Q3 2021 Limbach Holdings Inc Earnings Call
Greetings and welcome to the Limbach Holdings third quarter, 2020 one earnings call. At this time, all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation. If you would like to ask a question. Please press star one on your telephone keypad.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Jeremy Hellman with the equity group. Thank you you may begin.
Thank you very much and good morning, everyone yesterday, Limbach Holdings announced its third quarter of 2021 results and filed its Form 10-Q for the fiscal quarter ended September 32021.
During this call the company will be reviewing those results and providing an update on current market conditions. Today's discussion may contain forward looking statements and actual results may differ from any forecast projections or similar statements made during the earnings call listeners are reminded to review the Companys annual report on Form 10-K, and quarterly reports on Form 10-Q for risk.
Actors that may cause the actual results to differ.
From forward looking statements made during the earnings call with that I'll turn the call over to Charlie Bacon, The President and Chief Executive Officer of Limbach Holdings. Please go ahead Charlie.
Good morning, everyone and thanks for joining US joining me today is our CFO Jayme Brooks, our CFO, Mike Mccann and executive Vice President of Mad catches also on hand for Q&A session, which will follow our prepared remarks.
Those of you who have followed our company know we have been pointing to the third quarter was a major inflection point in our business and I'm extremely proud of the results. We reported specifically our OTR segment revenue growth was 17, 6% year on year.
Seven 2% sequentially.
Our <unk> gross margins of 29, 8% Roe.
90 basis points year on year, and 55 basis points sequentially.
And GC or gross margins of 14, 2% were delivered up 280 basis points year on year, and 403 basis points sequentially.
Our net income of $4 million is the largest since we went public five years ago and that was primarily the result of excellent gross margin performance in the quarter and our refinancing which was completed in Q1.
And as good as many of the indicators or for the quarter. We firmly believe we have further room for growth.
The strategic plan, we put in place two years ago centered on improving our bottom line profitability.
Process towards that goal was slowed as we grappled with the impacts of the pandemic with a risk with that preceding the results. We reported last night are strong evidence that our leaders are executing well on our strategic plan.
Also want to thank all of the staff here at the company for their hard and Smart work, we have incredible talent in our offices and in the field the entire team are rowing together.
We're realizing these positive outcomes are very proud of all the people here that work it with Buck I think we're doing a terrific job.
Our OTR segment continues to grow helping improve our consolidated gross margin. While we also believe temporary the overall risk profile of our business.
Our <unk> segment is also performing well as our shifted focus to bottomline profitability is delivering the intended results.
Within our <unk> segment, our bookings actively remained strong and accelerated through the third quarter with September our strongest month of the year.
The maintenance base continued to grow and as a reminder, maintenance contracts typically can lead to a higher margin kitting small capital project work often performed on a TNF basis, along with emergency repairs that work normally results.
And total revenues from there back in excess of the recurring maintenance contracts.
Turning to our <unk> segment, the risk management initiatives, we began two years ago to improve our performance continued to take hold as successful project Closeouts helped drive segment margin of 14, 2% in the quarter.
When we propose on projects our expectation is that once the dust has settled projects with gross margins at or above the level at which we proposed.
Our emphasis on quality project selection, coupled with consistent execution in the field is resulting in improved segment profitability and we intend to continue that performance.
There may be some variability in gcs segment gross margin quarter to quarter, but we expect the boarder margin improvement to continue.
And remind everyone that annual or 12 month trailing numbers and margins off of the best ones for which to monitor our GC our segment performance.
With that I'll hand, it off to Jamie for financial highlights.
Thanks, Charlie.
Earnings press release, and our Form 10-Q.
A review of our financial.
That in mind I'll focus my discussion on a few key points.
With further review firstly.
First is cash flow cash.
Cash from operating activities for the quarter with $7 8 million in cash and cash equivalent with $33 3 million.
The last call, we had questions around forecasting our cash flow.
Hi. This is Cathy has it can explain the dynamics of our cash flow is our industry has somewhat unique aspects of how work is still compare the company. It sounded product for example.
In addition, our cash flows much like our operating results our best view.
Our trailing 12 month basis.
This is a quarter to quarter swings that can occur as a function of the project lifecycle.
