Q4 2022 Limbach Holdings Inc Earnings Call
Greetings and welcome to Limbach Holdings fourth quarter and full year 2022 earnings call. At this time, all participants are in a listen only mode.
A brief question answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Jeremy Hellman of the equity group. Please proceed.
Thank you very much and good morning, everyone.
Yesterday, Limbach holdings announced its fourth quarter and fiscal year 2022 results and filed its Form 10-K for the year ended December 31 2022.
The company would also like to note that an updated investor presentation is available on the investors section of the company website at Www Dot Limbach in Dot com.
Management will refer to select slides during today's call and encourages investors to review the presentation and its entirety. 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 her to review the company's annual report on Form 10-K, and quarterly reports on Form 10-K for risk factors that may cause the actual results to differ from forward looking statements made during the earnings call.
Also please note that during the question and answer session at the end of the call. We will only be taking questions from our analysts 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 welcome Thanks for joining US joining me. This morning is Mike Mccann currently our CLO and incoming CEO .
And as Jayme Brooks, our Chief Financial Officer.
We reported another solid quarter and exceeded the upper end of our adjusted EBITDA guidance for the year.
Past several years, we have met or exceeded our adjusted EBITDA guidance and I credit that to the risk management practices, we installed in the business as well as our game changing strategy of rapidly expanding our overdraft revenue War OTR segment, as we call it and focusing on the quality of the general contractor or GC or backlog.
The financial results being introduced.
From a rapid revenue growth coupled with our earnings for better GC project selection have led to a steadily improving cash position all of which helps demonstrate our strategy is working.
One significant event during Q4.
To comment on as we successfully resolved one of our significant claims and expect to collect approximately $10 million in cash.
There are two legacy batteries that would mean that exceed $30 million and we're patiently yet aggressively working those opportunities to maximize our outcomes.
As you know this will be my last earnings call, beating the conversation.
After 19 years as CEO of Limbach is trying to take off some other challenges and the opportunities that life offers like will be stepping up to the CEO role on March 29th the work he and I have done over the past three years getting ready for this full support of the board is one of my highlights of my career.
We've executed the CEO selection well in addition to the succession planning work well I could I had been working together to build out our senior leadership team with the full support of the board we have built very strong and capable team of leaders.
We strongly believe that the strategy, we have deployed as limbach hasselbeck well positioned for its next chapter.
One of the value creation expansion and cash generation I'm extremely happy to be handling the leadership at the company off to Mike and look forward to transitioning from my role as CEO to that of a shareholder with a sizable position.
I greatly care about the company and all the employees and look forward to watching this next chapter of the company under Mikes leadership.
Let me now turn the call over to Mike and Jamie to share the results of the quarter of a full year as well as the outlook for 2023.
Thank you Charlie its been a pleasure working with you, especially over the last few years as we've set our OTR transformation in motion.
I also want to thank the board of directors for their support in appointing me as CEO I'm.
I am excited about our plans for Limbach and note that our new investor presentation as an expanded discussions about our vision.
Turning to our results I want to provide some high level comments on our performance in 2022.
Jamie will follow with some further financial highlights and then I'll return to discuss what lies ahead before we open up to questions from our analysts.
As Charlie noted, we closed the year, but a strong fourth quarter that resulted in an adjusted EBITDA exceeding guidance for the year.
That marks the third consecutive year of meeting or exceeding our guidance for this line item, which we think is a direct result of our emphasis on bottom line performance.
We continue to be focused on growing our OTR segment, while aggressively pushing margins as a primary project selection criteria and G. C. R.
We then did you see or that emphasis on margins continues to result in an expected modest top line contraction.
And GTR as a results demonstrate our rigorous project selection criteria has gone hand in hand with quality execution in the field.
Driving improved gross margins in the segment.
Given that success along with the makeup of our backlog we have updated our target TCR gross margin range from 12% to 13% to 12%, 15%, which is summarized on page seven of our investor deck, which shows our targeted gross margin range for a second.
Our consolidated yearly revenue came in just shy of our guidance range, which is primarily driven by supply chain driven equipment delivery delays, which pushed some revenue from late in the fourth quarter into 2023, we don't think those delays indicate any deterioration of the supply chain condition.
And we remain focused on providing our customers additional visibility and guidance in this area. Both in terms of longer range capital equipment planning and they need to be highly proactive in maintaining existing equipment.
