Q3 2022 Limbach Holdings Inc Earnings Call
Greetings and welcome to the Limbach Holdings third quarter 2022 earnings call.
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And it is now my pleasure to introduce you introduce to you Jeremy Hellman of the equity group. Thank you Jeremy. Please go ahead.
Thank you very much and good morning, everyone.
Yesterday, Limbach Holdings announced its third quarter 2022 results and filed its Form 10-Q for the quarter ended September 32000.
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 projecting on similar statements made during the earnings call listeners are reminded to review the company's annual report on Form 10-K, and quarterly reports on form Thank you risk back.
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, our President and Chief Executive Officer of Limbach Holdings. Please go ahead Charlie.
Good morning, welcome everyone and thanks for joining US with me today is our Chief Financial Officer, Jayme Brooks, Our Chief operating Officer, Michael Mccann, and our executive Vice President of acquisitions Matthew Cats.
We all for you from Tampa This morning, where we are experiencing a tropical storm.
We are in a facility with an emergency generator, but should we lose you during the call. We will we have a backup plan and we will call. It just give us some more mature dial back and should that happen.
As always I want historically, thank you to all employees for their outstanding work.
We had a terrific third quarter and those results were well earned by the entire organization.
The efforts of our teams from our business unit leaders to our craft workers service technicians.
Corporate and branch staff.
As reflected in our very solid financial and operating results.
As we continue to pursue our transformational strategy Limbach is evolving and building a sustainable value at the same time.
I'm tremendously proud of our employees and their contributions.
For those joining us for the first time, we're in the midst of a transformation of the business model to focus on building owners and are partnering with them to optimize mission critical mechanical electrical and plumbing system.
Those building systems represent significant capital investments for our customers and are fundamental to the proper functioning of the performance of our costs.
We have two distinct business segments first the older direct relationship or for D. R.
Fluids project work and services provided directly to facility owners.
General contractor relationships or TCR and clearance work performed as a subcontractor to a general contractor for construction manager.
In 2019, we implemented a strategic shift to accomplish two key objectives first to rapidly expand the lower risk higher margin OTR segment and second to rationalize the TCR segment through a focus on improving operational performance profitability and cash flow generation.
At the same time, the TCR segment constitute approximately 80% of consolidated revenue and generated an unacceptable level of volatility in earnings and cash flow. Our key priority was to set a bit your goal of achieving a 50 50 segment revenue mix by 2025, which we believed would help us.
Both key objectives.
The rationale for this strategic shift was fairly simple, we realize better returns at superior cash flow generation from the OTR segment is.
As a result of the direct relationship with the facility owner, which provide stable consistent and recurring project work and related services.
Within the <unk> segment, we know that when we cherry pick the right projects, which includes knowing the building owner allocating labor and having our smart contract, we generate better profitability and improved cash flow.
At the time, we believe the strategy would be to better execution with predictable growing profits and increasing cash generation.
Our experienced team executing that strategy over the last three years has proven us right.
Our results this quarter and previous quarters over the past two plus years, we now have the financial groups that we have the right strategy to build sustainable value.
Turning to our results.
Our transition to the owner focused business continues at an accelerated pace positioning us to achieve a 50 50 segment revenue split next year, which would be two years ahead of schedule.
As we've said for some time, we've undertaken this transformation with several goals in mind, improving our consolidated gross profit and net income margins driving better cash flow conversion and reducing the overall risk profile of the business.
Consolidated gross margin of 23% in Q3 was a company record as well as consolidated gross margin of 18, 8% for the trailing 12 month period ending September 30th.
<unk> was fueled by excellent execution in our <unk> segment and strong revenue growth in the higher margin OTR segment, which contributed 48, 8% of the box total revenue for the quarter this compared to 34% of revenues in the same period last year.
Cash flow from operations for the quarter was $10 4 million, bringing the total to.
23 million year to date, despite getting off to a slow start in Q1.
The significant cash flow generation allowed us to continue to reduce debt as our term debt declined by 244 million in the quarter.
Excluding vehicle finance leases and the Pontiac sale leaseback financing liability, we have paid down our long term debt by $11 6 million from December 31, 2021.
Third quarter OTR sales of $62 8 million were up 41% for last year's third quarter, resulting in the OTR segment backlog of $124 5 million at September 30 up four 4% from $119 3 million at the end of the second quarter.
Up 27% from December 31.
We also ended the quarter would you see our backlog of 332.8 million up seven 8% from the $308 8 million at June 30th.
We remain on track to deliver a solid year.
With strong performance year to date at a solid outlook, we're increasing adjusted EBITA portion of our financial guidance for this year, while tightening our revenue range, we tightened our full year revenue range to be between 510 to 530 million compared with 510 million to 540 million previously and.
We now expect adjusted EBITDA of 27 million to 30 million up from our previous guidance of 25 million to $29 million.
Want to spend a few minutes, describing our business in what I call recession resilient positioning of.
The company to succeed even in the face of weakening economic conditions.
