Q2 2023 Limbach Holdings Inc Earnings Call

Greetings and welcome to the Limbach Holdings second quarter 2023 earnings conference call and webcast.

At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If you would like to ask a question. Please press star one on your telephone keypad.

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As a reminder, this conference is being recorded it is now my pleasure to introduce your host Jeremy Hellman of the equity group.

Please go ahead.

Thank you very much and good morning, everyone yesterday, Limbach Holdings announced its second quarter 2022 results and filed its Form 10-Q for the period ended June 32023.

The company would also like note that an updated investor presentation is available on the investors section of the company website at Www Dot Limbach, Inc. Dot com.

Management will refer to slides during today's call and encourages investors to review the presentation and its entirety during.

During this call the company will be reviewing its from the actual results and providing an update on current market conditions. Today's discussion may contain forward looking statements and actual results may differ from any forecast projections or similar statements made during the earnings call listeners are reminded to review the company's annual report on Form 10-K, and quarterly reports on form. Thank you for risk factors.

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 Mccann, The President and 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 executive Vice President and Chief Financial Officer.

During the second quarter, we continued to execute our strategy and produce improved quality of earnings.

Our strategic plan continues to center around three primary value drivers.

Each of which is capable of positive results, but when combined they really provide a high growth pathway for our company.

The first drivers our segment mix, we continue to aggressively shift our revenue mix towards a higher percentage of our work coming from our OTR segment.

G C. Our Sydney continues to make solid progress in improving its margin profile.

Dr continues to be our main focus due to the improvement in margin profile, the more favorable risk profile and the opportunity to strengthen relationships with long term customers.

By increasing the proportion of revenues attributed to O D. R. Theres, a natural lift in our consolidated gross margin.

Amazing the best since we're constantly reinforcing this message to our local leadership.

They should always be looking to to deliver value to our customers while targeting high quality work that provides for high margins rather than large projects, which typically sell at lower margins.

Anytime that you can achieve a gross margin of 29% instead of 17%.

As was the case in our respective segments this quarter, they should pursue the 29% opportunity.

That's really the biggest driver of our segment mix shift.

The second driver is providing evolved offerings for our customers.

We are intensely focused under developing and delivering value added solutions to our customers.

And to be their trusted partner for all of the facility needs, especially when it comes to making proactive recommendations that enable them to drive long term benefits.

And maximize the return on their physical asset investments as we do that we expect to earn higher margins on work we do.

The third drivers our strategic acquisition play.

We continue to pursue both tuck in acquisitions to expand market share in relatively large acquisitions to bring them back into new geographies.

Properly execute acquisitions allow us to scale the business bolt on new service offerings.

And better serve larger regional customers that want a single partner across their footprint.

Following the quarter end, we announced the acquisition of Acme industrial which is based in Chattanooga, Tennessee, and it's right down the road from our Jake Marshalls subsidiary.

Actually he brings as several new customer relationships. We are very excited about their leadership position in the hydro electric end market.

This includes Tennessee Valley authority or TVA, which.

Which is a large federal young utility with significant hydroelectric assets.

This represents a new end market for limbach, and we'd be looking to leverage that positioning.

Biologic Marshall in Chattanooga, we enabled that we've been able to tack on tuck in acquisitions to the new geography and pick up additional market share.

And then I'll pass it off to Jamie to provide financial highlights and then I'll return with a few final comments on market conditions before we take your questions Jamie.

Thanks, Mike Yesterday, we filed our earnings press release, and Form 10-Q, which provided extensive details of our financials I will focus on some key highlights.

Starting with the income statement during the second quarter. The OTR segment accounted for 47, 1% of total consolidated revenue.

From 42, 9% last year.

Oh Dear revenue during the quarter was up 18, 1% from a year ago, well Gcs revenue was essentially flat, resulting in consolidated top line growth of seven 5%.

We continue to see solid execution in the quarter consolidated gross margin during the second quarter was 22.8% primarily due to increasing contribution from our higher margin OTR segment and strong overall margin performance in both segments.

For the quarter do you see our gross margin was 17, 1% Y O D. Our margin was 29, 3%.