As we've noted on our last couple of calls this paradigm is relative resulted in strong demand for our service and maintenance capabilities.
Our customers often at facilities, where they simply cannot be in a position where they need to close due to broken mechanical systems.
As shown on page five of the Investor deck. The key end market attributes, we seek our favorable demographics support good secular trends and most importantly, the facilities infrastructure is mission critical.
This is driving plenty of work for us, especially kind of a material work as we keep those systems operational over the mid to long term. We believe this continued affirmative capital equipment replacement also represents pent up demand for limbach.
Equipment becomes available we anticipate working with our customers to provide those equipment change outs.
Among the verticals, we consider our primary markets. The pets. The positive attributes we look for are supporting strong demand in health care data centers R&D facilities decided a few.
In some cases infrastructure development adjacent markets does not directly impact us, but it is contributing positively to an overall positive demand curve for our skilled labor, allowing us to realize improved margins.
I'll now pass it off to Jamie to provide some financial highlights.
And then I'll return to address the macro outlook and our guidance for 2023, along with some comments regarding my vision for the company before we take questions Jamie.
Mike Our press release and Form 10-K, which was filed yesterday I'll provide extensive detail on our financials. So I'll focus on some key highlights.
Overall, our LDR transition continues to track well with the <unk> segment up to 43, 6% consolidated revenue for the full year and more importantly, the Ats segment accounting for 58, 8% as a consolidated growth pockets of yet.
Close together with a solid fourth quarter, most notably adjusted EBITDA for the quarter was $11 6 million, resulting in adjusted EBITDA for the full year was 31 8 million, which exceeded the high end of our guidance.
Our free cash flow conversion as a percentage of adjusted EBITDA was approximately 78% for the quarter and 74% for the full year.
So keeping on the income statement, our gross margin continued to trend positively.
Consolidated gross margin during the fourth quarter, it was up to 24%, resulting in full year gross margin of 18, 9%.
This success continues to be underpinned by our strategic focus on our higher margin <unk> segment, which accounted for 44, 6%.
Fourth quarter consolidated revenue compared with 38% in the year ago quarter.
As I mentioned earlier for the full year <unk> accounted for 43, 6% of consolidated revenues that's up from 28, six in 2020 one.
SG&A expense in the fourth quarter was $21 8 million up three nine from the year ago period full year SG&A expense was 77.9 long.
$6 4 million from the prior year.
Digging into the significant driver of the net increase in our SG&A. The majority of the $6 4 million increase from 2021 to 2022 is a full year effect of the SG&A expense from the Jake Marshall entities, which is approximately 5.9 long.
We have also made huge investments in 2020 teams, which are reflected in the SG&A.
Our segment consisting of mostly salespeople are support staff given that second general profile of separating small dollar value work that historically has been the case in gcs it requires more selling and transactional support to grow their relationships drive revenue and those margins in those investments.
Were also a factor in the increased SG&A for the full year.
When looking to model 2023, SG&A the full year should run at a similar rate as a percentage of revenue to 'twenty to 'twenty two.
Consistent with our prior year revenue in the second half of the year is expected to be stronger than the first half, which will cause SG&A expense to be a higher percentage of revenue in the first half of the year.
In addition, the first half of the year will include non recurring CEO succession costs associated with the transition that was announced in January these.
These costs are expected to be over $1 million, but the majority of the costs hitting in Q1.
These costs will run through SG&A and will be an adjustment to our EBITDA calculation and will impact net income and earnings.
Additionally, during 2022, the restructuring that took place to wind down our socal operation and our GC our statement in eastern Pennsylvania negatively impacted our income and earnings before income taxes by approximately $6 million. The majority of those Pos and distractions are behind US. However, there have been.
Some delays in ramping up certain projects and claims and we will see some continuation of Pos into 2023.
Once those are completed we expect to see a positive impact on the business and in particular, our gross margins.
The fair value of contingency consideration for Geek Marshall acquisition also negatively impacted net income and earnings in 2022.
However, the fact that the first earn out target was met as of December 31st 2022 is very positive as it was well everybody Jake Marshall team as they exceeded their plan EBITDA for the year for.
For 2023, we expect a minimal expense related to the earn out as the majority of the earn out for 2023 is already accrued on the balance sheet.
Turning to cash flow.
As we have discussed before as a general rule of thumb, we expect our free cash flow conversion to continue to be approximately 70% of adjusted EBITDA when viewed on an annual or trailing 12 month period.