We often emphasize the key themes of diversity of the business and how we are essential to our customers, especially building owners I want to provide more detail on how our business is well diversified in four primary ways first we have 16 offices that service over 30 key metro areas East of the Mississippi.
Demand for nonresidential mechanical electrical and plumbing services, driven by local demographics and economic activity.
Our geographic markets are largely uncorrelated in this respect.
Second we offer customers a wide range of services from front end engineering and design through construction, and importantly service and maintenance demand for service and maintenance capabilities, driven by ordinary wear and tear on equipment as well as ongoing supply chain issues building.
Building owners have a critical need for maintenance services to keep their equipment up and running when replacement equipment is not available. We also anticipate the possibility of a strong replacement cycle once the supply chains normalize.
Third we operate in a large uncorrelated at critical end markets from health care to Datacenters to industrial manufacturing health care is one of our largest end markets, but we continue to see growth throughout many of the markets we serve.
Finally, we maintain a broad diverse set of customers ranging from well capitalized fortune 100 customers to thriving middle market industrial companies that form the foundation of many local economies were focused on strong relationships, expanding our services and revenue and increasing what I've referred to as wallet share.
These key factors underscore our continued strong pipeline of opportunities for both of our segments. The building systems. We design build and service are often if not always mission critical for the building owner.
Datacenters that operate 24, seven 365, low internet companies to make sure their platforms are always available for users.
Hospital simply cannot operate if the air handling systems go down. These are examples of mission critical systems and the list goes on and off by cultivating these customer relationships our goal to expand wallet share drive long term growth in our business with that I'll hand, it off to Jamie to provide more detail.
I was out in the quarter.
Thanks, Charlie our earnings press release, and our Form 10-Q contain a detailed review of our financials.
Focus my discussion of the key areas.
Total revenue for the quarter like $122 4 million versus $129 2 million in the prior year quarter.
Lower level of total revenue for the quarter as a result of our continuous and catch no rationalization.
He said to.
To reduce risk and maximize profit.
Can you see our revenue for the third quarter was $62 7 million versus $90 million in last year's period.
Well the our revenue continues to grow and increased $20 5 million or 52.2% to 59 7 million compared to the prior year.
But then the OTR segment the acquisition of Jake Marshall in December of 2021 contributed $10 2 million at the year over year increase and the remaining increase of $10 3 million representing organic growth of 26, 3%.
Greg in the OTR state driven primarily by the increase in larger owner direct project work.
The larger project work, which we define as projects in excess of 500000 at least fell approximately 60% from a year ago and it passed in the 18% in the second quarter.
We also experienced solid growth in maintenance revenue as well as T. N M work, which grew 19% sequentially and 48% on a year over year basis.
Third quarter gross margin was 25, 5% and Tcs gross margin was 15, 4% for consolidated gross margin is 23%.
This compared to consolidated gross margin at 18, 9% in Q3 of last year and 18, 4% in Q2 of 2022.
The overall improvement in our consolidated gross margin was a function of our revenue competition continuing to shift the O D. R.
<unk> gross margin in the prior year period.
Do you see our gross margin improved to 15, 4% from 14, 2% last year.
However, can you see our gross profit decreased $3 1 million because of lower revenue in this segment.
Our gross profit increased $3 5 million due to an increase in revenue. Despite lower margin is at $25 five or 29.8.
This lower margin was driven by project mix and timing in the third quarter as 2021.
Our SG&A expense for the quarter was $18 7 million, which is relatively flat compared to the first and second quarter and an increase from $18 3 million in the prior year quarter.
Third quarter SG&A included the SG&A cost for the quiet, Jason Marshall entities, which were not in last year's SG&A, partially offset by <unk> 7 million increase in payroll related expenses and <unk> 2 million decrease in rent related expenses.
Considering the progress in winding down our business operations in southern California, and the TCR stagnant and eastern Pennsylvania.
Both can be substantially complete by the end of this year.
The expense associated with winding down these operations and other nonrecurring expenses associated with cost reduction initiatives throughout the company have impacted our 2022 quarter to date and year.
Income before income taxes by $1 4 million and $4 3 million effectively.
This compared to three and nine month period in 2021 during which the unprofitable Southern California operation and the Eastern Pennsylvania, TCR segment unfavorably impacted our income before income taxes by $1 2 million and $4 4 million respectively.
At this point, we've worked through the cost savings initiatives. Additionally, identified as part of our plan for the year and we will realize the full year cost savings going into 'twenty two 'twenty three.
He has also prioritize the implementation and ongoing processes to ensure we are efficient with our expenses as we work to scale the business.
Turning to cash in the balance sheet during.
During the third quarter operating activities generated cash of $10 4 million.
Year to date cash from operating activities was 23 million.
As was the case last quarter, our strong cash flow was due to a combination of factors as we continue our focus on cash generation and working capital management.
The operations of the business generated cash and we experienced continued improvement in our cash collection and net overbill position, primarily due to the resolution of a claim settlement in Q3 of 2022.
Which provided $5 9 million in cash in addition to the cash generated from operating the business.
For the quarter free cash flow generated from operating the business before working capital changes by $6 6 million. This includes net income of $3 6 million.