Probably the most significant impact on our cash flow quarter to quarter, our accounts receivable accounts payable and the over and under billing, which are included in our contract liabilities and assets account.
As we commenced work on a project the auto book to Bill ahead for <unk>.
Does that work and when we are successful in doing so we developed an overbill position.
At December 31 of last year, we were in a net overbill position of around $14 1 million.
So that was cash that we collected and work not yet perform.
Setting aside the DSO.
At September 30 of this year that reversed and we were in a net undeveloped position at $3 3 million.
Setting aside the timing of payments. It is incurred cost that's basically cast any paid in advance as being able to tailor customer due to a host of reasons, which is typically normal of course for the operating perspective.
Both of these amounts can be found in note three of our Form 10-Q.
And looking at that time period from December 31, 2020 to September 32021. This shift from a net overbill position to a net undeveloped position is a $17 4 million dollar fluctuation of cash.
Re model monetary apparently based on our individual project cash flows.
Our over $100 billion are influenced by a range of things from project Titan lifecycle to the customers. We are doing work for along with other external market dynamics, such as the supply chain impact from materials and equipment.
Assets. Unfortunately, there is no good way for investors to model the fluctuations in these accounts and how their impact is on cash.
However, there are several license on our cash flow statement that are more easily model, such as depreciation and amortization noncash operating lease expense interest expense taxes and stock comp.
Nonrecurring items, such as the human loss on debt extinguishment and the upcoming payment in Q4 of $3 2 million for the deferred payroll taxes and then the cares Act, which we have discussed before should also be fairly straightforward to model.
Next I want to highlight our gross margin as this is where the impact of our efforts to drive bore.
As a balanced business mix so in our financial statements.
In the third quarter, our consolidated gross margin was 18, 9%, which is an excellent result.
Both of our segments performed at margin levels exceeding the ranges, we have noted before with <unk>.
<unk> gross margin for the quarter at 29, 8% compared with our target range at 25% to 28% at 27, 9% in the third quarter last year.
<unk> gross margin was 14, 2% compared with 11, 4% in the same period last year.
This quarter's results also compared favorably versus our estimated range of 10, 5% to 11, 5%.
As Charlie noted TCR gross margin then it is quite a big number of successful project closeouts in the quarter.
We continue to see in the target margin range as we have laid out as reasonable for modeling purposes in 2022 and O. D. R. We are optimistic that 2022, we will see more larger projects in the mix as he believes building owners will have growth in their capex spend.
As that work comes on we would expect our segment margins to soften a bit as larger projects tend to carry a lower relative margin.
We are also closely monitoring our supply chain, which Mike will discuss in more detail in a moment.
And do you see our margins can be a bit more volatile due to the timing of project completions and start a wireless external factors, such as weather and supply chain impact.
While we have succeeded in booking projects and improved margins relative to a year or two ago, we still feel it's prudent to conservatively model. The segment in the 10 and a half to 11, 5% gross margin range.
Lastly, I want to touch on SG&A.
Our SG&A expense picked up $1 3 million compared to the third quarter last year.
Last year's third quarter was a period of somewhat reduced SG&A expense as we were still not at full back to the Opex node and that's expense categories, such as travel and entertainment were running at a lower rate.
Additionally, in 2021, we've continued to make investments in our OTR expansion such as the opening of our new Nashville office in order to track additional health care, OTR business and getting out to see our customers.
Before handing the call up to Mike I want to discuss a potential headwind going into the fourth quarter.
Over the past few months, we have noticed an increase in our healthcare claims per participant compared to 2021 full year plan.
Yourself insured the increased claims have had a direct impact on our operating results. We continue to monitor our health care costs and note that if this trend continues into the fourth quarter, we could have an unfavorable impact on the quarter and full year operating results.
Additionally, Mike will touch on the vaccine mandates, but I did want to note that the compliance costs to meet the band vaccine mandates could also unfavorably impact our fourth quarter and our full year results.
I'll now pass the call back to Mike.
Thanks, Jeremy in light of the broader market conditions with respect to supply chain. So I want to provide some color on how we are reacting to those issues first.
First commodities pressure on raw material pricing and availability has leveled off it appears that were that were.