Just given the nature of our business cashless can be volatile over short periods. So we really urge everyone to focus on 12 months periods are longer when evaluating our cash flow performance.
Oh, he or she is having the intended effect on our operating cash flow performance fourth quarter operating cash flow was $12 4 million in full year operating cash flow was $35 4 million.
The primary use of cash we generate continues to be the reduction of debt, we paid down $13 4 million of our term debt during 2022.
At December 31st total debt outstanding was $31 8 million and total cash was 36 million, allowing us to finish the year with a net debt thousands hero.
We used 2 million during Q4 on our share repurchase program.
Approximately 180000 shares of our common stock.
As Charlie mentioned, we also set up one of her outstanding claims in Q4 equal to the carrying value of the claim that was in the contract asset account on the balance sheet as of September 30th.
Therefore, there was no impact to the income statement and the customer was built for the amounts in Q4, which is now included in accounts receivable as of December 31st.
We expect to receive a cash payment of approximately $10 million for this receivable in the first half of the year.
This is two claims outstanding with the total gross valued north of 30 million.
And everyone that the outcome of those settlement negotiations is something we cannot forecast, including the terms of the settlement amount and the timing of when the cash will actually be collected.
Our balance sheet is strong and this is expected to continue to yield free cash flow. We currently expect to have the strategic flexibility to pursue our acquisition program without needing to turn to equity financing and as part of our capital allocation strategy, we continue to evaluate and discuss additional share repurchase.
Damage to their board of directors I'll now hand, it back to Mike.
Thank you Jamie and as noted in our press release, we are introducing financial guidance for 2023.
We expect full year revenue to be in the range of 490 million to 520 billion. We also expect adjusted EBITDA to range from 33 million to 37 minute million underpinning the confidence in our outlook for 2023 and also the next several years there are a few key drivers to note.
First the outlook of our industry remains favorable demand for building construction and retrofit maintenance and services strong and expected to remain so far for the foreseeable future.
Limbach is also very focused on being disciplined in working work with customers.
Where are their systems are mission critical and have needs, regardless of the macroeconomic environment and.
And these type of buildings the owners can defer large capital expenditures, but they can't avoid immediate repairs. This allows us to flex between repairs of existing equipment and infrastructure upgrades.
The second leg of our thesis rests on our positioning and blend back based on a differentiated business model that combines engineering craft labor and a true partner approach all of which create values creates value for our customers I want emphasize this point as we think of as we think we're creating a unique differentiated model that combines elements of traditional nonresidential.
Construction.
Building service and maintenance energy services data analytics and property management.
We've talked for some time about our customer relationships and my focus as CEO goes squarely be on maximizing those relationships as we work to be an indispensable partner to those customers through our provision of these cross discipline products and services.
As shown on slide 10, as a building owner customer relationships evolved from reactive transactional relationship to a proactive trusted adviser we expect to have an opportunity for further margin expansion.
We have tremendous customer base that we built over the last few years and are very focused on delivering value for them.
This is to drive an appropriate return on our assets here at Limbach.
Third our balance sheet is in excellent shape, providing us strategic flexibility to pursue quality acquisitions, while also investing in the growth of our business.
We've done a lot to reduce our risk and improve our cash dynamics, which sets us well to attack our strategic plan.
We have built a large pipeline of opportunities, but will continue to be very selective ensuring that each potential acquisition has the proper synergies synergy with our strategy.
We learned a lot from our successful integration with Jake Marshall, we built an integration team and we'll be looking to apply some of those same principles and future acquisitions.
As shown on page 12 of the Investor deck. There are four key areas, where we look to improve quality of earnings post acquisition date.
Data driven decision making.
Alimentation of standard operating systems solution selling to owners and our niche based customer mindset when.
When we stop and consider the state of the market is clearer than in recent years, and particularly a responsive supply chain issues building owners have become more attuned to the need for value added service and maintenance of their building systems. This.
This has created an excellent opportunity for us here at Limbach to leverage our relationships with these building owners to become an indispensable partner in helping them extract maximum value from their physical assets.
Our long term opportunity centers on our ability to deliver engineering service maintenance and project work much of that rooted in data analytics utilization utilization of data will allow us to work with our customers to identify and design optimal systems for those assets.
Making us an indispensable partner for that.
We are confident we are uniquely positioned due to the combination of our disciplined approach engineering solutions and craft expertise.
