Limbach Holdings, Inc. (LMB) Earnings Call Transcript & Summary

All right. We'll get going. Good afternoon, everyone. My name is Joe Mondillo, Industrial Analyst at Sidoti & Company. This afternoon, we have Limbach Facility Services with us today. From the company, we have Charlie Bacon, CEO. Their CFO, Jayme Brooks as well as they're Executive Vice President, who is in charge of mergers and acquisitions and essentially corporate strategy, Matt Katz. We're going to start with a presentation of the company, probably 15, 20 minutes, maybe 25 minutes and then hopefully, you have some time left over at the end for some Q&A. And with that, I will hand it over to Charlie.

Thank you, Joe. I appreciate everybody listening in today and watching us. The deck we're going to present today will provide an overview of the company, where we stand, and both Jayme and Matt will have some comments to share with you. So I'm going to start off. The cover slide is really important, and I want to message to everyone listening in here that the way to look at Limbach is we're both diverse and essential. And I've been talking about the diversity of our business with market sectors, our geography and customer base as well as service offering for years. And so people talk to me about when a downturn comes, how will Limbach weather the storm? And I've said often, diversity. And in fact, that's exactly what we're doing today, and I'm very proud of the structure that we have. The other part on Essential, what's key about that is, I've always thought we were essential from heating and air conditioning and plumbing and electrical services that we provide to both [ general ] contractors and to building owners, but the virus situation clearly proved out, we were essential. We did face some impacts, but the majority of our business kept moving forward, both on construction sites as well as our service and maintenance business. So I'm going to move on now, and we always have this forward-looking statement. I want to make sure everyone is aware. I'm not going to read this to you, but clearly, our forward looking statement is there. Moving on though, from a business overview, for those of you who are not familiar with us, we provide mechanical, electrical and plumbing services, MEP services to both new builds and renovations of buildings, various types of buildings. And the little diagram you see here on the slide basically indicates we provide services from the start of concept right through the ongoing maintenance, which creates the annuity income streams for the business. And the beauty of Limbach, we don't have many competitors out there that have this full depth and breadth of offering. And the real differentiation is on the left-hand side, which is the engineering and energy modeling. We are experts at engineering systems. Many, many times general contractors will come to us, asking us for support to get things back in budget. And often, the building owner will take note who's this Limbach? And why didn't we bring them in at the beginning of the design process. And that leads to relationships with building owners, not only to maintain their buildings, but when they have future capital programs, they bring us in and marry us up with general contractors. It's the beauty of our offering, and it's very strong in the marketplace. By the way, we've been around since 1901, and our brand is extremely strong. Everybody knows Limbach in the industry, and it's extremely well recognized. The diversification that I started with, this just reinforces it. You can see our geographic footprint. We have these offices. We actually service 24 cities in total around those different locations. And we're looking to expand in the future. There is plenty of geography in the United States for us to cover. That's future opportunity for both organic as well as acquisitions. The end markets, right now, health care, data centers, research and development are hot markets, and I'm making that comment taking into consideration the past and what we're all dealing with COVID-19. We're also curious about the manufacturing sector, will that take off with the anti-China view with onshoring. So we're watching that very closely and we'll be prepared to move on the manufacturing sector if we see growth. And just to be clear with everyone, we can operate in any one of these sectors. We have broad resume, but if we see the opportunity to shift resources to a market sector, we can easily do that because of our strong resume as well as geography, shifting resources to different geographies. The service offering, again, from design through maintenance. And finally, the customer base. It's both owners, and you can see Disney, Hospital Corporation of America to some top general contractors like Barton Malow and Skanska. We're pretty selective on who we work for, and we're proud that we have both spectrums covered, both general contractors and owners. And you're going to hear me talk a little bit about future strategy around owners in a moment. As far as some numbers in terms of what we've delivered, you can see the construction segment revenue has grown nicely over the period that we're indicating here. And then you can see on the right-hand side, our owner-directed service revenue has grown remarkably well, and we expect that growth to continue. A big push for us, quite frankly, is to see that owner-directed service revenue grow dramatically. And this next chart provides some indication of our strategy around that. So you could see the revenue where we were in '16, it was 18%, 82% with general contractors. You can see the growth that we continue to expand the service revenue. And as we look at 2025, we're expecting to see a 50/50 mix. We're aggressively addressing this. And it's not only going to be through the traditional owner direct preventative maintenance and small special project works, but we're also expanding our building control offering and then on the lower side of the portion of that slide, you see energy management, predictive analytics and MEP Prime, Mechanical CM. I'm going to just spend a moment or two on 2 of these. Predictive analytics is an opportunity for us to predict when maintenance needs to occur helping our customer base understand -- meaning owners, when they need to apportion capital to change out a chiller or a cooling tower. MEP Prime is really an expansion of our basic specialty contracting service, but moving into being a contractor on projects that are very focused on heavy mechanical, heavy electrical, heavy plumbing. There might be some drywall, there might be some concrete, but the majority of the business or work rather is MEP-related and we've already been selling this, and we're looking to expand that throughout our entire footprint. Where we have delivered it, it's been quite successful and quite profitable. In the Mechanical CM, that's really providing a professional service to help owners understand how to get efficiency out of their design and then oversee construction, but we wouldn't be self-performing the actual work, we provide a professional management service. I'm going to ask Matt Katz to spend a few minutes on our current objectives. I'm just -- before Matt goes, though, I do want to just talk about the virus briefly. In March, when we saw that the virus was going to be hitting the economy hard, our management team started working every day together on virtual sessions, conference calls. I'm now a Zoom expert, but we ended up talking about what we needed to do and how to react to what was going on around us. In the third week of March I got involved in something. And while we have a broader strategy against the owners in a more aggressive fashion, and a bigger business mix, it was the virus and how are we going to deal with the virus. And I came up with 3 core tactical items to really hone in on: stay safe, get cash, get work. The stay safe part was all about protecting our employees from the virus, and I think we've done a great job with that. Get cash was really focused on our liquidity position. And I think we -- excuse me, I know we've dramatically improved that over the past several months. Jayme will touch on that in a few moments. And get work, we've been very creative having weekly calls on what can we do for our customers, like negative air pressure machines. How could we recommission buildings to deal with better air quality, HEPA filters, UV filters and UV lighting rather. So there's a series of things that we've done to get more business and through the crisis, our sales have continued, a bit off from where we'd like them to be without having a virus to deal with, but the virus has actually created new opportunities to us. And we're taking advantage of that, which is helping us offset maybe some of the work that didn't happen due to the virus delaying certain decisions. I'll be more than happy to take questions later about the virus. Matt, I'd like to turn it over to you. Matt, you're on mute.