At significant it doesn't appear that we are at significant risk in the existing book of business and the new business is taking into account the potential risk of a returned to inflationary period.
No when we bid projects, we make sure customers know our pricing is only good for seven days and keeping that limitation of pricing has helped us mitigate our risk next is labor the impact of a tightening labor market is not likely been felt in full we've been managing labor carefully to perhaps some opportunity emerge from having left some capacity available we believe our biggest.
<unk> term risk as one shared across the industry, which is the impending vaccine mandates currently any federal work requires 100% vaccination for all parties working on a project, but really don't do that much federal work for limbach to larger risk as the osha requirements at any private business with over 100 employees, everyone vaccinated or be tested weekly, we're keeping a close watch on.
And whether or not the courts will allow us to go into effect and are developing plans with the expectations that the mandates will go into effect.
On equipment. It is the risk point for us in Q4 as it could impact our ability to incur cost and drive percent complete which drives revenue recognition without key equipment. Some work could be forced into a holding pattern and we are very focused on doing although we can procure the equipment, we need on the schedule. We needed lastly, I want to reinforce that we are staying focused on all of our standard.
Our risk management processes, along with stronger data reporting that we incorporate into the business over the past 24 months. It is clearly paying off with the results. We realized in Q3 I'll now pass the call back to Charlie.
As I noted at the start of our call. We had a really good third quarter and are successfully executing our plan. Despite the ongoing COVID-19 impacts.
I am disappointed with the year to date numbers for Q3's results reinforce what's possible.
Are all your transformation is continuing with that segment growing nicely and doing so with healthy margins in terms of market dynamics for that segment. Our business mix has continued to favor operating capital spend rather than large growth capital work given everyone's aware of the supply chain issues in our economy building owners or act.
Currently aware of the need to make sure their existing equipment is properly maintained and that benefits us.
I want to share two other points.
The market forecast and our expansion of the <unk> services.
The September AIA billing index continues to indicate expansion of $56 six.
The Dodge momentum index at a 14 year high of 47% increase over the same period last year.
The <unk> fourth quarter forecast presents a forward view of continued growth with nonresidential building sector is growing through 2025 with healthcare our largest sector, indicating very strong growth over the period.
The <unk> report also reinforces the growth to the southeast U S, where we're looking at expansion opportunities.
With all of our services, we have been successful with Lawrence you can do service known as program management services, specifically focused on the national and regional healthcare providers.
The service assist customers to develop their capital projects.
Early entry will allow us to better serve our customer base and better position us to secure more business. Following the planning cycle of a project.
During the quarter, we sold <unk> services to several major national customers, including two new significant customers.
Looking ahead to 2022, the various indicators retracted the key continued market strength.
This positive macro backdrop allows us ample.
Ample opportunity to continue being selective in our project proposals with a focus on securing work at attractive margins, while optimizing our available resources.
In our <unk> business, we knew right sizing our operations would include negative headwind of a revenue decline with that said, we have seen our margins and profitability approve which is the ultimate goal of this strategy.
Also recapping some comments I made earlier, our OTR bookings during the third quarter were good and accelerated in September we're really pleased with the volume and quality of the opportunities in front of us.
Lastly, we are reaffirming our guidance for 2021 with revenues in the range from $480 million to $510 million with adjusted EBITDA of $23 million to $25 million.
With that we'll take your questions.
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Our first question is from Rob Brown with Lake Street Capital. Please proceed.
Good morning, Charlie Good morning, Jamie nice job on the quarter.
Hey, Rob Good morning, Rob Thank you.
Just wanted to kind of clarify your comments about Q4, and some of the cost pressures that you're seeing in health care and the vaccine mandate does that in your guidance and kind of the commentary about being in the low end of the EBITDA range or is that would that be incremental to what you're what you're talking about.
That would be incremental.
We're looking at we're just looking at kind of what we know today and that's what.
In our guidance and then.
That said, we just started making investors aware that those are things that headwind that we're looking at but we're not able to put any kind of parameters around those right now.
Okay. Okay got it and then the the margin kind of expansion that that's sort of implied in your and your.
Your project business you you know how is the visibility on that right now in terms of Q4.