We're still in the early innings of this shift in our business hitting a 50 50 segment revenue mix in 'twenty three will be an important milestone, but it's just that a milestone on a much longer journey.
In closing I want to thank Charlie and wish him. The best of what lies ahead, Charlie it's been a pleasure working with you with that operator, please open the Q&A.
Thank you we will now conduct a question and answer session for our analysts.
I'd like to ask a question. Please press star one on your telephone keypad.
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You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the darkies once again that star one at this time for our analysts one moment, while we poll for our first question.
Our first question comes from Rob Brown with Lake Street Capital. Please proceed.
Yes.
Yeah.
Yes.
Yeah.
Rob Your line is live.
Okay.
Okay.
Hi, Mike Thanks for taking my question first question Congrats on the first quarter.
On the quarter first questions.
The demand environment, what are you seeing in terms of kind of the real time.
Demand environment are you seeing a shift more towards the service and maintenance side of the business.
Is that does that become more pronounced or just just a sense of how the demand environment playing out into the into 'twenty three.
Good morning, Rob.
No it's interesting it from demand environment, one of the things that's very helpful.
Yeah.
Okay.
I think one of the things that's really helped US is really the vertical markets that would be both.
From from health care to data centers from industrial facilities to higher Ed to life Sciences, we see tremendous demand and I think our ability to really focus on our key customers to dedicate resources are we see it is helping us now and as well in the future you know depending on what happens whether they are in a stage.
Weather repairing a lot of small equipment or from a large capital infrastructure position, we really looked at ourselves that we position. So I think the key is our focus on those mission critical the sectors that are mission critical equipment, and we're kind of excited in the future from a different demand environment from them as well.
Okay great.
And then and then some of the margin kind of.
Trends seem pretty good in the quarter, how do you see those continue into 'twenty three.
So.
OTR, we've maintained at 25 to 28, we did raise the GC or from 12 to 13 to 12 to 15. So we see a lot of opportunity from a margin perspective, and just to kind of go into a little bit of detail were still kind of in the early stages of relationship with a lot of these building owners and it's much more transactional at this point some of them we've read.
To the point, where we are we think we're in that trusted partnership position. So from the OTR segment. We look we think there's opportunity beyond even the margin range that we gave of 25 to 28, but that's going to depend upon how we evolve.
All of our relationship with our customers on the TCR side of things I think one of the reasons, we were able to raise that margin from 12 to 13 to 12 to 15 is that as the business shifts to being more owner direct it's what we're less dependent on those GTR projects and we're able to demand a lot higher margin because we can be extremely.
Selected with that so I give a lot of credit to our local operators. They are really looking at making it and ensuring that we get the best return on our teams and that automatically driving us towards the higher <unk>.
Segment return on owner direct so that kind of is happening naturally has happened over the last two or three years. So we kind of expect that going forward, but with that being said I think at the same time to quad opportunity for margin expansion at both an owner direct and G. C. R.
Okay, great. Thank you I'll turn it over.
Our next question comes from Chip Moore with E. F. Hutton. Please proceed.
Good morning, Thanks, I guess.
First Charlie Lakers and Mike Congrats on the new role.
Thank you.
You talked a bit about.
It's coming coming in as a new CEO , but maybe Eric can you expand on that.
What you see as the biggest focus area, you know continuation and execution to do later.
New focus areas, and then particularly in relation to that sort of limbach three pointed out.
Slide eight.
70%, OTR archive and I assume that contemplates on M&A, but I'm curious on your thoughts there.
Sure No I'm, we're excited that we're enable to we're set up to get to the 50 50, Mark two years early in 2023. So we're.
We're looking at as you mentioned and that Limbach through Braille, we're gonna extend well beyond that 50 50 from an owner direct.
Compared to what you see are from a strategic perspective, we have a lot of opportunity to really evolve our offerings right now as I kind of mentioned in the previous question a lot of its based upon just starting that trusted relationship, but theres a lot of value beyond that be you know driving long term value from that perspective. So we're really focused on our top accounts, we're focused on getting <unk>.
Dedicating resources to those top accounts and getting to the point, where the customers Trust us we've been really focused on assigning account management resources and we believe that as we gain those trusted relationships there'll be able to give us more information on their business, whether it's data.
Data could extend from utility information asset information information coming off our analytics platform, that's going to be paramount to allowing us to provide solutions for those customers.
It will be in a position ultimately, where we're less reactive and more proactive that'll help us both from our business and our customers' business to understand what their long term spends are going to be.