Plus noncash operating activities of $3 million, which is primarily depreciation and amortization noncash operating lease expense and stock based compensation less 250000 of Capex.
As I suggested we believe a reasonable way to view cash generated from operating the business.
Let's start with net income.
Add back noncash operating activities and then subtract capital expenditures.
Using this methodology for estimating our free cash flow free cash flow conversion as a percentage of adjusted EBITDA like approximately 62% for the quarter and we are targeting an annual 70% conversion rate when we achieve an annual segment revenue split it 50 50.
Additionally, this quarter, we entered into a sale and leaseback transaction for our facility in Pontiac, Michigan.
This transaction provided us with $4 9 million of cash net of issuance costs, and a $2 4 million and tenant improvement allowance.
Our annual rent is approximately 500000 and it's expense to interest and this transaction was classified as a finance lease per GAAP.
The implicit rate associated with the aggregate purchase value of $7 8 million, which is inclusive of the tenant improvement allowances with six 5%.
With the current escalating interest rate, we were very pleased with the outcome of this transaction.
Our strong performance in Q3 and cash position has enabled us to continue to reduce our term debt.
We repaid $1 8 million through scheduled monthly amortization and point 6 million upon the receipt of cash proceeds from the reported claim resolution.
In total we reduced the term loan balance by $2 4 million during the quarter.
We ended the third quarter with cash of $28 4 million up from $19 6 million at the end of the second quarter.
At quarter end, we had no borrowings on our revolver and a total term debt position at $23 3 million.
Close it in the short term portion.
Additionally, during the third quarter, we hedged approximately $10 million of our term debt fixing it at at terms sofa rate at 3.1 or two per cent through July 2027.
At September 30th 2020, the interest rate in effect for the $10 million hedge portion of the term debt that is 7.22% and the non hedged portion of the term debt this 7.25%.
We have often noted for some time that outstanding claims represent potential significant cash coming into the business.
We were constantly towards resolving our pending claims and at this time, we are down to three major claims are meeting which are in active negotiation.
These outstanding claims total over $40 million and we will continue to actively pursue recovery.
Given the nature of these claims and the process by which they may be very salt, we are not able to provide a value or a timeframe in which these claims might be resolved.
To conclude our continued improving performance is driving strong operating cash flow, allowing us to rapidly pay down our debt, while also providing ample ability to find potential acquisition and the share repurchase program, we announced at the end of September .
I'll now pass the call to Mike discuss operational highlights.
Thanks, Jamie financial and operating results for the third quarter continued to demonstrate the potential of the OTR centric business model to improve profitability and cash flow generation.
Our strategy and associated processes, we put in place into two and 2019 continue with them to improve the quality of our earnings.
We believe there's even more room to run as we optimize our revenue mix expand our key building on our relationships and develop additional products and service offerings.
When we reflect back on the OTR journey, we've taken we can identify a handful of key business drivers that continue to form the basis of our success.
Improvements in data collection and analysis that allows us for real time visibility into project performance.
This enable us to get ahead of issues as well as opportunities.
An obsessive focus on account management, we recognize the leverage that even a handful of meaningful customers can have on the operating model and our local business unit.
The value of being a specialist in each market instead of a generalist.
Having a defined niche provides competitive differentiation and generally means above average returns in those markets.
The opportunities to drive margin improvement through better project selection and leverage of our design engineering capabilities as.
As well as a focus in providing integrated solutions instead of just one off project delivery.
There's one comment I don't Wanna add Charlie summary of the transformation we're undertaking.
We don't operate a one size fits all model, while we do strive to implement and achieve consistency across the business units with respect to these operating themes and core processes. We have to acknowledge that each business unit is different different customers different skills and talents and different local market dynamics.
In some locations that means our business unit is 100% OTR focus.
In other markets actually mean that our business units generating 80% of its revenue from GTR opportunities buses.
But those opportunities are of the type that makes sense given the return profile of each along with the capabilities of the local team.
What that means on a consolidated basis is that we expect to see continued growth in the OTR business.
Which is a common theme across all of our business units.
Because you see ours is not a strategy everywhere, though the volume of activity in that segment is it like to be a little likely to be a little bit more volatile in the quarters and years ahead.
We're concentrating that work in fewer places so theres less balance on a consolidated basis.
And those locations are really good at executing TCR work and that frequently means that some larger TCR work ongoing or in the backlog, but that could be more episodic.
So activity within the Gcs segment could have higher piece and lower trust given the concentration in a handful of business units, but we have no intention of sacrificing quality of risk management.
I've commented on the holistic approach to the business model and Jamie's address performance by segment. So I'll now focus on sales and overall activity Charlie touched on earlier.
As a reminder, when we refer to sales we're talking about work or projects for which we have contracted as opposed to revenue, which is we have actually done the work and build the customer.
In general we continue to benefit from a solid solid operating environment third quarter Odier sales of $62 8 million were up 41% from last quarters from last year's third quarter sales.
Sales of OTR pricing T N M, where again, particularly strong.
With product sales up almost 40% year over year, and TNF sales up almost 50% year over year.