Sorry, Joe, it had shut me up in the meantime here. I wanted to take a couple of minutes just to talk about where we're really focused here in the near term over the next 12 to 18 months as it relates to really basic business processes, to ensure that we've got a solid foundation upon which to grow as we move forward. And much like Charlie talked about, get cash, get work and stay safe. We've also focused on 3 initiatives here, the first of which is to redefine our risk management paradigm. We make our money in the field and in the building. And in order to maximize the return on that labor, we need to be picking and pursuing the right projects, focusing on deploying labor where we can generate the highest returns, mitigating project risk, enforcing contractual terms, and doing everything that we can to generate more consistent and more profitable outcomes, leveraging the differentiated capabilities that we have in design, engineering, constructability and so forth. So the first initiative really is to focus on risk management and to pursue those opportunities that offer the best risk-adjusted returns as we think about moving forward, again, in building a solid foundation on which to grow. Our second focus area for the year is to maximize profitability and cash flow. We think of this as being both a P&L opportunity as well as a balance sheet opportunity. I spoke a moment ago about redefining the risk management paradigm. That's sort of a front-end way to think about this. There's obviously a giant portfolio of work that we're building right now and that we will be building as revenue rolls out of backlog. We're focused on consistently executing that work, generating solid profit in the field, making sure that when we pursue opportunities, we price them appropriately and that we are earning the return that we think we deserve given the availability of labor that we have and the value that we bring to the table. We don't want to be a labor broker. We really do want to generate a return in price for work and price for risk at a level that we think appropriately reflects the capabilities and the services that we bring. On the balance sheet side, there's a huge opportunity to continue to improve working capital management. For those of you that have listened to both our fourth quarter and our first quarter earnings calls. Jayme has talked about the liquidity position the company is in today. And again, for those of you that are familiar with the story, that current liquidity position represents a significant improvement on where we've operated in the past. That's progress that we hope and expect will continue as we move forward. And we believe that there are additional opportunities beyond the success that we've achieved so far. We've also talked about and continue to pursue resolution of a significant portfolio of claims that are the result of some challenging projects we had in 2 of our branch locations in 2018 and 2019. Resolution of those projects will take time, but we're confident in where we carry those projects on the books and expect to receive significant cash proceeds in the future. And then finally, SG&A expenses, we're making inroads on rationalizing the cost structure, generating better operating leverage throughout our branches and at corporate and feel like we're in the early innings of tackling that and that there is a lot more leverage in the model going forward, and expect together with better balance sheet management to generate some better P&L margins by leveraging that overhead. Third, and this is again what Charlie alluded to a moment ago, we really want to focus on expanding our owner direct offering and establishing stronger and more comprehensive relationships with building owners. It starts at sales. It works through our design and engineering group. We think there are opportunities to provide more white collar, consultative, mechanical engineering services to customers outside of the markets in which we would actually self-perform work. And we think that there's a huge opportunity looking forward in building controls and in technology. The industry in which we operate today is one that has remained largely static for a long time. But as technology has started to invade all of our lives in many different ways the building market is not immune. We are uniquely positioned. We think to capitalize on this, given both our blue-collar installation and constructability capabilities as well as our more white collar design, engineering and consultive capabilities. And as we merge those 2 together and then start to focus on deploying new technologies that are focused on building services and building system maintenance, uptime and performance direct to our end market customers. Again, these are not necessarily our general contractor and construction manager customers, but the folks that own the buildings that we build and own the buildings that we service, we think there's a huge opportunity to expand our customer base and capture more of that recurring revenue and higher margin, small project work that's critical to maintaining facility uptime. So some very exciting things happening here. This is going to be, I think, a longer-term opportunity for us. We are in the midst of sort of finalizing business plans and continuing to move forward. But again, we've got some really interesting capabilities here that are pretty differentiated and unique, and we think it presents a really attractive vector for us as we move forward.

