Greetings, and welcome to the Limbach Holdings Call to Discuss Third Quarter 2023 Results and Update on Current Operations. 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. I would now like to turn the conference over to your host, Mr. Jeremy Hellman of the Equity Group. Thank you. You may begin.

Thank you very much, and good morning, everyone. Yesterday, Limbach Holdings announced its third quarter 2023 results and filed its Form 10-Q for the period ended September 30, 2023. The company would also like to note that an updated investor presentation is available on the Investors section of the company website. Management will refer to select slides during today's call and encourages investors to review the presentation in its entirety. During this call, the company will be reviewing its financial results and providing an update on current market conditions. Today's discussion may contain forward-looking statements, and actual results may differ from any forecasts, 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 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 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. Turning to the third quarter. We continue to execute on all fronts, and the result was continued margin expansion, which in turn led to solid growth in net income, adjusted EBITDA and cash flow. We continue to see our ODR transitions happening at a rapid pace. Recall that we're originally targeting a 50/50 revenue split by 2025. As we speak with you today, we appear on track to hit that target this year. And in doing so, this change in our business mix is driving the intended growth in gross margins, earnings and cash flow. As indicated in Slide 12 in our investor deck, we're now focused on shifting to a new target of at least 70% ODR. Both of our segments are performing well, and we continue to shift our sales and marketing resources towards the ODR segment as the margin advantage for ODR segment during Q3 was 1,000 basis points compared with our GCR segment. The performance improvement in our GCR segment is a product of execution and project selection, which has been made easier due to our rapid shift to ODR and ability to be extraordinarily selective. Within our GCR segment results for this quarter was the successful resolution of our largest legacy claim. The claim resolution resulted in a $1.2 million write-up and net cash to the company of $16 million. That leaves one less significant legacy claim open. Beyond the segment shift and in-segment margin enhancement objectives, the third pillar of our strategy is scale for acquisitions. We already completed the acquisition of ACME Industrial in July and are pleased to announce that we're able to close another deal this year. Subsequent to quarter-end, we announced the acquisition of Industrial Air based in Greensboro, North Carolina for $13.5 million in cash. We're very excited to add Industrial Air to the Limbach family. We are able to fund that deal with our cash on hand as our organic business continues to allow us to self-fund acquisitions. Recall that our acquisition program focused on both tuck-in deals as well as larger opportunities that we believe will allow us to build out our geographic presence. Industrial Air falls into the latter category, providing Limbach with a new presence in the attractive growing Carolinas market. As shown on Slide 18 of our investor deck, Industrial Air hit the mark in all of our acquisition criteria. Strategic geographic location, strong ODR customer base, including a number of national-scale customers, and we believe an incredible opportunity for future value creation. Industrial Air also has their own line of products, including air handling units that are manufactured in-house. That gives us a decided advantage in being able to propose and deliver value-added solutions for customers without contending with supply chain choke points. Industrial Air also built a very ODR-centric model, and we believe they are a really great fit for Limbach. We are very excited to have them aboard. With the deal closing on November 1, we expect Industrial Air to have a relatively minimal impact on 2023 revenues and EBITDA, while 2024 should benefit from the inclusion of roughly $30 million of revenue and $4 million of EBITDA. We are pleased to have built favorable earn-out economics into the deal structure which lowers our cost of capital and provides all parties with a great outcome if and when targets are met. I'll now pass it off to Jayme to provide some financial highlights, and then I'll return with a few comments on market conditions before we take your questions.

