mainly due to the timing of certain discrete tax adjustments. So for the quarter, net income was $932,000 or $0.07 per share versus a loss of $3.8 million or a loss of $0.30 per share from Q1 a year ago. Adjusted EBITDA in Q1 of this year was $9.9 million compared to $2.3 million in 2022 and adjusted earnings per share was $0.32 this year versus $0.07 per share a year ago. It's a significant improvement in operating performance, which has enabled us to reduce our leverage ratio to 3.0 and bring our credit facilities back into compliance with our original loan covenants, removing the borrowing limitations under our $50 million line of credit. The net result is a reduction in our annual interest rate spread by 2%, saving about $2 million on an annual basis. Our balance sheet also reflects the improved earnings and higher cash flows. Our cash balance at the end of March 2023 was $17.9 million, up $9.1 million from the end of 2022. We are on track to deliver the full year outlook we provided in March and continue to delever our balance sheet. Moreover, we're encouraged by several factors, including significant improvement in Willdan's financial health, strong backlog of new contracts and new projects and ongoing proposal activities. We look forward to providing an update to our 2023 outlook with our next call. Operator, we're now prepared to answer questions.

[Operator Instructions] And we have our first question from Chip Moore of EF Hutton. Please go ahead.

Good evening.

Good evening.

Hi, thanks for taking the question. Congrats on the very strong quarter. I guess I wanted to start with Kim, your last comment there on updating guidance next call. I guess, just given that strong Q1 beaten and what seems like good momentum across most of the business. Just curious how to think about the existing guide, sort of high end, certainly seems very achievable, if not beating it. But what I guess, what are some of the risks to the guidance and visibility you need to update that.

Well, there's always the question of timing of some of the start-ups of some of the problem -- some of the projects that we have and we're not seeing a lot of downside risk from supply chain issues. But there are a start-up timing issues, I think, that are always involved exactly what the mix of revenue in any individual quarter that has a little bit of impact on the risk profile that we have there. But we remain confident in the way that we kind of forecasted the year laid out at the beginning of the year. And so our expectations are -- while we're optimistic, we're -- we'll know a lot more by the time we get to the next call.

Understood. Appreciate that. And if I could ask on the software win for iA -- or software wins, I should say, in particular, maybe just give us a sense of the scale and scope there. I'm assuming that contributed to the margins in the quarter. And then particularly with the largest -- one of the larger IOUs out there, is that across their territory? Is there opportunity to expand that contract? And is there any sort of recurring service component?

Yes, Chip, this is Mike. This is the first contract where we do have a companion service license and additionally, the software license. So we'll be providing significant services to this customer over the next five years. We're looking to provide that on an ongoing basis. Unlike usual, we don't break out individual software licenses, but it really puts us ahead of our plan for Q1. We started off the year great, and we'll look at guidance again at the end of Q2. But right now, we feel pretty good that we're ahead of plan.

Got it. Okay. And maybe just one more for me. I'll let others hop on. On the momentum you're seeing on the city side, on engineering and financial services as well, net revenues at 15%. It sounds like you've seen an acceleration there. You announced that electrification deal in Percept County. Just maybe if you could expand on that opportunity. It sounds like you're incrementally more bullish on the synergies there. I would love to hear what you're seeing.

The five projects you that I mentioned collaboration on, our engineering legacy business was instrumental in making the introductions to do the performance contract you referred to it as electrification. So we are seeing that synergy really taking place. Was that your question, Chip?

Yes. And then also on sort of backlog and outlook there. Obviously, a lot of funding to come from IRA and elsewhere, but how those discussions are going and when that sort of -- it could kick in?

I think I already said the second and third quarter on the performance contracting will be very strong, and they're doing work for cities in California as well as across the country. So we see them growing. And we're very optimistic about the year.

Appreciate the color and congrats again. I'll hop back-in queue.

Thanks. All right.

Our next question is from Marc Riddick of Sidoti. Please go ahead.

Hi, good evening. So I was wondering if there was anything that you were seeing as far as the timing of customer activity or any tangible delays or changing order patterns that either would be tied to just general economic conditions, but also maybe some of the banking headlines that we've seen, if there's anything that would be connected to what you're seeing currently?

Yes. I referred to it in the script. We have not seen anything change due to inflation or a lot of talk about a recession. If you want to get very specific when we talk to city managers, see financial people, what they're doing this time, which we think is different than '07 and '08 is it's not such a big surprise. We've been talking about recession for so long that they are preparing for, they are not spending. They are buckling down. And as I commented in the script, they are not hardened. So we provide outsourcing people to cities in a big way. So they are going to more of an outsourced model. So we haven't felt any effect yet. And if there is one, unless it's a massive one like '07 and '08, we think we're going to be okay and much better than what we saw in '07 and '08. And we're now for more a little more detail, I think, Mike, they're 25% of our net revenue, where in '07 and '08, it was 100% of our net revenue. And on the 75% that's in the, let's call it, energy space. Back in '08, they saw no effect. So we are hoping for a similar outcome. Does that help you at all?

That's helpful. And then I guess the other part of the thought is, I was thinking about sort of maybe some of the labor availability and in some areas of the of the economy that's begun to have a little greater availability for better or worse. I suppose -- just wondering if you could talk a little bit about maybe where your staffing needs are and the availability of labor has changed much over the last few months?

We're pointing at each other right now. I'm trying to get Mike to answer.

Staff availability -- so Marc, labor is still tight in the U.S. As we mentioned last quarter, we did most of our hiring coming into this year. So we have hired most of the positions. The remaining positions we'll hire over the course of this year as we continue to grow. Those would particularly be in our front-end services, our energy consulting business with E3; performance engineering, particularly electrical engineers, we need that resource. We've done most of the hiring in the energy efficiency business so far.

Okay. That's helpful. I appreciate. Thank you.

Thank you.

[Operator Instructions] And there are no new questions so far.

Okay. Thank you very much to everyone listening on the call today, and we will see you in about 90 days. So thanks again for being patient, and it was a good quarter, and we expect a good year. Take care.

This concludes today's conference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.