Limbach Holdings Inc. Q1 2023 Earnings Call
Lists and instructions will be provided at that time I would now like to turn the call over to your host Jeremy Hellman of the equity group Jeremy you made again.
Thank you very much and good morning, everyone yesterday, Limbach Holdings announced its first quarter of 2023 results and filed its Form 10-Q for the period ended March 31 2023.
Company would also like to note that an updated investor presentation is available on the investors section of the company's 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 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 <unk>.
This call listeners are reminded to review the Companys annual report on Form 10-K, and quarterly reports on Form 10-Q 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 Mike Mckenney, Chief Executive Officer of Limbach Holdings. Please go ahead Mike.
Good morning, welcome everyone and thanks for joining US joining me. This morning is Jayme Brooks, our Chief Financial Officer.
2023 is off to a solid start with adjusted EBITDA pacing well ahead of the first quarter last year and also the year before that.
Top line revenue was up modestly year over year gross margin continue to expand driving the bottom line expansion. Our local teams continue to provide best in class services, while always living our values.
On the whole market conditions remain much the same when we spoke to you two months ago and.
We will continue to focus on managing the business expanding our relationship with building owners, who recognize the value in having a partner to manage their mission critical building assets.
One was characterized by solid and consistent execution of our plan, what's drove that sort of margin and bottom line success. We continue to talk about this success rests on three key pillars.
First of these is segment mix, we continue to push towards a greater proportion of our revenue coming from our higher margin LDR segment.
And if successful in doing so we expect gross margin continue to improve in the long run our results. During the recent periods have proven that we can grow our bottom line. While total revenue remains relatively flat even with modestly declining revenue in the <unk> segment and our updated investor presentation, we have a new slide number nine which shows this digitally.
However, we certainly aim to grow our topline going forward as our higher growth <unk> segment outpaces the contraction in our GTS segment.
For example, our Q1 revenue was up from the prior year and the midpoint of our guidance, but also represent represent year over year growth.
The secondary three pillars as gross margin, which is an output of both mix as noted and also how we price and execute work in each segment during the first quarter both of our segments continued to perform well leading to gross margin expansion.
Within the <unk> segment, we continue to focus on improving project execution in securing high margin work as a result of our revenue mix continuing to evolve to a greater OTR concentration we are able to be very selective in the GTR work, we take on it.
For instance, as a result of our strategic shift building owners are extracting our general contractor customers of their desire to use limbach.
Within the OTR segment, we're focused on changing our relationships from reactive to proactive.
We're not only trying to maximize margin opportunity, but also realize we must provide long term value in order to earn future opportunity.
Slide eight within our Investor presentation demonstrates how we expect to drive further margin improvement.
Our third pillar is scaling through acquisition as shown on slide 11 and 12.
We continue to diligently work this front and we believe our opportunity pipeline is robust.
Our acquisition strategy is important both from a topline revenue growth as well as improved earnings.
Relative to when we spoke with you a couple of months ago market activity remains at a similar level and as always we remain selective is absolutely paramount in any business, we added to our family be a cultural fit well and meeting our operational financial and strategic requirements, such as targeted geographic expansion and our strategic tuck in with existing offer.
Our strategy is focused on gaining market share while working collaboratively with the proposed acquisition to unlock maximum value.
I'll now pass it off to Jamie to provide some financial highlights and then I'll return with a few final comments before we take your questions Jamie.
Thanks, Mike our press release and Form 10-Q, which were filed yesterday provided extensive details in our financials.
I'll focus on some key highlights.
Okay on the income statement.
During the first quarter. The OTR segment accounted for 48, 5% of total consolidated revenue.
That compares with 44, 6% in the fourth quarter of 2022, and 43, 6% for the full year 2022, because we are continuing to make good progress towards reaching the 50 50 revenue split milestone, but the long term goal of our OTR segment, contributing 70% or more to total.
Revenue.
Consolidated gross margin during the first quarter was 21, 7% as a result of both the increasing contribution from our higher margin OTR segment and strong margin performance within each segment for the quarter GCI gross margin was 16, 6% well LDR was 27.