Thanks, Mike. Our press release and Form 10-Q, which was filed yesterday, both provide extensive details of our financials, so I'll focus on some key highlights. Starting with the income statement. During the third quarter, the ODR segment accounted for 51.5% of total consolidated revenue, up from 48.8% last year in Q3. ODR revenue during the quarter was up 10.3% from a year ago, while GCR revenue was essentially flat, resulting in consolidated top-line growth of 4.4%. As Mike noted, we continue to see solid execution in the quarter. Consolidated gross margin during the third quarter benefited from the increasing contribution from our higher margin ODR segment, strong overall margin performance in both segments, and a couple of one-time benefits that flowed through the GCR segment. These one-time benefits included the settlement of one of our outstanding claims which resulted in a gross margin benefit of $1.2 million. And then we also had another $1.2 million gross margin benefit during the quarter as a result of the early completion of a project due to a reduction in scope from the customer. These one-time benefits contributed $2.4 million to the higher-than-usual GCR gross margin of 19.3%. Excluding these two items, the GCR gross margin was still solid and exceeded our target range of 12% to 15%, and our ODR gross margin stayed strong at 29.3%, which was similar to Q2. Consolidated gross margin was 24.5% for the quarter, and even if we were to back out the one-time benefit, we had very strong performance and record high gross margin. SG&A expense was $21 million for the quarter or 16.4% of revenue and was up modestly from $20.4 million in the second quarter and up from $18.7 million in the year-ago period. The increase in SG&A expense was primarily related to a $1.4 million increase in payroll-related expenses, a $600,000 increase in professional fees including acquisition deal-related fees, and a $300,000 increase in stock-based compensation expense. SG&A expense associated with the ACME transaction was approximately $300,000 from the purchase date through the end of the quarter. On prior calls, we have noted that we expect full-year 2023 SG&A expense as a percentage of total revenue to have a similar annual run rate as 2022. As we have seen bottom line growth outpace our total revenue growth this year, currently projected SG&A expense is expected to land at the higher end of our targeted range of 15.5% to 16.5% of total revenue for the full year. Now, turning to cash flow. We continue to have a strong balance sheet. At quarter end, our cash and cash equivalents balance was $57.5 million and we had $10 million outstanding on our revolver. We exited the quarter in a net cash position of $35.2 million compared to a net cash position of $23.6 million at the end of June and $4.2 million at the end of December 2022. Total operating cash flow during the third quarter was $17.2 million, compared with $10.4 million a year ago. Changes in working capital accounts had a $5.8 million positive impact on operating cash flow this quarter. The remaining $11.4 million of operating cash flow was the non-working capital component. As we’ve noted previously, our free cash flow from operations can be calculated by taking this non-working capital component and then subtracting CapEx, which totaled $221,000 in the quarter. That leaves free cash flow at $11.2 million or around 82% of our adjusted EBITDA. The third quarter did include a couple of noteworthy cash items, starting with the net receipt of approximately $15.6 million from the settlement of a claim. This cash receipt was primarily offset by an increase in accounts receivable of $15.2 million in the changes of working capital mentioned earlier. We also used cash of $4.9 million in investing activities for the ACME acquisition. Subsequent to quarter end, as Mike noted, we used $13.5 million of our cash to fund the acquisition of Industrial Air, which still leaves us with a solid liquidity position.