It gets carried into next year, but how is the margin expansion visibility sort of for the rest of the year.
Rob Thanks for that question the biggest thing that we've really been focusing on the last nine months is to make sure that we get our mix between owner direct and TCR.
And really been pushing that we're excited about our sales in Q3 from OTR.
And that mix along with similar performance that we're looking for going forward is is really the mix that we're looking to obtain.
Okay, Great and then I mean, you're pretty.
Positive comments about the growth rates into next year.
You know, how how does that order book sort of play out at and.
You know how.
How does that how much visibility we have into next year sort of.
At this point and how much of your sort of view is or I guess, how much of your.
Experts or the expectations out there is sort of in the backlog at this point.
The <unk> sales picking up Rob just fantastic news, we've seen a trend the whole year in a positive way so.
We're looking at <unk> growth go right into the next year, we don't see that letting up.
When you look at Gcs, we continue to look at maximizing our return of people. So as I've said in the past.
Were looking not so much that's.
That's not really the growth story its kind of profit story, we're going to maximize our margins arent GC or so when I look at the pipeline.
Pipeline is.
Certainly appears strong and by the.
Indices, we track it by made those statements about the recent reports all very positive for 'twenty two 'twenty three 'twenty four and I think just the supply demand curves are really going to allow us to continue to maximize the bottom line of JCR and.
Where we see opportunities in the business to grow it meaning we have a very successful execution, we will look for growth, but quite frankly in some of our business units, we've not fair that well theres going to be a shift really to focus in on <unk>, which is very high margin and quite frankly as those branches have a great track record of executing.
So it's going to be a mix of I would say growth on OTR and modest opportunity our TCR.
But I think we have pretty good visibility on next year.
Okay. Thank you I'll turn it over.
Our next question is from John Oh Longmeadow investors. Please proceed.
Hi, everyone, Thanks, and congrats on the results.
Yeah.
I Wonder if you could update us on claims collection and.
Sort of the acquisition program.
Sure Good morning, John Troll here so.
So on the claims collections that we've made some progress on two of the projects.
That deal were definitely moving forward in the right direction and we're really pleased with it we had one project that.
Was extended a federal project, it's kind of interesting I think we've worked it smartly we've submitted.
Total of three claims all of those claims have been resolved, but the project was going to be about two years later and we're growing and we're the fourth but the progress is steady and as a result, we did see some of the problems. We received in the past, where we just couldnt get resolution early.
Another particular project, which is a private project is in kind of final negotiations right. Now so we'll have to see how that continues to play out, but we are holding firm.
Not backing off and we're looking for strong settlements.
Some of the bigger ones that we're dealing with are continuing to drag out and that's just what's interesting step back and look at one particular opportunity. The general contractor is going after millennials that are probably 10 times the size of our claim.
And it evolves all the contractors, it's not just us so we're working hand in glove with them to continue to progress that but it's going to continue to take a while to resolve so we're seeing progress on several fronts.
Sure wish it would move faster on the other fronts split again I look at it as future cash to come into the company.
While on the acquisition front, we remained active and actually I would like to have Matt I'll make a comment or two gladman.
John Good morning, Yes, I think Charlie's quick comment there is is certainly appropriate the market I think broadly speaking has leveled off in terms of overall activity given the anticipated capital gains tax rate changes at the end of the year. Thank.
Thank you everybody, who was who was going to try and get something done this year, probably launched over the summer into the early fall and so if you want to use the inbound broker driven.
Banker driven activity.
<unk> of the health of the market, it's probably where you would expect at this point, obviously, if somebody launching now they don't anticipate getting anything done by the end of the year.
What we are seeing again broadly.
Is that even for folks who may not have been in a rush.
There is a level I think of just emotional fatigue for a lot of these business owners and folks who a year ago might not have really seriously considered.
Evaluating a transaction I think are having a change of heart and so we're seeing the market.
That is certainly receptive.
And I continue to think we've got a very good story to tell.
A good brand to market.
<unk> sort of manifesting itself in some very interesting opportunities at various stages of discussion what we're sort of always in this perpetual cycle brings.
Bringing opportunities into the queue evaluating them.
Putting some on the back burner moving past, others, and then really focusing on a couple.
We're going to continue to remain disciplined but we do.