1%, so again in our view very good performance in both segments.
Also to expand on my comments regarding GCI margins a year ago, we were talking about GCI gross margin in the 11% to 12% range and we increased that to 12% to 15%.
This is a result of continuing to not only focus on execution, but also the selection of projects.
As a result, we expect to see margins fluctuate quarter to quarter, depending on the timing of those newer projects and we have a mix of new higher margin projects and older lower margin projects in backlog.
SG&A expense in the first quarter was $21 1 million up from $18 7 million in the year ago period. The $2 3 million increase included approximately 811000 of costs related to the CEO transition and 534000 increase in stock based compensation expense.
Primarily due to an increase in the grant date stock price year over year.
On our last call. We noted that 2023 full year SG&A should have a similar run rate as a percentage of total revenue to 2022, and we continue to expect that to be the case.
Also consistent with the prior year, we currently expect that our revenue in the second half of the year to be stronger than in the first half, which would cause SG&A expense to be higher as a percentage of revenue in the first half of the year.
Turning to cash flow.
Solid execution and working capital management during the first quarter contributed to operating cash flow of $9 4 million.
Changes in working capital accounts had a positive impact of $1 8 million on the operating cash flow.
Accounts receivable provided cash of $24 6 million as a result of the decrease in <unk> from December 31.
This included collecting 10 million from the claims sentiment we talked about on last quarter's earnings call.
And it was great to see that come in during the first quarter.
Offsetting the increase with Kashi is in accounts payable of $14 9 million and accrued expenses of $3 2 million, which included payment of the 2022 accrued incentive compensation.
The remaining $7 six at the operating cash flow with the non working capital component.
As we have noted previously our free cash flow can be calculated by taking this figure and then subtracting capex, which totaled 923000 in the quarter that leaves free cash flow at approximately $6 6 million were around 77% of our adjusted EBITDA to.
So cash conversion for the quarter came in better than our 70% annual target level.
The primary use of cash we generate continues to be reduction of debt, we paid down $1 9 million.
Our term debt during the quarter and the quarter end, we had a cash balance of $41 4 million in term debt of $19 6 million.
Additionally, at the end of April we paid down an additional $9 $6 million of our term debt.
That left in outstanding term debt balance at April 30th of $10 million.
Our balance sheet is strong and the business is expected to continue to yield free cash flow subsea.
Subsequent to quarter end, we also negotiated an amendment to our existing credit agreement with interest the new amendment extinguished our term debt and extended our $25 million revolver to $50 million. So.
So coupled with our free cash flow, we believe we have ample capital to pursue our acquisition program without the need to turn to equity financing.
Lastly, we have had a few inquiries regarding the remaining $15 sponsor warrants and the 12 15 merger warrants as a basis approximately 116000 warrants have been exercised on a cashless basis for approximately a net share issuance of 26000 shares.
As a reminder, both of the remaining charges of warrants expire in July of 2023.
I'll now hand, the call back to Mike.
Thank you Jamie as noted in our press release, we are reiterating our financial guidance for 2023.
Consists of total revenue for the year in the range of $490 million to $520 million and adjusted EBITDA in a range of 33 million to $37 million.
So currently continue to expect second half results to exceed the first half as Jamie highlight which will guide us to the upper end of the range.
As I noted at the onset industry conditions are much is much the same as when they were when we spoke two months ago that said, we know conditions will always change, but our focus is on engaging customers, whose systems are mission critical pent up.
Needs, regardless of the macroeconomic environment.
These type of buildings and customers the owners can defer large capital expenditures, but they can't avoid immediate repairs.
This will allow us to flex between repairs to the existing equipment and infrastructure upgrades.
Supply chain demand eases there'll be an opportunity for many building owners to execute their infrastructure upgrades and we believe limbach will be well positioned to capitalize.
In many cases building owners are looking to reduce their operating costs and improve the energy efficiency of their buildings.