Thanks, Matt. Jayme, could you quickly go through first quarter results.

Yes, looking at -- I think we're on Slide 12. So year-over-year, we saw revenue growth of $3.8 million. However, gross profit and adjusted EBITDA were down from the prior year, and this was primarily due to the write-up that we took actually in Q1 of last year, $1.2 million for the Little Caesars Arena project in Michigan. So that was a write-up -- it that was in that period that obviously was not reflected in the comparable quarter for this year. Then going to the next slide. For Q1, we ended with backlog at $534.9 million. Although backline has declined, we're basically sold out for 2020 on the construction segment. But this decline was planned and anticipated. So first, we had 2 large projects that were booked in Q1 of 2019 in New England. But more importantly, we're watching our capacity with operations on our construction side basically over the next 12 to 18 months. So we're trying to take a conservative approach on the construction sales as we make an intentional shift, as Charlie talked about earlier, to expand that service business, which has a more favorable risk profile. You can see this focus on the service side in the next graph, next to -- there on the far right, that we are at a 53% increase over last year, and the service gross margin is improving as well. And then turning to the last slide on liquidity. As Charlie said, we are focusing on maximizing our liquidity, improving our working capital. You can see with the Q1 results that we had total liquidity of $21.2 million, and that increased actually to $27.2 million at the end of May, and that also included $16.7 million of cash. And additionally, we also had $3.5 million in operating cash flow for the Q -- for Q1. So the focus from the business has really been on getting cash in the door, getting billings and really tightening up that cycle.

Thank you, Jayme. There's more information in our appendix, but at this point, I'd like to open it up for questions.

Yes. If anyone has a question, please type it in the chat or the Q&A, either/or I can receive it, and I'll ask the question to management. We do have one question from the audience. API Group just went public through a SPAC back in April earlier this year. How does their business differ with yours?

Yes. API is really a holding of many different types of construction services. They have a big focus on fire protection. But in that business, they do have mechanical contractors, but they also have civil engineering, heavy civil construction, steel. So they own a number of different types of construction-related businesses. So that's different than our strategy. Our strategy is really focused on MEP, not going into the other building trades. I did mention earlier, though, that we would consider -- or excuse me, we want to expand into what we call MEP Prime, which is acting as a general contractor. But when it comes to the bit of steel that it would require or some concrete drywall, carpeting, things like that, we would actually subcontract that out. At this point, we are going to stay focused on the MEP trades.

All right. Another question from the audience. Does Governor Cuomo's comments today about requiring improved filters in malls. Is that an opportunity?