SG&A expense of $20 4 million during the quarter was down modestly from $21 1 million in the first quarter and up from $18 7 million in the year ago period.

The increase in SG&A spend from the year ago period was primarily related to increases in payroll related expenses of $1 3 million and a $500000 increase in stock based compensation expense.

These increases were partially offset by a $400000 decrease in rent related expenses.

As we noted on our call last quarter.

We expect full year 2023 SG&A expense as a percentage of total revenue have a similar annual run rate as 2022.

Now turning to cash flow.

We continue to have a strong balance sheet at quarter end, our cash and cash equivalents balance was $45 9 million and we had $10 million outstanding on our revolver.

Accidents, a quarter and a net cash position of $23 6 million compared to a net cash position of $4 2 million at the end of December .

As we have previously noted our Ot.

Our focus and tightened G C. Our project selection process.

To provide a better operating cash flow profile.

Our strong execution during the second quarter contributed to operating cash flow of $16 9 million compared with $15 6 million a year ago.

Changes in working capital accounts had a positive impact of $7 6 million in operating cash flow and accounts receivable provided cash of $12 5 million as a result of strong collections in the quarter.

Offsetting some of the increase we used $6 8 million of cash and accounts payable.

The remaining $9 3 million of operating cash flow was the non working capital.

As we've noted previously our free cash flow can be calculated by taking this figure and then subtracting capex, which totaled 576000 in the quarter.

At least free cash flow at $8 8 million or around 74% of our adjusted EBITDA.

Cash conversion for the quarter came in better than the 70% and your target level.

Our primary use of the cash we generate continues to be the reduction of debt and the funding of our acquisition program.

With our current cash balances and our expected free cash flow. We believe we have ample capital to pursue our acquisition program without needing any equity financing.

Subsequent to quarter end, we utilized just over $5 million of cash on hand to finance the acquisition of acne.

Lastly, during the second quarter.

Oh 600000 of this $15 exercise price sponsor warrants were exercised on a cashless basis.

Holding in the issuance of approximately 168000 shares of our common stock.

In addition of the roughly 630000.

Dollar and 50 cent exercise price merger warrants.

<unk> hundred 53000 were exercised on a cashless basis fairly in the quarter.

Resulting in the issuance of approximately 46000 shares of our common stock.

In total nearly 213000 shares of common stock were issued during the second quarter as a result of warrant exercises.

Of the remaining merger warrants outstanding at June 30th approximately 443000 of those warrants were exercised prior to their expiration on July 20th.

Dosing in the additional issuance of approximately 229000 shares of our common stock in July .

As of August seven we had approximately 11 million shares outstanding inclusive of all of the warrant exercises. This share count can be located on the cover of our Form 10-Q on that.

I'll hand, it back to Mike.

Thank you Jamie our first half adjusted EBITDA benefited from gross margin of both segments coming in ahead of our guided ranges and we continue to remind investors that margins can vary quarter to quarter.

Just on project mix timing and execution.

As we have noted our longer range strategy for the business continues to push for higher margins, but at the same time I want to remind everyone that the path will not necessarily be a straight one.

Nor will it necessarily be rapid change with.

With those factors in mind as noted in our press release, we are increasing our adjusted EBITDA guidance for 2023 to a range of 38 million to $41 million up from 33 million to 37 million previously.

The upward revision to our adjusted EBITDA guidance is a function of our strong performance for the first half of the year.

Along with a very small contribution from the recently acquired Acme industrial business during the second half.

We expect Acme will gradually start to become a more meaningful contributor to the bottom line once it's been integrated into limbach and the way we do business.

I also want to point out that our business appears to have entered a new normal when it comes to supply chain and equipment availability.

Given this dynamic we are reiterating our revenue guidance for 2023, which consists of total revenue for the year in the range of 490 million to $520 million.

Summarizing our guidance for 2023, then we are reiterating our expectation that revenue will be between $490 million and $520 million, while adjusted EBITDA between 38 million and $41 million.

I also want to remind everyone that slide 25 in our Investor presentation includes additional modeling considerations.

Recapping business conditions the demand in our mission critical vertical markets continues to be very strong as.