They need equipment to be readily available in order to execute their plans.
In the meantime, we are still able to provide them on demand services and continually monitor a pair of their older equipment.
In short we are intensely focused on executing our strategy, which combines a discipline approach with engineering solutions and craft expertise by.
By delivering value to our customers from front end solutions to timely quality work in the field, we cement ourselves as an indispensable partner.
Taking that approach to the market will be a focus on mission critical building assets is something we are confident we will win and our end market verticals.
As we do this we expect to earn a return of assets commensurate with the value. We are providing some wages forever is a new way of thinking of the industry. We are excited to be at the forefront of this metamorphosis.
With that operator, please open the Q&A session.
Thank you.
At this time, we will conduct a question and answer session for analysts if you would like to ask a question. Please press star one on your telephone keypad and you will be placed in the queue.
Once again to ask a question. Please press star one on your telephone keypad, one moment, while we compile the Q&A roster.
Your first question comes from Rob Brown of Lake Street capital.
Hi, good morning, and congratulations on all the progress.
Good morning, Thank you Rob.
I just wanted to get a little color on kind of the demand environment.
We focus on owner direct but but overall demand environment. How is how has that been trending and are you know obviously with the strong results it's been good but.
What's the demand environment and sort of visibility.
Yeah, Rob the demand environment is still really strong and I think one of the things that we're really focused on and I mentioned. This is we want to make sure that our customers have.
Mission critical systems.
And if you kind of look at the vertical markets that we're in sometimes each one of these virtual vertical markets will shift towards short term repair work first long term capital expenditures.
And right now we have a diverse enough group of vertical markets that each one of them is operating a little bit differently, but they all have demand. The question is the demand short term or long term.
There's a couple of examples of this health care still high demand, but more of a quicker turn.
The data center of mission critical market Theyre investing in long term capital expenditures it's.
Maybe hedged a little bit towards that direction from a manufacturing standpoint, a lot of it is customer dependent whether they're short term or long term, but.
We're well positioned because we're because those customers are mission critical because we positioned ourselves and then lastly, if you look at higher end of life science on higher Ed. We typically work for if we're working for University, it's going to be labs style work and that market has kind of changed a little bit but the demand is still there. It's gone from maybe less of a core and shell to fit.
Spec lab and it's also kind of tailored. So the biggest thing is our teams are really focused on working for mission critical customers that have equipment that can't go down and not really sure.
This example, internally if they have a call on Saturday anyway.
Equipment goes down to three o'clock, if they can wait till Monday or Tuesday, then they're not mission critical so we use that as a simple guy but.
Demand demand is still really strong.
Okay, great. Thank you for all the color there.
Then on the M&A.
After you talked quite a bit about some of the some of the parameters there, but but how does that pipeline look.
You know what what are you sort of looking for more near term they're in.
The status of where that's at.
The pipeline is really strong we really focus refocus probably six or nine months ago and I think the most important thing is we want to make sure that the acquisitions are a cultural fit number one.
And number two is they kind of fit into the mold of the rest of the branches and.
We have completed Jake Marshall I think about 16 months ago, and we've kind of dialed into two different types of acquisitions. The first type is a new geography, which we have a lot of footprint right now that we have lot of opportunity from that standpoint.
And then the second time that we've also been focused on is tuck in locations. So is there a.
A tuck in acquisition adjacent to an existing.
Business that we have that we can add market share. So we're really looking at those two different types. We've also been very patient to we're asking a lot.
And we want to make sure that we really culture of them and and make sure theyre going to be a fit.
Okay. Thank you for everything I'll turn it over.
Thank you.
Your next question comes from Chip Moore of E. F. Hutton Chip your line is open.
Good morning, and congrats on the good start to the year as well.
Good morning, Good morning, Hey, Jamie I wanted to ask about.
OTR path I think you talked about 70% longer term, you've obviously gotten closer to 50 quicker quicker than most people thought.
He covered acquisitions, but maybe more on the organic investment side.
You can do there and how that helps that path.