We see some things that we like the challenge obviously is threading the needle between seller willingness to engage.
Our feelings about our underlying performance in the market and getting our arms around commodity price exposure equipment availability and COVID-19 vaccine mandates both at <unk> and elsewhere.
And then feeling like we've got the right cultural compatibility so.
We've certainly set up for ourselves a process and a structure that requires some degree of precision and firing on all cylinders before we're at a point, where we fall in love, but we are open minded to following excuse me falling in love and wed certainly like to get something done if its the right opportunity.
John I, just want to add a couple of the points to matts comments.
We continue to hunt.
We're mainly focused in the southeast United States, We think Thats the area.
Region, we really need to expand it to.
We're also looking at either an existing sector or possibly a new sector that has strong growth potential.
But all of it has to complement our OTR expansion plan.
So.
<unk> done a great job at nurturing some opportunities as you said, we're at various stages of discussion.
Okay. Thanks.
Our next question is from Kim Brown with Stifel. Please proceed.
Good morning, guys. Thanks for taking my call. My question is regarding the OTR service segment.
So you made some comments on the Nashville office and how it impacts on SG&A.
Any light you can shed on.
That's the working cap.
Going forward from here.
Capital constrained.
Yes, so it's a minor SG&A investment.
Im sorry, it was chip chip Brown.
Yes. Good morning, Thanks for the question.
Yes, it was a minor investment, but we brought on board a very talented person.
And we're going to walk before we run we have added another professional to that staff.
We're selling it's like working better than expected actually it's ahead of plan.
Original view.
How to get into this.
Our objective to add program management services.
To explain a little bit different than our core service, but it's something I did for 21 years of my career I did a lot of program management in the past.
Before joining limbach and it's an opportunity for us to really develop the value propositions for our client to spend capex to develop their project and then we get the knowledge early on what's going to happen, which positions US later for another further already or play with the actual capex.
<unk>.
So we actually secured three new clients during the quarter. These are major players based in Nashville. So.
We're quite excited so from a capex perspective excuse me of.
SG&A perspective.
<unk>.
We just have to people there and they are doing a great job and there'll be feeding work to the rest of the company and we didn't open up it will be.
Walk us through or anything like that it's a very modest investment. So I hope that provides some color on what we did in Nashville.
Yes. Thank you I appreciate that can we expect would then I mean, just to be cash flow accretive within the next.
Yourself.
Yes.
Oh, yes, absolutely.
Thank you I appreciate it.
As a reminder, star one on your telephone keypad, if he would like to ask a question. Our next question is from Mike Hughes with.
Oh please.
Please proceed.
Good morning, Thanks for taking my questions first I wanted to follow up on the M&A discussion can you give a range of multiples that youre looking looking at at this point.
Mike are our target range is in the area of plus or minus four five times trailing EBITDA over the last couple of years for target companies.
And that's that's that's prior to any potential synergy opportunities either on the front end from a revenue and gross profit point of view.
Or in terms of back end administrative efficiencies.
Okay, the OTR business.
Last quarter, you indicated would grow by 25% this year, which implies a full year of $159 million year to date, you've done $101 million.
So to get to that goal that you've put out there last quarter you'd need to do close to $60 million. This quarter up from the just reported $39 million can you just kind of comment on that potential.
Sure.
I said earlier, we had very strong sales of the third quarter, which we needed to see in order to fuel the fourth quarter revenue.
I think the $159 million is probably a bit of a stretch for the quarter, but we do expect it to grow over Q3, so we're going to wrap up the year nicely.
In terms of growth year on year.
I said earlier I was a bit disappointed in terms of how the beginning of the year wed which impacted sales.
And resulting revenue.
But from a standpoint of the strength of Q3, and we don't see that lightening up at Q4, its kind of teeing up even though it's a nice start to the year with Q1.
And again the sales the way that works, which is very different at JCR, the OTR sales or rather immediate it's we sell it we book it and we execute it.
So seeing that strong third quarter fuels, the following quarter right the fourth quarter.
And again the sales right now the pipeline there seems to be just continued pent up demand and a lot of customers are focused on fixing existing equipment, which is great for most routine TNMP.
PNM perspective, an emergency work.