As of September 30th OTR segment backlog was $124 5 million up four 4% from $119 3 million at the end of the second quarter and up 27% from December 31.
We ended the quarter with TCR backlog of $332 8 million up seven 7% from $308 8 million at June 30th.
That position <unk> well through the end of the year into 2013.
I want to stress again that and adding to the <unk> backlog.
We believe we are remaining disciplined when it comes to the work for pursuing we have a good pipeline and we're selective.
Supply chains continue to be an issue with constant demand for crude materials absorbing any slack that develops.
For us it has caused our quick hitting hoodie or work with their time and material or service or maintenance work to be very busy.
Equipment deliveries can push or pull revenue from one period or another we're coaching building owners to make proactive decisions on their capital infrastructure programs.
These decisions include preorder equipment on one side of the spectrum.
And the other side, we have seen customers ask them to help rebuild equipment in place.
Our OTR focused strategy has helped position us to be a partner for building owners and directly a system with their infrastructure and building operational needs take.
Taken altogether, we feel good about the outlook.
Now I'll pass it over to Matt.
Okay.
Thanks, Mike in the acquisition market, there's been a modest increase in seller activity in the last few months. We continue to hear the same things for business owners. They are not getting any younger.
Business is a lot harder than it used to be and business just isn't as much fun as it used to be all of which is great news for us and that we offer some unique solutions to those problems.
That message excuse me that message is resonating really well with nearly everyone we speak with.
We're offering cultural continuity for like minded businesses.
Port of environment for a local brand and the employees and a breadth and depth of resources, it's really difficult for smaller businesses to develop and invest behind.
So while we realize that will often have to compete for transactions in some way, we're seeing progress toward achieving our goal of being the preferred buyer for local and regional contractors for the front end of our acquisition model.
Being that preferred buyer is really what our goal is.
That being said, we're also dealing with human nature, there's a busy environment and this is a life changing decision for a lot of business owners. So for sellers that often leads to a lot of reflection and introspection longer less predictable and potentially less streamline transaction timelines for us there's a lot of starts and stops and there's the occasional deal that falls apart at some point.
But that maybe comes back to like down the road.
So someone who hires and advisors probably need at least a loose commitment to getting a deal done, but that's not usually the opportunity that we're pursuing and in many cases, we're trying to acquire the business isn't that isn't necessarily for sale. So we have to remain patient and disciplined and be willing to push and pull opportunities in response to sellers timelines and transaction processes.
The market data points that we've seen this year haven't given us any reason to change our focus.
And that continues to be businesses located east of the Mississippi River in smaller secondary and tertiary markets.
Dominant local market brands.
Strong incompatible culture and core values.
Execution excellence.
Exposure to attractive end markets like health care and higher education in industrial and manufacturing.
And then at least some elements of an OTR Foundation, something we can build on.
We also continue to feel good about the valuation paradigm for these types of businesses, it's consistent with how we approach last year's Jake Marshall transaction, we need to find the balance between offering value to the business owner and still creating value for limbaugh, all without stressing the balance sheet or absorbing all of the company's liquidity.
Building on Mike's comment about the key themes and drivers of the OTR journey, we've experienced over the last few years, we've taken that experience and developed some process technology that we can apply to the acquisition candidates.
Like with our own business units, it's not a one size fits all approach, but we definitely see opportunities now that we might not have seen a couple of years ago, when we feel better equipped to capture the resulting value.
We've also engaged with a lot of business owners, who share our frustration over how the industry has evolved in the D. C. Our market and who are eager to benefit from the lessons that we've learned and that's been a real competitive advantage we think.
So with all that said, we remain concentrated on our areas of focus and we remain disciplined in our process. We obviously can't make predictions related to growth through acquisitions, but we continue to believe that we've got the right areas of focus and the right process as we pursue this type of growth.
Finally, just a few comments to wrap up about Jake Marshall as we approach the one year anniversary of the transaction. Early next month integration continues to proceed well we feel comfortable now that we've got a repeatable and battle tested core process for integration as Jamie noted Jake Marshall has been a strong contributor to the company's overall growth in OTR this year.
And we continue to really like the opportunities in that market Charlie.
Thanks.
In short, we're very optimistic about what box prospects insiders have bought shares many times over the past year, we announced the share repurchase program right at the end of the third quarter. So we are certainly standing behind this viewpoint.
Our aggressive shift through an ODM are focused business already is delivering gross margins above our peers.
In our Investor presentation that is available on our website, we have a slide that details. This Jamie noted restructuring initiatives, we have undertaken a share to improve our operations and with those expenses dropping off next year, we expect to see our operating margins improve in addition, we're focused on continuing to scale up our business.
Both through organic growth and the OTR segment and through acquisition.
As I stated earlier, we are tightening our revenue guidance for the year, while increasing our adjusted EBITDA expectations. We currently expect revenues to be in the range of $510 million to $530 million and adjusted EBITDA between $27 million and $30 billion. In addition, a new investor presentation contains a number of other helpful.
Modeling parameters.
Our team is executing our plan and it's working.
With that we'll take your questions.