Yes. Someone else asked me that question earlier today. And what he actually did with the outreach, when we got to that point of stay safe, get cash, get work, on the get work part, the first thing we did was a major outreach to all of our customers to say, look, we're here. We can help you. Here are some ideas, and we actually had what we call a line card of all the things we felt we could support them on. And at that point, many of the customers turned and said, look, we don't even know what we need to do yet. Everybody was kind of in kind of that what the heck is going on mode. So what's starting to evolve now is, yes, we're changing out more HEPA filters. There's a lot of that activity going on. But as colleges and universities are figuring out how do they get the students back to the campuses? How do we create social distancing in office buildings? All of that's going to lead to opportunity with airflow improvement. So that will mean recommissioning of equipment, additional filtration, be it actual things like HEPA filters to UV lighting to kill things in the air. So we've got all of that happening right now. And actually, this afternoon at 4:30, we have our weekly sales call with all the sales team. And today's theme is going to be reaching out to all our customers, once again, like we did in late March and make them aware, look, we're here, we can help you. That first round of calls definitely generated business in April and May. And we think now that buildings are starting to come online, and people really understand they need to do something to create a safe environment for the occupants, it's going to be another opportunity for us to get in and do even more for them. So I mentioned earlier, we're an essential service, and I firmly believe that. So yes, Governor Cuomo's comments, while we don't do retail, we're not in that sector, we clearly have opportunities in other areas with other types of buildings that we maintain and build.

Okay. Another question from the audience. Does typical industry seasonality hold this year? Or does COVID change that trajectory?

I think COVID has changed a lot. And when it comes to seasonality, for our business as we look at just Q1. We actually had a mild winter, which isn't good. We like the weather extremes because if something breaks, we have to go fix it. We make some more money. So it was kind of a mild winter for us, and we didn't see as much pull-through as we were hoping to see. And I also will comment that with the maintenance sales, it's been a bit of a challenge because many people don't want to have site visits right now. They just aren't in their buildings because they're working from home. That's kind of stalled a bit. What's been interesting, though, is projects on the service side, we were concerned maybe that would stall. But for the most part, the projects are continuing. People had already teed them up, I think the new normal is starting to set in, and people are moving forward with what they had planned.

Okay. If anyone else has a question, let us know. One thing that wasn't really discussed, Charlie, but that I think is important, especially for people, which I'm sure there's someone on the line here that are not fully familiar with the company, is that you've had a project out at LAX for the last year, 18 months or maybe 2 years, I'm not sure exactly how long that extends, but certainly has weighed on your gross margins over the last 12 to 18 months at least. Talk about that and where you are with that? And relative to your gross margins in 2019, what outside of that, is normal. And then maybe you can also address sort of quality of projects and the focus there to sort of prevent something like that happening again?

Sure, Joe. Thanks. So we're building a very large terminal facility, airport terminal at LAX. It's referred to as the Midfield project. The project has been delayed. It was a little over a year late, but now COVID has impacted it again. There'll be further delays. The good news is we're not being impacted by that COVID other than we're probably going to be at the building through November. But the bulk of our construction is absolutely complete. We're now in what they call the punch out and commissioning phase, where we have a handful of people still working around the building, taking care of something that's scratched or damaged that has to be fixed. But the commissioning is going to be pushed out a bit, mainly due to, say, concessionaires are fitting out their space, we tie into them with the base systems. So we're going to be out there a bit longer. We have a large claim in on that for all the delays and impacts. We are actively meeting with our client, actually a couple of days a week specifically to work through all the information, to come up with a settlement on resolving those matters. So that's progressing as well as to be expected right now. You always hope they're going to get resolved quicker than they do. But we have to go through the process. And if we rush, quite frankly, we'd be leaving money on the table, we don't want to do that. So that's coming off-line, the project is wrapping up. But as far as what's normalized, the business should be earning gross profit margins collectively between construction and service combined, in the 15% to 16% range. That would be a good operating gross profit margin for us. So I'm not going to comment about our forward projections at this point, but we're certainly working hard to achieve those gross margins. As far as risk analysis work that we've done and improvements to our overall processes of discipline, about 15 to 18 months ago, I forget the exact timing. After we oversold our capacity to deliver down in Mid-Atlantic and we were burnt by that, we just didn't see the labor crisis emerging, and we should have. Those projects were sold back in '16 and '17. And then we built them in '17 and '18, and we were burnt because we couldn't find the labor to execute all that work. We're now doing labor curves. Every branch in our business has to go through a monthly branch review. And as part of their standard packet of information they have to submit, they have to present their labor curves, which includes all the work in backlog, all the promised work where we have handshakes, on new work coming up where we're doing engineering and estimating. And then any projects that they expect to secure, they like them, they're pursuing them aggressively. They have to show us that they have the labor capacity to actually execute that work. That's been in place now for 15 to 18 months. The other thing we did was any project over $7.5 million now has to go through a risk review committee, which consists of myself, my COO, General Counsel, another Executive Vice President, and we put them through a pretty rigorous process to prove out. One, again, that they have the labor, they have the project management to execute the work. We're looking at margins. We're looking at risks on the projects and how they've mitigated them. What's interesting, we've killed a few opportunities, I told them not to pursue certain opportunities. But I'd say the vast majority of what has come out of that conversation, we've asked for a stronger language in our contracts to protect us. But also, we've increased margins. In one particular opportunity, we went back and said, we think you should push for another 200 to 300 basis points on the margin. There was this fear that they would lose the project, but we just mandated they had to. Well, they won the project. And recently, there's another opportunity that we're pursuing, and they reviewed it with us. It's a good-sized project. They've got a good track record of delivering larger projects. They have the labor, but we basically said, look, we think you should be at x margin. And quite frankly, it was 2x what they've traditionally received in that marketplace. But based on risk and reward, we just felt that, that was the appropriate thing to do. And as of right now, it appears they will secure that deal. It's not done yet, but we're working our way through it, and it's been received favorably. So -- and a lot of it has to do with our relationship with that customer and the engineering services and the value we create. So it's not just charging more. We actually deliver better value, and the customers respect that. As a result, they're willing to pay for -- belief that we're going to deliver a great project for them to get them to where their end goals are. So I think we've done some really smart things on risk management to ensure getting to that 15% to 16% that I mentioned. So Joe, thanks for asking that question.

