Hello, and welcome to Limbach Holdings Q3 2020 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Jeremy Hellman of the Equity Group. Please go ahead, sir.

Thank you very much, and good morning, everyone. This morning, Limbach Holdings announced its 2020 third quarter results and filed its Form 10-Q for the quarter ended September 30, 2020. Today, the company will be reviewing those results and providing an update on current market conditions. The company may also refer to a slide presentation accompanying this earnings call. The presentation can be found in the Investors section of the company's website at www.limbachinc.com. The company encourages everyone to review the forward-looking statement disclosure on slide 2 of the presentation. With that, I'll turn the call over to Charlie Bacon, the President and Chief Executive Officer of Limbach Holdings; and Jayme Brooks, the company's Chief Financial Officer. Please go ahead.

Welcome, everyone, and thanks for joining us. We're excited to review our third quarter performance with you and to take your questions. During the quarter, Limbach again generated solid financial and operating results. We're pleased with where we are, but we still see multiple opportunities to deliver even better results as our focus on operational execution becomes further ingrained in our core processes. We remain on track for a successful year, and we're excited to be able to increase our financial guidance for 2020, which I'll address at the end of our prepared remarks. First, I want to take a moment to thank the more than 1,700 employees at Limbach for taking on the challenges of the past nine months with focus and passion. During the year, they've adapted rapidly and smartly to these challenges and continue to press on. It's been quite a period. We rose through the challenge and are staying focused on staying safe, getting cash to protect our liquidity position and getting work through creative sales strategies. It's impressive to watch and to be part of to all my fellow Limbach team members. Thank you. As a result of your efforts, we're in a good position as we get ready to enter 2021. From a macro level, we continue to deal with the broader environment, which has no shortage of economic, political and public health challenges. To date, that's mostly been just noise, though. We credit our success this year to the market diversity of the business and the strength and fortitude of our employees and workforce. The three tactical areas of focus I mentioned above, staying safe, getting cash and getting work, are leading to one of our best years. Nonetheless, we continue to evaluate a spectrum of potential scenarios that could impact the business, so that we're prepared to the extent possible. We need to remain flexible and responsive. Although there has been an increase in COVID cases in many of the geographies we operate in, we have also realized additional market opportunities. These include increased filtration, improved air circulation, and restart processes for building systems and equipment as facilities reopen. Over the last several months, we've seen a meaningful increase in opportunities on the service side as building orders are staying true to the new normal caused by the pandemic. Overall, our sales pipeline remains strong in most of our historic end markets, and we're finding opportunities in new end markets as well. As an example, over the past year, we've seen a significant uptick in opportunities to design, engineer and construct indoor farming and growth facilities. We've secured contracts for a number of these facilities in several states already. With further demand coming online in the near-term in four more states, we expect to see even more opportunities going forward. We're building a strong market niche with indoor farming, which we believe will be a sustainable area of capital investment. Overall, we are evaluating a significant number of project opportunities in both the construction and service segments. As a reminder, our project selection criteria in the Construction segment has become much more stringent. This may lead to less top-line growth in construction as we continue to focus on operational excellence and continued improvement to gross margins, ultimately driving growth in gross profit dollars. We want to select the best opportunities leveraging Limbach's talent and staff and deliver even better margins and improved cash flow. So notwithstanding the recent increases in the virus cases, we're not experiencing the same market response that we did in late March and April. We do see customers hesitating from time to time and continuously evaluating capital investment decisions. However, there were no virus-related project shutdowns like we experienced in Boston in April and May, and we're able to be in the field in the ordinary course. Throughout the year, we remain focused on executing three key initiatives: managing risk under an enhanced project selection framework, maximizing cash flow and liquidity, largely through better working capital management, and expanding exposure to the owner direct market. We're still in the early innings, particularly as it relates to deploying resources required to deeply penetrate the owner direct market, but we're seeing great progress as these practices become institutionalized within the organization. To drive that owner direct orientation, while remaining focused on leveraging SG&A expense, we've redeployed resources from the construction segment where possible. We've also made some strategic investments and recruited some terrific talent to support owner direct sales and account management. That helps us build a broader customer foundation and the distribution channels to which we can deliver a broad array of services over time. So with that, let's move on to review of the third quarter performance.