Thank you at this time, we'll 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 that your line is in the queue. You May press star two if you would like to remove that question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
<unk>.
One moment, while we poll for questions.
Yeah.
And our first question comes from the line of Robert Brown with Lake Street Capital markets. Please proceed with your question.
Hi, good morning, congratulations on a nice quarter.
I just wanted to get a little more color on the demand environment.
The current economic environment, I know you addressed it.
The ins and outs, but how how do you sort of see that playing out and what markets are sort of strong in some markets or maybe a little weaker.
Rob This is Mike. Thanks for the question, it's interesting that we've what we've seen in the market, we see tremendous demand for what we provide.
Just I think one of our key focuses is we're really looking for buildings and business owners that have mission critical systems, and that's really what's been a key differentiator for us.
And and I would say I would look at it. This way is kind of the current environment plays with our strategy, we're very account focused.
Along with the mission critical systems and that that's really led us to partner with building owners and kind of almost flex with their spending and I'll use a couple of examples of this two one was a national health care company that.
Their spend as they look into the next year or so has basically flex from large greenfield new site construction to existing building construction, which plays perfectly for what we're looking forward to and that's going to lead to more or switch out and theyre looking for areas of the hospital, where they can get a quick return that's led to more of an existing building type of approach.
The other example is a fortune 500 company that shifted their spend from.
Again larger newer newer construction to retrofits from a.
Service and maintenance perspective so.
Definitely we see the mission critical systems, especially on the health care, we've seen great demand from that and I think especially from an existing building perspective.
Rob I wanted to just add a bit more to that.
Your account management processes that we're focusing in on right now Mike used the word we're aggressively pushing that and we are we think there is a lot more opportunity for us to expand again I call. It wallet share, but basically increasing the revenue streams out of an existing cost effects, we have over 12 months of customers and.
And right now quite frankly, we're looking at the top 30 plays.
Laser focused on the top 30 accounts that we think we could rapidly expand and we're going to continue to work our way through this massive list of customers that we have those fortune 100 customers.
Need us and I use that word essential so we're pretty pretty pumped up about what we've laid out in front of ourselves and we know what's working because we've got the evidence of the proof of expanded about wallet share with certain customers today.
Great. Thank you for all the color there and then maybe on the SG&A costs. They seem to have come down a little bit how how is that trend line and.
How do you see that protein.
Yeah, I would expect next quarter to be fairly similar and then.
Basically you know working to maintain that level of SG&A is we're trying to offset increase due to inflation and auditing for salaries those types of things as well as professional services that we're offsetting that with the cost reductions that we've identified.
It's been fairly constant as a target you know that he is going to grow and that's where we're getting to that 13 to 13, 5% number that we've put out very SG&A margin in the long term.
Okay.
Great. Thank you I'll turn it over.
Thank you Rob.
And our next.
Question comes from the line of Chip Moore with E. F. Hutton. Please proceed with your question.
Good morning, Thanks for taking my question.
Congrats on the execution on the transformation of everybody.
I wanted to ask.
The 50 50 split I think I heard you say.
Next year two years ahead of plan.
Pretty remarkable.
Any thoughts on handicapping that or kind of what you need to go right.
To get to that 50, 50 split potentially next year.
Great job, Jeff. Thanks for the question right now we're definitely on track to hit that 50 50 with the way, we're operating the business and again expanding the relationships with these owners.
And in all reality, we're going to blow through that you're going to see it.
Constant increase in audio revenue with the business and the <unk> side of the business probably will level off we suggest a slight contraction going into next year, but when you look at the OTR opportunity you've already seen the growth percentages, we're suggesting not modeling at those larger numbers that we are achieving.
To say conservative, but we see a lot of opportunity in front of us. So does the mix shifts you know 60, 40 70 30.
Yes.
Yes.
Yeah.
As a follow up I wanted to ask.
It's already Facebook playbook, you alluded to.
In supply chain.
Presumably that's a big you have great visibility on it sounds like just.
I'm, just thinking about how that could play out.
So next year.
Loosen up.
Would this be sort of upside.
What we're seeing now for the best of both worlds.
Got that.
Chip this is Mike thanks for the question.
Interesting on the supply chain.
Our business units or are kind of used to the new cycle or paradigm of of lead times at this point.
I kind of you know we have opportunity in both ends of the spectrum right now there's lots of opportunities because the equipment. The equipment has taken a long time, there's there's two different areas that we've seen extensive growth and one is I can't get the equipment and I need to make a quick repair or I need you to have one of our talented service person.
I need them onsite it all the time to manage that equipment. The second piece of it that we've seen recently and I would say in the last six months when building owners and customers are starting to realize that this equipment lead time supply chain issue is still ongoing.
He is what can we do right now to get that equipment replace and we've looked we've talked to customers and we've had pretty good success with it.
Of replacing equipment in place by certain components. There was an example of a mission critical customer that there's a food processing customer where they had to get the equipment back up and running we changed a particular component of it they've got a 30% energy efficiency pick up based upon that switching to we were able to switch the components in <unk>.