Thank you, Jayme. As we approach year-end, we have good momentum. We’re executing well on our plan with demonstrated success in each of the three growth levers we have identified. That has allowed us to raise our adjusted EBITDA guidance for a second time this year. Recall when we began the year with a range of $33 million to $37 million, and then we subsequently raised that to a range of $38 million to $41 million last quarter. We are now increasing our adjusted EBITDA guidance again for 2023 to a range of $42 million to $45 million. The upward revision to our adjusted EBIT guidance this quarter is a function of our continued strong performance year-to-date, along with a small contribution from our two acquisitions during the second half of the year. During the third quarter, we were once again able to record gross margins above the target range in both segments. Underpinning that performance with our rigorous project selection, excellent field execution, and overarching emphasis on delivering value-added solutions for our customers. Our adjusted EBITDA also benefited from two one-time GCR gross margin benefits of $2.4 million that were booked in the quarter as Jayme discussed earlier. We’re also reiterating our revenue guidance for 2023, which consists of total revenue for the year in the range of $490 million to $520 million. We believe overall conditions in our end markets remain supportive of our services. While much of the day-to-day headlines focus on macroeconomic conditions, Limbach continues to see strong demand due to the mission-critical nature of our end markets. As we continue our evolution of being an indispensable partner to building owners, our key customers continue to show that our services are essential and the spend is resilient. Leading customers in our alternative verticals have been successful in managing their operations and balance sheets. As of now, we have not seen interest rates make a significant dent in demand. As a reminder, with our ODR expansion, our business is less correlated with new construction than in the past. Over the past quarter, all of our vertical markets experienced strong demand. As an example from the last quarter, we saw healthcare spend from both our operational repair budget and long-term capital projects. In our industrial manufacturing vertical market, customers were focused on preparing for future capacity, and there appears to be no shortage of opportunity. Also, as a reminder, we spent a lot of time refining our model to be flexible and adaptive to a variety of market conditions. Central to that is a focus on customers with mission-critical facilities. By providing high-value solutions to those customers, we expect to be well-positioned to serve their needs regardless of the prevailing economic winds. Focusing on supply chains for a moment, we do see some moderation in equipment lead times for off-the-shelf items. At the same time, complex equipment is still difficult to obtain with delivery times remaining elevated. So again, one of the many reasons we are very enthusiastic about the acquisition of Industrial Air. Heading into year-end, we believe we have good momentum and look forward to closing the year strong. As we head into 2024, we look forward to having ACME and Industrial Air provide full-year contributions to our results and help propel our continued effort to maximizing our ODR opportunities. Based on our current views and expectations, we don’t want to underestimate what we believe is a large market opportunity that we continue to pursue. We continue to believe that we have the right platform, the right people, and the right strategy to continue to drive strong operating results. I also want to remind everyone that Slide 27 in our investor presentation includes additional modeling considerations. With that operator, please open the QA session.

Thank you. Our first question comes from the line of Rob Brown with Lake Street Capital Markets. Please proceed with your question.

Good morning and congratulations on all the progress.

Thanks, Rob. Good morning.

You talked a lot of detail about the margins and some of the ins and outs in the quarter. But your long-term margin targets are they – you’ve been running ahead of them. Have you seen some structural improvements there that maybe you can continue to do that? Or how do you think about long-term margin targets into next year and the year after?

Rob, regarding each one of those, we’re definitely optimistic that there is going to be future improvement. But at the same time, we continue to make sure that we have the right trend line going forward before we do anything from a range perspective. Just to talk about each one of them really quick. GCR, I mentioned this in the prepared remarks, but a lot of this has to do with our ability to be extraordinarily selective right now. There’s a tremendous amount of work; we could be filling up our backlog. But since we are very strategically increasing ODR and reducing GCR, that’s allowed us to be very opportunistic from a margin perspective. From the owner direct perspective, there are still lots of opportunities. I can tell you our main focus from a go-to-market perspective is to make sure that the work that we get is a combination of both relationship and value-add. We’ve had a lot of conversations with customers recently. They’re very appreciative of the work that we’re doing and the dedication we are to a select group of accounts. We’ve been really working collaboratively with certain customers to ensure they understand our value, and working collaboratively with them. Over time, we believe that’s going to be an opportunity for additional margin expansion. But it’s really a process that we’ve gone through. So, just to summarize, GCR is really a product of being extraordinarily selective and owner direct is – there’s future opportunity, but it’s a matter of us really ensuring that we prove our value and continue to expand our services.

Okay. Great. Thank you. And then sort of on the market and demand environment. I know you focused on some high growth verticals. But how do you see the demand environment kind of continuing? Are you seeing any areas of sort of weakness? Or is it remain – in terms of quoting activity, I guess remain active?