As a reminder, we adopted both ASC Topic 606 and 842 in the fourth quarter of 2019 for the annual and quarterly periods beginning after January 1, 2019, using a modified retrospective transition approach. Since we filed our 2019 quarterly results before we were required to adopt the two new standards, we are obligated to recast our 2019 quarterly results to primarily reflect these two new standards at each quarter end during 2019. As such, all the numbers we discuss today for the third quarter of 2019 are as recast. While certain categorizations in line items may change in each quarter, there is no impact on full year results or cash flows previously reported for fiscal 2019. Please follow along in the accompanying presentation, starting on slide 4. For the quarter, total revenue increased by $10.6 million, a 36% year-over-year. Construction segment revenue increased 10.2% year-over-year and 23.2% sequentially. Service segment revenue increased 12.3% year-over-year and 14.1% sequentially, while not entirely surprising based on the activity levels we witnessed exiting the second quarter; it was still comforting to see strong revenue growth this quarter. With strong activity levels and better execution, we posted some meaningful margin expansion in the quarter. Gross margins increased 235 basis points year-over-year, with almost 200 basis points of improvement in the construction segment. The 11.4% gross margin in construction this quarter does reflect the impact of additional write-downs in Southern California. However, as we've noted previously, work there is now substantially complete, and we have progress in closing the books on that project and finalizing our cost reconciliations. Without that project weighing on results, we would expect to see continuing improvement in gross margins, all else being equal. Of course, we continue to drive pricing on new Construction segment work wherever possible, and we are more disciplined in project selection. Those dynamics should be increasingly reflected in the construction gross margins going forward into 2021. Service segment gross margins expanded 360 basis points year-over-year and once again increased sequentially by about 20 basis points. That's the third consecutive quarter of margin expansion in the Service segment. Gross margins in Service are 770 basis points higher than in the fourth quarter of 2018, as reported in 2018 prior to ASC 606, which is a function of our focus on the opportunity and solid execution from our service organization. On a consolidated basis, all of this translates into higher gross profit dollars, which is the primary objective. Gross profit expanded 31.6% year-over-year and 18.9% sequentially. Again, we continue to believe that there is still opportunity to improve profitability, particularly in the Construction segment. With more disciplined pricing and better execution, we think our gross margin can expand another 150 to 200 basis points over the intermediate term. So even on lower volume, driven by greater project selectivity, we would expect growth in gross profit dollars. Gross margin dynamics in the Service segment are largely a function of business mix. The highest margin lines of business, like preventative maintenance, are also the smallest dollar value and grow more slowly in comparison to owner-direct project work. Although the owner-direct project will carry lower margins as compared to preventative maintenance contracts, it's still good work and typically has less variability in outcome than a construction project. As this line of business becomes a larger part of the mix, we'd expect some margin dilution based on the higher volume. Again, though, we’d expect growth in gross profit dollars. Total SG&A expense increased by just under $500,000 or about 3% over the same quarter last year. The increase was primarily driven by higher performance-based incentive compensation, given the stronger financial performance this year. That increase was partially offset by lower payroll expense and reductions in a variety of corporate and overhead cost categories, which reflects the continuing effort to identify cost reductions undertaken earlier in the calendar year. We remain focused on controlling growth in SG&A, but also making the investments necessary to drive growth in the owner-direct model. As a percentage of revenue, SG&A expense was 10.4% in the quarter as opposed to 11.2% in the prior year period. Moving to slide five, which presents our year-to-date performance and slide six, which presents our trailing 12-month performance through the third quarter. On both slides, I just want to call out the expansion in revenue, gross margin, gross profit dollars and in adjusted EBITDA. Additionally, Q3 2020, LCM adjusted EBITDA of $25.9 million represents the highest level of profitability the company has achieved in its current operating configuration.