We're seeing one of our best years ever on the TNF front. So we don't expect that the wide model, especially because of the supply chain issues.
Okay. You just hit on one of my concerns without segment pent up demand I'm just wondering.
How much of this is just business that was pushed to the right and you're going to have very robust results.
That OTR for a few quarters and then it kind of rolls over just maybe address that issue.
One of the things that.
Our service business a indicator of its strength is the sale of preventative maintenance contracts and we're having a record year and what does that mean, so once you sell a preventative maintenance contracts youre in with the customer.
And we have right now about 88% renewal rate annually evergreen contracts and when you look at selling that maintenance contractors start getting multiplier effect of revenue and it's very high margin. So to see this year's growth, it's going to be our best year ever of preventative maintenance contracts right. So it's not just the <unk>.
Emergency work, it's actually setting up the future to have an expanding core services business. So we are quite excited about that we did spend more money on sales resources over the past two years to get that momentum going and it's paying off so actually we don't see it letting up and the way I'd like you to look.
I still think it's the tip of the iceberg, there's so much growth potential in the <unk> segment, we just start looking at our footprint and market penetration. There's so much more opportunity for us to expand so I don't see us letting off we're going to continue to invest in the expansion of RDR. We believe that's where we should really really.
First.
Okay. So you expect the revenue for that segment to increase sequentially into the fourth quarter from the $39 million you just reported for the September quarter.
Do you have enough visibility to commit to that segment being up in the March quarter versus the December quarter.
Right now as far as the fourth quarter, we expect the growth in revenue in the fourth quarter.
Visibility on that.
And I'm sorry, the second part of our question.
Do you have visibility into the March quarter thinking it will be up sequentially from the December quarter.
Yeah I think.
Now the pipeline of sales appears to be strong right. So we sell it we perform it.
Through the course of this year, we've seen a continued ramp up of sales activity through the year in the third quarter was better than the second quarter second quarter is better than the first quarter. So we don't expect that to slow down and again I think we've invested with the right call.
Feet on the street, so the expansion I don't expect it to let up.
The only the only concerns we have right now are kind of supply chain matters, which is no different than any other business today.
But we're making our customers aware of it.
Interesting part of that in.
Instead of ordering maybe newer equipment. They wanted to move forward with a chiller stead, they're saying well don't want put band AIDS on the existing charters, which is great for us because we have our techs in their buildings and they're spending money.
The revenue at very high margins so.
We're working it as best we can in terms of opportunity and.
Mike do you have any other thoughts about that in terms of opportunities on the supply chain.
I think from the other thing too that we've seen from both segments is.
The supply chain has become more complicated and we've really worked internally to make sure that we're managing that properly through communication and awareness.
The one thing we've definitely seen from our customers is they are turning to us, especially from a trusted relationship perspective to look for more of a turnkey approach maybe in the past they would have bought parks and smart pieces now theyre looking for somebody to kind of manage that for them. So we see opportunity as we go forward and especially we've seen now for more of a turnkey approach matters.
As opposed to what we've seen in the past.
Okay, and then turning to the gcs.
<unk> side of the business. The backlog has declined for a few quarters now, which I appreciate your discipline on bidding.
But when does that bottom out do you have an idea.
The TCR perspective, and I think Charlie touched upon this a little bit too, we're really making sure that we're maximizing outcomes. We've got a a business where we're trying to make sure that.
We performed the best that we can in places that we've historically performed we're really watching the quality of the gross profit and making sure that we're not growing and impacting that.
So I think it's very dependent on market.
Markets that we're working on it depends on opportunity, we're trying to be smart from really making sure that resources are paired with opportunities.
But our key is once we hit a certain level in a certain market, we're making that that will turn to a growth pattern in that market.
Yes, I want to reinforce that when we look at our existing business all.
All the business units, we have a disciplined ROI right now that if they are proven to us that they can execute deliver the great margins, we do expect them to grow.
But we're being extremely disciplined on pricing and where say either up origin supply chain is in our favor.
Go for it.
Lose something but that's okay, because there's plenty of opportunity out there in the indices that we have are indicating it's knockabout went off.
In certain business units, where they've had some challenges in the past, we're making tough calls and pulling back and really focusing in on OTR.