The other side of this supply chain too from a and OTR perspective is when they know they can't get what they want and it's still taken a long time.
They go back to us because we're their partner we spend time with them looking for what a creative solution may be we use our design group and we work with them and figure out how can we solve their problem in the short term eventually we do see the supply chain, obviously easing up we havent seen that as of late.
But right now even with the supply chain. The way. It is we've seen tons of opportunities for high margin work.
That's super helpful. Yes, it sounds like if anything it's.
Deepen the relationships.
The benefit.
Absolutely alright, okay.
Thanks.
Thanks Chip.
And the next question comes from the line of Gerry Sweeney with Roth Capital. Please proceed with your question.
Good morning, Charley, Jamie, Matt and Mike I think I got everybody there hope everyones morning reported Georgia Umm.
Obviously O D or is the topic there sure so I want to keep sort of digging in on that a little bit but.
Do.
Do we should we look at the client base really and the number of clients really is the driver of the business or sort of a benchmark and I know Charlie you sort of touched upon your total customers and how much you're interacting with but just curious if that's something we should continue just to watch as a benchmark or a driver of it because I do believe you know theres.
Certain amount of pull through as you get deeper with some of these customers.
Jerry we've talked about our OTR customers quite a bit here over the past several years and.
We keep looking for the better customers out there we're actually.
Directing our sales teams to be laser focused on what's the potential of the older like where can it go clearly fortune 100 companies theirs.
The tremendous opportunity.
But even in the mid mid market type businesses.
We're just asking our people to look at the selection of an OTR customer, where we can really maximize the return on capital and grow the relationship grows the revenue grow the wallet share.
So today, we do have the 12 quarter plus customers and we are talking internally are there a better set of Kpis, we can provide.
Haven't determined that yet.
What what I referenced the top 30 that were looking at you I'm wondering if there could be a benchmark that we could start sharing we're not ready to do that yet, but basically to provide little more color on kind of how were our top top bigger customers.
Al for us likely to plummet certain big customers can make a dramatic difference in one of our local original markets.
So.
This is a really important part of our strategy going forward.
Aggressive account management, so not ready to share any new kpis, but we are trying to think through what else can we provide no.
Yeah, that's fair and that's good.
How do you.
Get better penetration of these guys or even go downstream and which sort of evolves into the question of.
Differentiated services moving up the stack if there was a little bit of talk about data, maybe even predictive management or maintenance.
There's a sensor is gonna be a longer term evolution also what they already are.
Terry It's Mike Thanks for the question, Yes, you're absolutely right. This is a long term play.
Again, if we look at our business units they have to select properly and be disciplined to the marketing strategy, but.
Dedicating resource and specifically account manager dedicated to that really makes the initial push I would say we've got a game trust, we're looking for long term relationships.
Our relationship with those customers once we maintain trust then theyre starting to discuss to us once we prove confidence.
Is it overall look of their business and that's where we can provide our solutions to more of a holistic infrastructure look.
Well, we believe differentiate US is we're focused on accounts not opportunities for focus on solution not bidding. So ultimately once we gain trust. We spent time with the customer then we can have more involved solutions and when we get in there that's what's really going to drive the margins at that point, but to your point, it's an evolution of the account and what we do is.
We stick with it we have dedicated resources and we work with them to become a trusted advisor.
Got it Super helpful. I appreciate it I'll jump back in line.
Thanks sure.
Thank you and our next question comes from the line of Jon Oh with Longmeadow investors. Please proceed with your question.
Thanks, Good morning, everybody.
An incredible quarter appreciate all your hard work.
I was wondering if you could.
Talk a little bit more about the three claims that are remaining.
Any color on I know you can't be exactly.
Could you could you maybe be able to provide you know an estimate that maybe by the end of 'twenty three they would be resolved or just any more color would be great.
Good morning, John Thank you for the positive comments about our progress it's greatly appreciate it.
Claims are very very active all three of them at various stages of back and forth probably more activity than we've seen over the past year. So we're pretty excited about it and we mentioned the rail to Dulles settlement happened and that's what that was a bit of a surprise how that happened. So quickly we're starting to project maybe next year with at all.
All of a sudden it just got resolved and actually I just found out through a conversation earlier this week, where I was with the cost of or how it all happened so fast and it basically was a change in leadership with that particular public authority or do director came in and wanted all the old stuff cleaned up he did not want that on his watch that's that's how.
It got settled so quickly so the timing of these things it's really it's frustrating.
We want to get that cash in the door, but I could assure you right now all three of the major claims or very very active.
And.
We're hoping to see actually one of them, possibly resolve this year, which might be in cash.
In Q1 or Q2, depending on the timing of when they pay but all three are extremely active right now.
Okay. Thank you.
And then maybe one for for Jamie.
I'm just trying to reconcile the ER I mean, if you look through look at the guidance numbers.
<unk> provided them in the fourth quarter revenues.
It would have to come in Iran, I'm, just making that number of water.
$60 million or so.
And the EBITDA would be 8 million plus so the revenues are much higher than the third quarter and much higher than last year's fourth quarter and yet the suggest that EBITDA is less than the last quarter and last year's fourth quarter, what am I, what am I, what am I missing there.