Turning now to slide seven. Backlog of $469.3 million was essentially flat sequentially and a decrease as compared to December 31. As we've communicated before, the reduction of the value of the Construction segment backlog is a result of stricter project selection criteria. We planned it, we're comfortable with it, and it's consistent with our near-term tactical strategic objectives and performance expectations. The decrease is not the result of a lack of opportunities in the market or of the company's ability to successfully secure new work. We're managing the Construction segment carefully, and that's reflective of these backlog numbers. The construction backlog figure also includes approximately $95 million of work that we categorized as promised during the second quarter earnings call. We recently announced that those opportunities in the healthcare, data center and indoor forming end markets had converted to backlog. In addition to the quarter end backlog number, at September 30, we currently have another $166.3 million of promised work and we expect the balance of the promised work to convert in the fourth quarter or in early 2021. The bottom line is, we are comfortable with the activity levels and profitability in the Construction segment for the rest of this year and into next year. Service segment backlog has remained stable during the year. It's grown modestly as compared to December 31. Given the environment, particularly during the second quarter when some customers wouldn't let us into their buildings, we're comfortable with the trajectory. We said previously that we felt there was an acceleration in service sales activity, as we exited the second quarter, and we saw that materialize in Q3. Service sales in Q3 were up 3% sequentially, but 36% year-over-year. Growth is particularly strong in service projects, nearly all of which has performed on an owner-direct basis. These jobs can range from $50,000 to several million dollars in value and can burn over a period from just a few days to several months. So, as compared to longer lead and mortgage duration construction projects, service work turns over at a higher velocity. Finally, on the far right, we provided a graphic of cash flow from operations, which again, has been a key focus for us this year. Through September 30, we've generated $35.2 million of cash flow from operations, $12.8 million of which was generated in the third quarter. That's nearly a $53 million improvement year-over-year. It's simply a tremendous result and a trend that we've got to maintain. As a reminder, this success mostly results from more active and persistent working capital management, billings, invoicing and collections, and these figures do not include any proceeds from claims collections. With respect to unresolved claims on construction projects, we continue to work diligently with various counterparties to make progress towards acceptable resolutions. The vast majority of the work on these projects with unresolved claims is complete, and we're now completing only punch list types of items. We continue, as a management team, to focus a great deal of time and energy on these claim matters. While it may not appear to the outside world that things have progressed quarter-to-quarter, we believe we are moving in the right direction. At this time, we really can't offer any more insightful predictions about when we might bring these claims to a resolution, but know that we, as the management team, are appropriately engaged and comfortable with our recovery strategies.

As you can see on slide 8, liquidity remains strong. We ended the quarter with $39.6 million in cash and $10.6 million of undrawn availability under the revolver. We did not draw on the revolver throughout the quarter and expect to continue in this manner for the remainder of the year, assuming current market conditions persist. Our efforts to enhance liquidity and working capital have been outstanding, and this area continues to receive our constant attention. We are reviewing our processes and incorporating them into the company's culture.

So, we're obviously pleased with the quarter, but we also see opportunities to continue to improve performance in many areas. The impact of most of the actions we've taken this year is only just now starting to be reflected in the P&L. We expect to see more improvements in margins, particularly in construction, and we expect to see our exposure to the owner direct market continue to increase over time. Before we move on to Q&A, let me hit two final issues. First, refinancing the senior debt is still our highest priority balance sheet objective. With the quarter we just delivered, we've got a solid 12 months of earnings, which goes a long way to improve our credit profile. We want to optimize the cost of debt capital while picking the right financing partner and getting to the right structure. As with the claims, we can't make predictions as to timing, but we want to be clear with everyone that we're appropriately engaged. Second, we're pleased to be offering revised guidance for the calendar year 2020. The original revenue range of $560 million to $600 million remains unchanged. However, we're increasing our adjusted EBITDA guidance from a range of $22 million to $24 million to a range of $23 million to $26 million. For the year-to-date period through September 30, we've outperformed expectations, and we're sitting at an adjusted EBITDA of $20.6 million. The fourth quarter is usually a strong quarter for us, but given everything that's happening this year, we built some contingencies into the fourth quarter. As a result, we're forecasting fourth quarter profitability to come in at the low end of where it's been over the last several years. As before, the guidance we've offered does not assume any resolution of the more significant claims discussed earlier. It's clearly still an uncertain time. We can't point to any specific problems we've got or any specific concerns we have, but we also can't ignore the potential for something to come out of left field that we have to react to. The best approach is to maintain ample liquidity, to focus on improving our core processes and to maintain the momentum we're carrying into the back of the year. With that, we're available to take questions.

Thank you. We will now be conducting a question-and-answer session. Our first question today is coming from Gerry Sweeney from ROTH Capital. Your line is now live.

Good morning, Jayme, Charlie. Thanks for taking the call.

Good morning.

Good morning, Gerry.

Can we start with owner-direct? Well, first of all, a great quarter. I had a couple of questions on owner-direct. My understanding, and this is going back a little bit. Is that all for the Service segment or does that include some construction opportunities? Because I know in the past, you had relationships on the construction side. And I think that helped you get some programs. So I'm just curious when you discuss owner-direct, it's all about service? Or is there — does that include the construction side as well?