One particular branch we had we looked at what they were doing with the <unk> side and we just don't what if we just deploy the SG&A dollars over to OTR.
Killing it on that side of the equation and let's back off the <unk> so to recap.
We are performing and performing well, we expect to see expansion, where we're not performing well, we're actually going into contract and I think thats smart strategic and then moving back to <unk>.
Continue the forward growth.
Every location on the OTR front, the nice thing about <unk> is just besides the very high margin and cash flows much better.
It's just not human capital intensive compared to building a new building. It just requires many people and.
That with the labor conditions out there we think it's just a smart play.
Okay, and just the dimension of our cash flow being better on the OTR side of the business and I know you discussed this earlier in the call but.
What does cash flow look like over the next 12 months because if you look at 19 operating cash flow was roughly negative $1 million. Then you had a huge 2020 at $40 million and year to date, it's negative $17 million. So you sum all that up it averages about $7 million, which isn't very good conversion on the EBIT.
You've reported so what does that look like going forward.
What do you aspire to.
Yes, so that's why we.
At the time it goes through the details of it we really have the fluctuations in our billing cycle and how we do work with regards to overbuild in undertone and so the best way to model it.
As laid out is you need to.
What's the targeted adjusted EBITDA and from there for example, FERC in for Q3 that we had.
The Tac tax of $1 six we had interest of about <unk> five they had debt around two one and capex running around three <unk>.
Look at those kind of impacts to cash against the adjusted EBITDA that basically can I will give you a ballpark figure as cash before working capital adjustments and as the working capital deficit piece as I spent the time going through that.
We have insight internally, but we're not giving guidance on that in two difficult infill.
Information for investors.
<unk> modeled that fluctuations in some of those accounts.
Just wanted to comment on just.
John also asked a question earlier about claims where we stand.
We did consume a lot of cash that claim period, where those projects as we were working through them. They were delayed and we are obviously seeking recovery to get that cash back into the balance sheet or onto the balance sheet.
That's another thing to be thinking about the good news is if you look at the business over the past 18 24 months, we haven't had any new major claims of of what we suffered in the past.
Decisions on jobs that just.
Just one south not because of us, but we were caught up in just problems with the owner or problems with the general contractor and other specialty contractors, we had to lay out that cash years ago, but this past 18 to 24 months, we're not seeing that and I think it's the discipline, we've put back into the business. So we got the recovery of the <unk>.
Cash will be old claims that as a future period.
Activity.
But also we're not seeing that outlay that we saw in the past because we're just speak lot smarter over the past 24 months of what were taking room.
I hope that helps.
Well I appreciate the variability from quarter to quarter modeling working capital, but you know what.
Operating cash flow is converted at about a 30% rate to EBITDA. If we look at 1920 and year to date I would think that you'd be able to put a metric out there hey, we want to convert at a $50 $60 70% rate.
Maybe we outside of escape model that but I would suggest that you maybe put a number out there because you know the one thing missing in the story right now is the operating cash flow year to date has been very poor.
You've outlined so that that's just a suggestion last question.
You filed a shelf in the middle of September or was that just re upping existing shelf or would you actually issue.
<unk> shares at these levels.
Yes.
Kind of good housekeeping in the sense of putting up a shelf we had the warrants that were issued under the other shelf insulet, but no availability on it.
So we anticipate.
To have something out there.
Okay. Thank you thank.
Thank you Mike.
Our next question is a follow up from John Hall.
Soon.
Please proceed. Thanks, yeah. Thanks, So I just want to sort of flip that last question on et cetera.
Given the I mean, you are in a net cash position.
Hum.
And.
Pending on what metric you look at it.
I think we can.
Evaluation is in many cases a third.
Even more.
Less than.
Public peers.
Are you in a position at this point, where you could.
Yeah.
Modify your credit agreement to allow yourself to buy back stock.
Now we're still we're still in a position.
Keeping with our agreement with the bank.
Yeah.
That change at some point.
Sure.
Yes.
The industry average of eight.
Year end too.
The agreement.
Something we could consider.
Going forward, but at this point.
New with the relationship.
Okay. Thanks.
Our next question is a follow up from Jim Brown with Stifel. Please proceed.