So I think we're just trying to be cautious going into the end of the quarter. They had a lot of material delivery, that's going to come with equipment at the end of the quarter and so just being cautious around when that and the timing of that but yeah. I mean, that's why we increase we're expecting to increase the bottom line.
And that $27 million to $30 million for the full year and because of that revenue piece of it. That's why you see the tightening of the revenue numbers.
Yes, John .
I'm, just thinking that I'm, just saying that the.
The middle of the range the guidance would be like eight and a half million or so.
Which is well below which is below.
The just reported quarter and below last year's fourth quarter looks like it was light in the half and yet the revenues are going to be much higher than both of those quarters.
John where we are trending towards the higher end of guidance today, we're looking at our forecast and a lot of it has to do with these major equipment deliveries that are happening.
Several especially everything scheduled right now, but you know as we've experienced over these past two years some things to slip.
But as of right now we have the visibility.
Okay, Alright, and then I'll just make a final just a just a comment.
Your your.
Your hard work and great effort.
And incredible execution.
I'm just saying.
It's been fantastic.
That's not been reflected in the.
The stock price and.
So.
By my estimates if I do an estimate of the claims and the.
We're trading at like two.
Two to three times EBITDA. So I. Thank you for the stock purchase authorization.
And 947, the market's open.
Just for me [laughter] alright.
Alright.
Thank you John .
And our next question comes from the line of William Brenner with Vanquish Capital Partners. Please proceed with your question.
Good morning, Charlie and team.
Good morning Bill.
Okay I have a few.
First let's go to cash flow keep consistently is getting better and better.
What I'm seeing an elevated level of accounts receivables and.
Is that due to the mix shifts or because I feel as though cast lucrative even been stronger.
It's really timing as we have and if you look at the balance sheet. We have our contract assets. He has basically announced that we've not been able to build four so it's really a timing a shift from those.
Billings in overbilling into <unk>, and then the collection of that.
We have not really seen much of a lag on detour as collecting the E. R M.
But as we go into the next year you know, we're still highly focused on cash conversion and wanting to put in.
Some guidance out there sort of loose guidance around what we're looking at from a cash flow conversion of adjusted EBITDA.
Okay got it alright.
Secondly, second question.
Given the.
James.
Typically in some of your regions.
Were there any emergency restoration services or contracts that you were able to.
Garner during these times.
Hey, Bill Thanks for the question, we we did.
As an example of this one of our National Health care providers actually brought us onto there.
And I would call this augmented their staff.
For a three or four months engagement of purely working together on their staff to help resolve their problem. So.
That's just one example, there were several other examples as well too, but again I think our focus on as I mentioned before a dedicated account manager.
Leads us to when customers run into situations, where they need help they turned to us in on that particular account, we had a dedicated account manager and it worked out so again I think things will happen.
But if we're there for that account theyre going to look to us and I think that's.
Perfect example of where we can get to on that build that particular instance, they lost five hospitals five hospitals shut down and.
Three of them were able to help them get restored very quickly they were back up and running two of them were severely damaged one was actually.
Oh and the Wall Street Journal that gave an example of roof ripped off of the E. R was flooded.
We were asked to come in actually the day before the hurricane hit to help them get organized to provide program management services to help them with their overall needs are critical building spec open the only way that happens is because of the trust that they have with us and we talked a bit earlier today during the call about.
The account management aggressive account management, Mike emphasized the issue of building trust through solutions based offerings. That's the direction of where the company is going so we only see that opportunity being amplified as we continue to focus.
Nicely done and that's exactly how these relationships over the long term truly built.
My last question is on a capital structure priority is.
Is it.
The late September announcement of a share buyback versus the paying down of debt what is the priority.
Your team has.
So when.
When you look at the capital allocation Bill we're looking at all the opportunities that are still.
Available to us.
Our priority right now is really looking at the acquisition opportunities that are out there to scale up the business.
And we're very focused laser focused to create.
Create the proper deals that are <unk>.
<unk> with the seller and obviously an opportunity for us to help them go beyond where we are going to buy them out at four to five times EBITDA.
And we see those opportunities, but it's been a very interesting environment.
As Matt alluded to you're sitting with the owners and explaining to them, where we're going with our strategy and the proof we have that it works. The owners of these businesses are really intrigued because they are tired of getting.
Burnt by general contractors, and they really like the OTR focus so matched been nurturing those relationships through business development, and explaining where we can help them when they become part of what block. So it's been an interesting environment. We just have to find the right deals.
We want to continue to strengthen our balance sheet and quite frankly have the dry powder available to execute those opportunities.
They are presented to us so right now I'd say the majority of our focus is going to be on scaling up the business.
In that range of multiple I, just gave you for the deployment of our capital.
Okay, great hopefully that's in a new geographic region I. Appreciate the time. Thank you for taking my questions. Thank.
Thank you Bill.
And our next question comes from the line of Chip Brown with Grapevine Group. Please proceed with your question.
Yeah.