Yeah, Yeah, and you're right, it's a combination of acquisitions plus organic but from an organic side.
And I think I've mentioned this a path, but I just want to reinforce as we have gained a ton of customers in the last four or five years, our customer count.
Over 200 and at this point, we're really looking to make sure that we.
We pick the right relationships and just we have a kind of a criteria again is the equipment mission critical.
Is there availability.
For long term spend in.
And basically we're really focusing our locations as pick your top 10 customers make sure. Your top 10 customers fits the attributes that were looking for.
Then focus resources on them and we have a we have so many customers that you can't provide a high level of service and provide that value that we want to provide and we're really focusing on.
The top 10 per location Thats still a tremendous amount of customers. If you add up all of our locations.
The other thing too that I have been.
Visiting a bunch of customers last four or five weeks and it's interesting we have a lot of and I talked about this a little bit in the.
In the script, but.
We're trying to change our relationships from reactive to proactive and just as an example that we could be doing reactive calls for a customer for six or nine months and we could be getting a lot of revenue and gross profit out of there, but really been challenging our teams to say, okay take a look at the information the data that you've received from the customer the spend that you've said meet with that come.
<unk>.
With them co author of more of a long term plan with them, that's where we're really going to be able to embed ourselves and thats, where were really going to be able to grow this owner direct side of it even more than we are and I think there's not only from a revenue side, but also from a margin. So just to kind of summarize it's really focusing our customer list listening to them and making.
Sure that it's just not a reactive than its co authoring a long term spend plans. So it's a number of different factors, we're really super focused on it all of our sales and marketing efforts are really focused around owner direct and Hum.
Hum.
We're getting there, but we also have a long way to go to.
Thanks for that color I appreciate it.
Maybe if I could ask one more on more sort of near term.
Margin mix in backlog the GCI side with the outperformance in Q1, and then obviously the stronger outlook in the second half just anything could take in mind.
Project activity near term thanks.
Yes.
From a G C or margin perspective.
There's a bunch of different factors that have really helped us but as we've got we're going to approach 50, 50 and beyond it allows us to be really selective from a <unk> perspective, so being selective.
Laos us to really raise you raise our margin the second piece of it is we are getting in a position now where the owner is recommending that they use limbach it puts us in a different position going forward.
So.
From a margin perspective, we still think there's opportunity there.
But really the strategy fits really importantly into the margin and I would add to that our teams continue to execute really well.
And all the risk management process that we put in place combined with the fact that our strategy really emphasizes the fact that we're trying to be selective we're trying to focus on building owners and there are times of needs where they.
They have to have us and when they have to have it. It's obviously a change the changes our value proposition and changes to the way that we can approach from a margin perspective as well too.
Okay. Thanks again.
Your next question comes from Gerry Sweeney of Roth Capital Jerry Your line is open.
Good morning, Jamie and Mike Thanks for taking my call.
Good morning, Jerry.
Just wanted to circle back OTR, Mike you'd mentioned, a proactive reactive and really.
Couple of questions around just the OTR segment right.
I think even in the presentation I highlighted opportunities about getting data driven subscription.
And that.
Those offerings I would assume help you to become more proactive. So the questions are really what exactly do you need to become more proactive and then secondarily I'm just curious about just assets on the ground.
<unk> do you need more sales how's your equipment utilization do you have enough to support growth or should we be.
How do we look at that on a go forward basis as well.
Yes, I mean youre right.
Relationship always allows us to get in front of customers, but the second part of it is we have to in order to maintain the relationship and grow the relationship we have to provide value. So just from a data and I would also kind of caveat to an information perspective.
We will perform work for our customer and we will get will compile service tickets equipment history asset history.
That's one side of information that we're trying to make sure that we translate into more of a long term plan.
Also from a building automation system and analytics platform perspective, that's another Avenue.
That we can provide information and data and I would tell you that we're really focused on internally is making sure it's simplified as possible.
Simplest thing as I've gone out to that piece of equipment for two years are you providing that customer feedback on how that equipments performed or are you just continue to repair that equipment.