Well, Gerry, it includes some larger projects with owners, but it's all owner-direct. So we're eliminating — we work with some great general contractors, but we're eliminating some of the bottleneck where we can provide better value to owners with certain types of projects. So we're marketing those owner direct. And it's really paying off in space. We continue to see just great progress on that front. So our focus is to increase sales resources and continue to expand that portion of our business as rapidly as we can.

Okay. I think I got that. And then can you describe the go-to-market strategy on what you discussed in terms of owner-direct? Are you replacing another provider? Or you — as you said, we're moving a bottleneck and removing the GC. How much opportunity? Or how much does the market operate like this? Is this a little bit newer opportunity creating some white space per se and run rate, I just wanted to get a better understanding.

Sure. What's interesting about the opportunity is we have them both local and national. On the national level, when we talk about clients like Hospital Corporation of America, one of our stronger customer's owner direct, we see just tremendous opportunity to really expand that relationship. So we're hitting up major healthcare customers that are nationwide to penetrate more of their facility investments and they may be a small $50,000 project or might be a several million dollar project that they need, and they're going to be heavy MEP, mechanical electrical plumbing. We're not replacing general contractors. We're not going to compete and build our own hospital. But where they have to renovate their facilities or retrofit them, that's what we're marketing. So when I mentioned national, where we've just actually increased resources on that and the focus in terms of sales resources, but also locally, we're shifting resources where we're going to continue to work for key general contractors where we just have very strong outcomes. But we're looking to not go broadly with general contractors and instead shift those investment SG&A dollars into more local owner-direct. So it may not be national customers, but it could be a local health care provider that we're going to market locally to do the same types of projects. And by the way, that's across all of our sectors that we serve, not just health care. Gerry, does that help answer that?

Yes, it does. It does. That's helpful. And then hearing a lot of discussion about healthy buildings, airflow, especially around COVID, have you seen any emerging work on this front, I guess, especially on the Service side?

Absolutely. From a filtration perspective, that's been a big, big focus. The only thing we're starting to see there. I mean, there's so much opportunity the lead time for things like the ultraviolet products, it's like three months now. So everybody is scooping up the production and even now to move 13 filters. It's becoming more of a challenge to find them. But the great news is, there are a lot of customers out there asking for that. So the other thing we're starting to see, Gerry, this is relatively new. We're starting to go into the winter months. And owners — building owners are starting to figure out how to get these buildings opened back up. And they're increasing the airflow into the buildings, right, outside air, which means they have to heat more of that air, which becomes a problem with humidification. So now we're starting to see opportunities to increase humidification in buildings, because of this outside air increase. It's kind of an interesting phenomenon, but we keep identifying more and more opportunities off the back of the pandemic, and we're an HVAC company. We're perfectly positioned for that.

I guess some of these healthy building trends, I mean, this becomes a little bit more of a recurring opportunity? I mean, just where can the UV filters, humidification that should have — this is not one and done. This is a little bit more longer tail occurring in nature?

I think it’s definitely. I think everybody is going to be looking at their buildings differently as they go forward in case anything like this ever happens again. So from a healthcare sector, you're seeing hospitals looking to increase ICU beds, which is great for us, whether it's retrofit or new builds. There's just R&D facilities with pharmaceutical and then you obviously go to the building. The existing building stock has to be retrofitted to create a healthier environment, so people feel comfortable moving into them. We think we're well-positioned for a number of sectors to do quite well. And I've said this to several people. I don't feel comfortable saying COVID has been good for the company from a standpoint of market opportunity, but it certainly has, right? I hate to talk about it that way. But it certainly has been good for our company and our revenues and our outcomes are clearly indicating that.

Got it. One final question for me. I know gross margins in the service side can jump around a little bit depending if you're doing some project work, et cetera. But on a, I guess, say a run — or on a stand-alone basis or margins in that business. Do you — would margins improve as you add additional customers, because you're leveraging tax assets in a city or region? Is that a fair way of looking at it, all things being equal in terms of if the project book stayed at the same level?

Yes. I mean, at the Service side of our expense, the SG&A, it's a bit more expensive to pursue Service and owner-direct work versus general construction work. But obviously, the margins are much greater. And what we're doing right now is we're pushing very hard on increasing our gross profit margins. And I think the quarter will clearly reflect steady progress with that. We see the opportunity to leverage that SG&A even more, but we're going to continue to invest every chance we get, we do see this as our future, and we're going to continue to expand owner-direct as rapidly as we can. So I think we'll leverage the overhead. But then again, we're going to keep reinvesting.