Hey, good morning folks I hope you guys are being saved out there well quick ignoring the corporate centre of SG&A.
I just wanted to see if you guys could shed some more light on any material cost shifts in your overhead going forward I mean on a trailing 12 months basis, OTR is actually up 21% or so 26% excuse me.
Year over year.
Just like we've done this quarter so is there any.
Anything that we can expect a material going forward on the cost side for overhead excluding acquisitions.
So from an OTR perspective SG&A.
SG&A ranges for Ot are far higher than <unk>. So we are rapidly growing the OTR element. If we gave the percentages earlier between 40 and 50% year on year. So yes. There has been some increase in SG&A on the OTR side. What we are looking to do is to shift some of the expenses away from <unk>.
<unk> kind of levels out and actually get a better return on the OTR piece. So we are shifting resources over to Old York. So that's gone well and quite frankly, we are adding shoe Vod our piece in terms of investment with account managers. We obviously, that's the theme of today's call. The other part is we.
Continue to look for Teck.
Technology solutions, not necessarily to build new programs and things like that but the team with channel partners. So we're putting in some resources to look at expanding Natura sales platform.
And again, it's all part of expanding the relationship with the older. How can we help them with predictive analytics basically AI.
And we actually have found a channel partner and we are deploying that.
Our pilot so it was a bit of expense there too.
As Jamie said, we continue to look for the opportunities to reduce overall SG&A, but we are facing some headwinds in terms of just inflationary cost with salaries and compensation.
Professional services that we have to employ but we're working hard obviously to keep that level and not see a bunch of increases.
Okay.
Thank you.
That's fair.
And then in regards to the acquisitions going forward.
That that big doing not just don't overhead, but actually your actual cash flow that cash flow conversion rate is attractive, but when we add that back in.
The acquisition cost to the cost side of that it's obviously deterrent. So can we expect with your strategy of one to three a year.
Hum.
The other thing that hit down as low and within both segments.
Our consolidated basis.
Yeah.
Could you it was breaking up at the last part they've said.
I said excuse me.
On a on a cat I hit the cash flow actual cash acquisition costs.
If you're doing one to three a year what can we expect going forward, what where that where that accounted for what can we model that out.
What's that taking up some of your competitors do some unique things like they have a note payable on on a third.
Acquisition costs.
Going forward, so anything but any color you can still not on the actual cash cost or overheads.
That's great.
We built that into kind of the ultimate return on that investment. So we look at this.
The one time costs as we go forward.
You know what that is actually doing the acquisition and then we look at it from a long term perspective.
Terry.
Time cost versus the ongoing sales and that'll be that'll play through those numbers I'm not sure if you're looking for like Jasmine.
Okay.
I mean, yeah, I mean, yeah, just if it's not it's not nonrecurring if youre, having one to three a year right and the Jake Marshall go last year, I think was announced what are between <unk> and <unk> on December 2nd.
That was the $5 million with a cash earn out and I think you guys have to pay like what happened to cash earn out. This year. So going forward is that going to be your strategy for acquisitions exactly we kind of assume that would be the normal range.
And our strategy.
The strategy that we're doing.
Matt would you mind jumping in all those places.
Yeah sure.
The.
The structure that we've been working through and that's been reasonably well received.
In the market has been a structure that provides.
For you know at least from our balance sheet about 50% of the purchase price payable in cash.
And then 50% you know payable in cash from debt financing.
Okay. You know, we're basically trying to balance incurrence of new debt with existing sources of liquidity, we don't want to overleverage the balance sheet and we don't want a drain it.
All of operating capital and then.
Providing in some but not all situations.
Depending on the business opportunity and earn out.
Structured over generally a two to three year period.
That again it is payable in cash.
At the end of each of the individual years within that earn out so we we really haven't.
Seriously considered stock.
As an option for transaction consideration given the relative valuation.
But we are trying to really maintain a balance between existing liquidity and incurrence of additional indebtedness.
And you know for the time being that should continue to provide enough capital to do the deals that we like to do from a size point of view.
Obviously, you know if we find something that's meaningfully bigger even than what we acquired last year I think we'd have to take a fresh look at it.
But.
You know 80% of the transactions, we look at fall within you know the middle of the bell curve for which that structure would be appropriate.
Perfect. Thank you.
I appreciate it.
History with are required of as well.
D G. I guess I wanted to I wanted to know.
Where.
Work.
Where that actual cash cost is going to it then it where I can model that out I mean.
Going forward. So I think you pretty much answered that so I appreciate it. Thank you.
No problem happy to follow up if you're if you've got other questions offline Yep, Yeah, we'll do it we'll do that thank you. Thank.
Thank you chip.
Thank you there are no further questions at this time I would like to turn the floor back over to the CEO Charlie Bacon for closing remarks.
Thank you for your continued interest for Nuomi found interest that lovelock were.
We're building the next chapter of the company and we're working hard to unlock the value of Limbach for all of our shareholders. Please reach out to our Investor Relations representative Jeremy Hellman of the equity group. If you have any questions about the company want to arrange a meeting.
Yes.
Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Hum.
[music].
Okay.