As we have shifted our focus to pure customers, we've seen an even greater opportunity to improve our market position with these customers we.

We have a slide on our investor deck, the highlights the industry trends per segment and emphasizes the opportunity we have within these verticals.

In order to take advantage of that demand, we continue to shift their internal staff to account management positions. So their station daily at our key customers.

Our staff is aligned to our strategy and adaptable to the ever evolving needs of the business.

One of the key reasons, we've been able to shift so quickly is due to our amazing people that are both talented and dedicated to the overall company success.

In regards to larger capital projects, we are very focused on working directly with building owners to understanding of their needs.

In helping get these infrastructure projects across the finish line.

We are focused on utilizing our engineering group to provide engineering analysis and design solutions that have an appropriate return on investment.

Most of these large capital projects include equipments, which helps.

Lead times continue to be a challenge, but the entire industry has adjusted to the new norm.

As long as demand remains strong it will take some time for supply conditions to ease the supply side of the equation is not fixed.

In certain cases building owners may decided to defer capital projects due to another funding needs in their business.

Due to the fact, we have dedicated personnel to a select group of customers.

We're able to continue to provide emergency and on demand services.

Building owners, especially those with mission critical assets need to keep those facilities operational.

That represents a certain baseline a durable demand we continue to work closely with these owners to develop both short term opex and long term Capex plan.

All of this results in keeping demand strong.

And supply chain tight, which ultimately we believe is good for limbach.

Before moving onto questions for analysts.

I'll now highlight a page we've added toward the end of our investment presentation regarding our social media channels.

Because we are not a retail customer facing business, sometimes it's hard to see what we do.

Our marketing team has been hard at work building up our social media presence and an effort to showcase our projects and services.

We encourage everyone to take.

Take a look follow us and share content with that operator, please open the Q&A session.

Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time a confirmation tone will indicate your line is in the question queue. 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 the hill.

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Today's first question is coming from Rob Brown of Lake Street Capital markets. Please go ahead.

Good morning.

Congrats on a nice quarter.

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Just wondering if you give a little more color on the on the OTR business are you seeing kinds of demand growth and I'm sure. It's both but is it the direct projects or is it maintenance and repair business and what's sort of the areas you're seeing the.

Most demanding growth.

Good morning, Rob Thanks for the question.

The short answer is we're definitely seeing it on both sides of it there's a tremendous diversion deferred maintenance opportunity right now a lot of our customers are continuing to try to balance their needs between short term keep systems up and running and long term planning. So as an example, I met with four different hospitals, this week or health care groups and.

It's interesting because they'd.

They've got their clients that they have to take care of their patients and there's definitely a balance and really working with them a consult a manner to make sure that we take care of their short term needs, but we're also telling them to make sure that there's ways to avoid these long term issues and we need to work proactively as a partner so it's.

It's definitely a mix between both.

It depends where the client is that and their own particular journey and their needs of their business.

But definitely opportunity bolt.

Okay, Great and then you know you've made some pretty strong progress on I guess EBITDA margins, where do you see that sort of going over time or do you feel like you've gotten to where you need to be and you'll see growth with broken revenue. We're just just a sense on where you're at in terms of getting EBITDA margin towards you.

Targets.

Yeah, we're we're very focused on quality right now so the the demand environment is super strong.

And to US right now, it's a super disciplined strategy and working within our six core vertical markets, where the customers and the clients are mission critical.

Do they have that durable demand and theres resilience at.

At the same time, we've been really focused on each one of our locations of working for the top five to 10 customers. So there's a tremendous amount of demand out there, but we're super focused on the quality.

And I think the other thing too is we're just trying to make sure that we staff accordingly to make sure that we can take advantage of the AR.

The short term our opex in the long term. So it's it's a you know we're very early in our journey, we're very focused on quality.

And making sure we're setting ourselves up for for durable demand from these customers.

Okay. Thank you I'll turn it over.

Yeah.

Thank you at this time I'd like to turn it back over to Mr. Mccann for closing comments.

Thank you everybody for continued interest in Limbach do you have any additional questions. Please reach out to Jeremy Hellman of the equity group. Thank you everybody.

Ladies and gentlemen. This concludes today's event you may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.

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