Question of we've really challenged our teams.
In that kind of plays into the discussion of Okay are you as a customer to the point, where they trust us will they'll give us the data even from a utility spend perspective so.
We have a long way to go in that perspective.
But allowing us to position ourselves to gather that data is really the spot that we're in right now and just from an asset perspective.
Internally, we're really focused on switching from new business development to account managers.
And I think the other big piece going forward to as we continue to talk to different people from a customer respective even further changes.
More of return on investment that's a question that we are getting asked more and more and we wanted to make sure that our teams and our account managers are well positioned to make sure that they can answer those questions. So I think its most simplistic perspective, it's we've gone from new business development to account managers and a lot of it.
A lot of those assets, we have internally, we always look.
Externally to figure out if there's a key hire or two I mean, our primary focus is promoting from within.
Also our sprinkling in some.
Some talented account managers as well too so just as the shift from new new business to <unk>.
Extracting as much as we can and really cementing ourselves with these customers.
So I mean at the end of the day it sounds like we're still I mean, you've had great growth on OTR, but we're still sort of even in the early innings of the.
The growth potential here so.
Lots of runway it sounds even within your sort of existing customer base for your customer base that you have some type of contact with that sort of a fair assessment.
Yeah, I completely agree we have and I think that kind of is it right now we have a good foundation going forward.
But understanding our customers focusing on them, making sure that where we're putting our staff in a position to to meet those needs.
And I think to your prior question, even from a data and information perspective, we're still trying to get to that point, where we're they're trusting us to give that data and that we can gather the data and then analyze that and provide our solutions back and that's ultimately build that kind of modify our offerings going forward, but we're still really in the early innings.
And I think as we continue to shift our mix.
It's just going to continue to put us in a position from a foundation perspective.
Oh, who do you.
Compete against on the OTR side, when you're doing some of this business or even the <unk>.
<unk> management side that you are moving into.
Are you competing against another entity or is this even a game shift for your customers sort of.
Engaging with the with Limbach per se.
It's I would say, it's primarily they have a provider every once in a while we'll have a customer thats.
This is lacking but I would say the majority of the time, there's a provider because again they have systems that need to be serviced and maintained an upgrades need to happen.
And that's kind of what are checkbox, and whether that customers the right customer for us. So typically they have now is that provider, giving them and the quality services and the focus well, that's really where I think traditionally that we come in so we've got a slide in the investor deck that kind of touched upon this in kind of this pie chart.
Each one of these relationships.
That we're going into a different may have a different provider and the other thing I would tell you too is sometimes we will be on a campus for our customer and we are embedded in them, but they will still use another couple two or three different people and theres still an opportunity even on an existing customer to pick up market share. So a lot of times it will be just the local contra.
<unk> it could be some of our <unk>.
Some of the other mechanical publicly traded contractors.
From an OEM perspective, Siemens trained Johnson.
Sometimes we buy equipment and controls for them, but there is also they do compete and provide those services directly.
It could be an engineering firm and again, we look at it this way when we're talking to our customers. We can provide engineering solutions as well, but we can install the work as well too.
And then occasionally from a property manager perspective, so it's very situational.
Our teams are really focused on making sure that even if we're in a with a customer sometimes they'll still be another provider or two.
And theres more market share to be had with the customer as well too. So most of the time there is a provider it's a matter of us positioning ourselves.
And if we're competing we want to make sure that our value proposition is solid compared to.
One of the providers that may be there.
Got it Super helpful. Doug.
I'll jump back in line and Doug Congrats a really nice quarter and.
And.
Great appreciate it thanks.
Thanks Jackie.
At this time there are no further questions I would now like to turn the call over to the management team for any closing remarks.
Thank you everyone for your continued interest in Limbach do you have any additional questions. Please reach out to the equity group.
Looking forward to speaking again in August and all the best Thank you.
This concludes today's presentation. Thank you everyone for attending.
Okay.
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Yeah.
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