No, that's fair. I mean — well, I mean, it's a great segment invest away. But that's just helpful on an underneath basis. Got it. That’s it. I appreciate it.

Yes. We're really very excited about our progress with ODS, and we think it's just the tip of the iceberg. There's so much more opportunity for us.

Thank you. Our next question today is coming from Richard Greulich from REG Capital Advisors. Your line is now live.

Thank you for taking my question. I'm new to the company this year. But I'm increasingly comfortable with the strategic thrust that you're taking. And in that regard, I wanted to thank you again for hosting the webinar a month or two ago. I found that for a new person to the company, I found that very helpful and instructive in terms of really understanding what you're trying to do. But my question was for Jayme, I just wanted to clarify what I thought I heard you say that is it correct you said, over the intermediate term, you feel there could be another 150 to 200 basis points improvement in gross margin overall?

Within our segment — in our Construction segment.

In the Construction segment…

That's probably six months to 18 months.

Thank you for the feedback on that call we had. We really appreciate that. That's helpful to hear.

Thank you. Our next question today is coming from Jon Old from Long Meadow Investors. Your line is now live.

Hi, Charlie, Jayme. Thanks again for doing this today, and congrats on the results.

Thank you, Jon.

Yes. It’s just fantastic. So just to clarify, on the construction margin increase, is that based off the existing numbers that include write-downs? Or is that on sort of an adjusted basis, assuming no write-downs?

What we're looking at is we're really focusing on as we're bringing on new construction projects is our kind of our risk management process and how we're really focusing on high-quality projects in the sense of how we can bring on the labor and just the — building the best margin we can out of those servers — those construction projects. So it's more of a long-term focus.

Jon, the way we're looking at it right now, we have all of our business units actually in the business for any process. It's currently underway as we speak to wrap up that planning process, which will really complete in December. So we see certain business units with definite expansion opportunities for construction, and we see other business units that we purposely are saying we want to pull you back. And I'll just put it out there, the Los Angeles SoCal segment. We are going down that path of what we did in Mid-Atlantic, and it's working.

Right. Okay. And then finally, just an observation, I mean, I'm just I think you've done really turned things around, did an incredible job. I mean, I think it's not that hard to see, if you add back the write-downs, the warrant, expense and adjust interest expense for a normalized interest rate, your adjusted earnings this quarter would have been probably even $0.40, $0.45 higher. Not that you can multiply that by 4, but just an observation that it looks to me like, I mean, just your — the earnings are really coming through and the stock is insanely cheap. And I just hope, in this refinancing process, I just — I hope you will be able to incorporate the ability to do share buybacks, because, we may not be buying back over sure, I could at this point. But that's just an observation.

Thank you, Jon. We're going to continue to work that refi very aggressively. And so it's in play, where we're doing what we can. Just can't talk about the timing.

Thanks. Our next question today is coming from Jeremy Bloomer, Private Investor. Your line is now live.

Yes. Thank you. Just a question on the fourth quarter, you kind of gave some guidance there. I was wondering if you can give a little bit more color on the puts and takes, as to what you're saying about the fourth quarter.

The fourth quarter traditionally has been a solid quarter for us. And we're expecting to do well, but we're also just a bit concerned, we want to stay conservative with everything that's going on around us. We do see some COVID uptakes. We're all seeing that correct. It's not just me. And right now, we're not seeing anything happen in terms of any sort of shutdown or some city directive to have to shut down some of our work, which happened earlier this year. But we do want to take a conservative view right now, as we project our numbers for the rest of this year. It's just a tremendous amount of unknowns. But as of right now, we have a strong backlog, and we're well positioned for a good quarter.

Thank you.

Thank you. We reach the end of our question-and-answer session. I'll turn the floor back over for any further or closing comments.

Well, listen, everybody, thank you for joining us today. We're very proud of the Limbach team, our Board of Directors for what we've accomplished. We've stepped up to the issues of the past and dealt with the pandemic head-on. As we noted throughout the presentation, we're in a good position to finish strong and continue the momentum into 2021. We remain very focused on our refinancing and claims resolutions. Lastly, we expect to continue to be very active when it comes to Investor Relations. We're happy to facilitate one-on-one calls. Please reach out to us if you'd like to do that. We plan on participating in the Sidoti Virtual Conference next week and at the LD Micro Main event in early December. Hopefully, we can connect with some of you at those events. Thanks again, and we greatly appreciate your interest in Limbach. All the best.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time. And have a wonderful day. We thank you for your participation today.