Hi.
Based on the two prior questions with the negative impacts of working cap. This.
This quarter or not.
Trailing nine months was that predominantly with the over under billing was that obviously the GTR segment.
We expect the negative impact.
Any any light on the negative impact.
The service segment.
Or is that predominantly just all.
On the construction and then 12 months.
On the one way IV.
So you add specific to each segment.
Yes.
Guys don't break out the working cap or athletes in terms of segments. So.
You could have impact.
At the end of September so working cap on the over under billing side. That's obviously just did that.
The argument.
And then from the primary one.
Primarily.
Primarily.
What are the capital constraints on the service side, then with it.
And just like in Nashville, and what can we expect going forward. I mean, you had made comments in the past it's Harley.
I appreciate that you had grown too fast.
Whereas the fine line there.
Yes.
Okay. So.
When you look at the GC or work right. We've taken on some very large projects in the past and we still will continue to take our large projects in the business units that have a great track record of execution and those jobs could cause fluctuations in working capital and our cash position was project startup, we look to get to that overbuild position.
That's a primary goal, but what we have done over the past 18 months is we've actually backed off those big jobs, and we're taking a smaller work and the opportunity to get to that overbuild position doesn't necessarily it's not as great compared to a very large scale project, so and we by the way we think from a.
Midterm long term health perspective, that's the smart way to go about it the big jobs, because they are growing well, it's great, but if they go the other way it could really impact our position when you have the smaller projects and we're talking of $1 million to $5 million jobs versus a 40 or $50 million contract you don't.
See the fluctuations we're able to stay ahead of it they don't tend to get in trouble you get in and get out it's kind of just a smarter business platform on the OTR segment. You just generally what we're doing there was we actually asked for 50% down payment on some of the deals and once in a while we get it I think the smarter buyers basically say no I'm not going to do that.
Basically that's the larger sophisticated customers with the smaller customers.
Agreed too well.
To that 50% upfront payment so.
We're constantly pushing for improved cash position.
It feels like chip I, just want to reinforce that Nashville opportunity is a very very small investment. We just think it was.
Very smart play our largest sector is health care.
Nashville is the hotbed of where decisions are made for the for profit health care customer base. So we're really excited the individual that we actually brought on with someone who worked for me at my former company and he started excellent job ago. The number of months. He has been here actually like I said earlier he's ahead of sales.
And back to the positive cash flow.
I think they are by the early part of next year will definitely be positive sales are there it's great to see what he has already delivered very high margin. So we're pretty pumped up about it.
I appreciate it.
As we are.
What's your targeted in 2025 of a 50 50 mix with service and install and we expect that working capital kind of smooth out I mean, just for modeling purposes.
That makes sense.
Yes that makes sense because right now we're sitting I think Charlie mentioned.
70% of our TCR and Thats, where we see the fluctuation more so with regard to the <unk>.
Lifecycle of the cash over the project.
So yes.
And work towards the ODI it will balance out.
And what can we expect in terms of capital out from the OTR perspective.
And you're right there it is.
Actually a very small capital outlay right because when you are looking at it all your business you're basically talking about.
Our service Tech event.
And he's got some equipment that van right. So we have the releases that come through and from a people perspective, we are adding staff in terms of sales and management as we grow that business.
But it's not as you know.
Intensive compared to construction with.
With Capex set of Capex.
Yes.
On the <unk> side, we have plants that produce sheet metal and obviously, that's you'll big outlays from the standpoint of maintaining those plants. Although I think it worked out very efficiently, but the ODP business really doesn't require that kind of plant activity.
So it's.
It's just not as intensive which although the reason why we like it so much.
Great. Thank you.
Yeah.
<unk> and answer session I would like to turn it back over to management for closing comments.
Well listen everyone. Thank you for joining us today, we're obviously very proud of the quarter. It is a clear indication of what we can do as we go forward. We appreciate everybody's patience with management as we continue to work through some challenging times, but we're starting to see the fruits of our labor and I think our strategy.
Is spot on and we're going to continue to aggressively execute that we look forward to meeting with you again with our.
And of your results.
Doug.
Thank you.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
And it goes back now.
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Okay.
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Okay.