Providing visibility of the future and make sure that the customers are making the right decisions. So I think in short the we're going to continue to expand and really be focused really on those building on our relationships and I think even from a margin perspective again, we've set a range of 25 to 28 and to get to the higher end of that and beyond is really about.
Changing our relationship with the customers and making sure that relationships piece.
Key piece of it but also to make sure that we're providing a lot of value to those customers to when were providing insights into their business. So we really look at that is lots of opportunity in that Limbaugh three pointed out you referenced chip with the kind of interest yet chip it would be.
With your customer base that we have today in many many cases these customers have multiple locations multiple buildings multiple campuses that were working on one campus for in one building. So the core focus right now on account management really expanding that or as we say gaining more wallet share with.
That customer is too.
Focus on that account management develop that relationship that we can get into all of those other buildings and that happens naturally you'll have a trusting relationship. They just started introducing the other buildings to us. So that's I think that's one of those.
Core areas of focus going forward to really expand those revenue dollars out of the existing customer base. We already spent the money selling the relationship that was a matter of expanding that relationship and getting more wallet share.
That's helpful, Charlie and I and you did mention some of the organic investment on the OTR sale.
Yeah, you know we should expect continued investment more organic and then also you think your assets you can scoop up it might you know, whether it's a new a new market or something like that that might be beneficial.
Yeah.
Chip just from any organic perspective, we've had a lot of new business type sales resources and thats going to really shift to expanding that you really are shifting that to more of an account management focus. So I think we've spent a lot of money. We've gathered this gigantic customer list and really its about kind of changing our type of relationship.
It's less new business developments and our board of our account management as we move forward. The other piece of it too is that as I talked about changing our relationships. We wanted to make sure that we're being as relevant and as cutting edge for those customers as possible to even from a tech perspective as well.
But as you mentioned the other piece of us from a growth perspective is it was acquisitions, which is really important to us so and as we mentioned in the script. We're excited that the Jake Marshall deal went better than expected and Theres a lot of lessons learned that we have coming out of the Jake Marshall deal and we've really worked in the last I'd say six or eight months.
To build a robust pipeline and isn't that robust pipeline, we've seen kind of two different styles of acquisitions, one or more tuck in type Oh D. R centric type company. So there's a bunch of companies in that range and that's helped us as well and then the other piece of it is from new geography perspective can you get it to places where we're not right now.
Our focus is really east of the Mississippi and if you look at a geography, we have lots of gaps right. There. So I think the pipeline's robust theres a lot of opportunity within the acquisitions and again, if I point back to Jake Marshall, It's gone extremely well a lot of that's the credit to all the staff of Jake Marshall to make to that.
Kind of learned together, but we've really learned about that and we're going to take some of those principles as we apply them to new acquisitions as we move forward too.
Fantastic.
Maybe one last one on the guide.
I assume it's around 50 50 split.
For the year OTR TCR.
To confirm that and then any more.
Okay.
Second half weighting should we kind of think about similar to what we saw in 2022 in terms of.
No.
Revenues. Thank you.
Sure.
50, 50 is is right now what we're projecting for 2023 and just from a split perspective, there's kind of a natural seasonality of our business and it's kind of a normal cadence. We've had over the last couple of years, which is the back end is a little bit stronger than the front end of it.
But again, we kind of think of ourselves as a normal cadence to that as well Jamie do you want to add to that.
Yeah, no that's yeah.
So you know 50 50 as well as.
And just thinking about the SG&A eight two and it should be relatively same as a percentage of revenue.
As mentioned in the script, but.
But you'll see it a little bit higher obviously based on that on that cadence of a stronger back half.
Perfect Alright, thanks, Jamie Thanks, everybody ill hop back in queue. Thanks.
Okay.
Once again, ladies and gentlemen for analysts to ask a question. Please press star one on your telephone keypad.
At this time I would like to we do have a follow up.
Question.
One moment please.
Yeah.
Yeah.
At this time I would turn the call back over to management for closing comments.
Thank you everybody for your continued interest in Limbach, we're really excited about the strategy, we feel like we're in the early innings of it and there's a lots of opportunity as we go forward as well too so I'd like to thank everybody.
Everybody for their interest and all the employees of the company for successful execution in 'twenty, two and looking forward to 'twenty. Three so if you have any questions. Please reach out to our IR firm.
And all the best.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.