And just for people's reference, they did 13% gross margins last year. So that just gives you a point of reference. There is a follow-up question to the seasonality question that was asked just a little while ago by an attendee here. You mentioned that the winter was a little bit weaker than usual, but that COVID also slowing things down in the summer. So I guess, maybe they want to know sort of more specifically seasonality-wise, should we expect that June bump from the March quarter, the second quarter -- first quarter to second quarter bump that we usually see, should we anticipate seeing that, or how [indiscernible] ...?

Yes, I think where we're at based on -- we just finished our branch reviews and the reports from all the business units. We're pretty much back online with the majority of our business. We were stopped up in Boston, the Mayor of Boston as well as the Mayor of Cambridge stopped everything in Boston. That came back online earlier this month in June. And Michigan, we faced some challenges, too, the governor up there shut the state down. We had a couple of essential projects moving forward, but not much. But all of that's opened back up. Our last area that we were shut down was actually the Disney Corporation. We're doing a lot of work for them down in Orlando, a little bit in Anaheim, and we were shut down there, but that's actually opening up next week. So we expect in the month of July, to be back up to about 95% of what we were expecting to see. There's a scattering of projects that have been delayed or postponed, pushing revenue out. We've had no cancellations. And in terms of seasonality, with the cold, cold winters are good and the hot, hot summers are good for us. We expect there could be some impact in June, but July, in August, we should be back to a more normalized revenue curve. You have to remember, we're not doing retail. We just don't do retail. We do very few office buildings. We do a lot of higher education, research and development centers, transportation. And a lot of those facilities have to be maintained. And if something breaks, they're asking us to come right in.

Okay, great. And I'll try to sneak in 1 or 2 more questions in here. I know we're pretty much all done with time. But a couple of questions on debt. Any update with the debt refinancing opportunities? And then also, interest expense was way up last quarter. Was there anything unusual there?

Well, we're clearly very focused on figuring out our answer to refinancing. But Jayme, would you mind taking that, please?

Yes. So as we're putting quarters together, we're trying to get as -- go into the market in a better position with our liquidity position as well as having cash on the balance sheet. Getting this working capital improved, and then we have just executions. So as soon as we see the right opportunity and we can go to market, we're going to look to refi as soon as we possibly can. With regards to the interest paid out, that should be very flat from Q4. If you're comparing year-over-year, there is a difference there because that's -- we have the different facility in place than we did last year with a higher interest rate.

Perfect. And then let me just try to squeeze this in because I don't want a question go unanswered. What role, if any, has Brian Pratt asked for with the company, possible board seat, actions he wants you to follow, anything there?

Yes. I met Brian back in 2016 in investor conference. He and I got together way back then and I paid a visit to him and spent a few hours. I was intrigued with what he did with Primoris and more recently, with his investment in Limbach, I think it's a real positive indication of where we're going. He sees value. And I think he's got a lot to offer us in terms of just offering his thoughts and ideas of some things we can be doing here differently at Limbach to improve our outcomes, including he always had a tremendous track record at acquisitions. So I think it's going to be great to be able to reach out to a significant shareholder and talk to him about some opportunities in terms of how to look at different things and for improvement in our company. So I think it's going to be great to be able to converse with him from time to time and have him offer his insights to us.

Okay. Well, we're well past time here. I just want to thank you, again, Charlie, Matt, Jayme. Thank you for participating here. And thanks for everyone else listening in and participating. Thank you. Have a great day.

Okay. Bye-bye.

Thank you. Bye-bye.