I think one of the key things with our strategy is making sure that – and we’ve really been positioning ourselves over the last couple of years to ensure that we have the right mission-critical markets or customers where they can’t afford not to have service done. Just to touch upon a few of them. Healthcare has been really, really positive for us this year. It’s been an interesting ride with them going from 2020 into the last few years. But we’ve dedicated ourselves to those accounts, and we’re starting to look ahead to future capital budgets going into 2024 and 2025. At the same time, there’s tremendous amounts of repair work that needs to happen, some of that suited to deferred maintenance. So we’re really looking optimistic about that. The industrial manufacturing sector has been really strong this year. Those are due to whether it’s a line change or it’s – again, deferred maintenance. So I think in summary, we’re really looking forward to the fact that we’re dedicating ourselves to mission-critical vertical markets that demand remains resilient, and we’re very optimistic about that.

Great. Okay. Good. And then on the Industrial Air acquisition, it looks like a pretty interesting situation. How can you use this component manufacturing ability they have? Can you use that in other areas of your business or just maybe a sense of how that adds to what you’re doing?

Yes. So just in kind of summary, we have a criteria for these acquisitions that we’ve really learned from both the ACME Industrial and Jake Marshall continue to learn through the whole process. So we’re excited that Industrial Air really checked all those boxes. And one of the pieces that was really interesting when we started to look into them and get to know them was they have a product line. Air handlers, dust filters, all sorts of products that they use currently with their owners and the work that they do. They’re able to provide a design-build solution where they design it around their manufactured install products, and we’re able to provide a complete end to end. We do think there’s an opportunity in IA both from a customer perspective, because they have some national customers, and I think also from a product perspective, to feed our other locations and strategic points. So we view that as future value-add. The deal itself was just a strong component that met the criteria. But there’s definitely future opportunity.

Okay. Great. Thank you. I’ll turn it over.

Thank you. Our next question comes from the line of Gerry Sweeney with Roth MKM. Please proceed with your question.

Good morning, Mike and Jayme. Thanks for taking my call.

Good morning.

Just to follow-up a little bit with what Rob was talking about on the ODR side. My sense is you’re probably still pretty early in this expansion. And I just want to see if you could maybe discuss the playing field a little bit, the opportunities. Are we still really in the early innings? And how do you continue to drive this forward?

Yes. No, I agree with you completely. I think what you said is that we’re still very much in the early innings. The key thing with our strategy in the last 18 months is to be extraordinarily selective. We’re selective on the GCR side, but on the owner direct side, we’re being selective because we’re focusing on each location that’s selecting their top five accounts, 75% or 80% of their time. And that’s really led us to getting some different insights from these building owners. What’s been consistent is they want us to do more. At the same time, they want us to prove our value along the way. So I think as we go into the next phase and we get into 2024 and 2025, we’re at a point now where we build competency and trust. We’re starting to get a peek into their budget and their needs long-term, really co-authoring and developing long-term solutions. One thing we hear time and time again is that other providers don’t have the same strategy per se and aren’t dedicating themselves as much as we are. They like the availability of our people. The next stage is how can we develop a two, five, or 10-year program with them. We’re really working tightly with their budget, understanding their business needs beyond HVAC, mechanical and electrical, and building that long-term plan, which is going to give us additional visibility. At the same time, they're looking for visibility on their budget as well.

Got it. That is interesting. So you're really trying to get in there and make a sticky relationship. You said top – you look at each location and focus on top five customers. Over time, I would assume – I mean, you got to balance sort of building out that two, five, or 10-year relationship you talked about versus maybe even going after accounts six through 10. Is that a way of looking at it? Or is there more than enough currently for your top line customers?

There's definitely more than enough. I would tell you that we had 75% on the top five, and there's still 25% that's probably on the next five, 10, 15. So there's plenty of diversity in there. To your point, just the top five has been so demanding. They want us to do so many more things that we just continue to – our strategy, I think, resonates with building owners. They understand that there's a race right now for talent, and they need to work with us to ensure that they're getting the same person that shows up every day, whether that's from a management or field perspective. What’s nice too from a diversity perspective, as we add Industrial Air, they have a whole different group of customers. They're really textile manufacturing-type customers. So it’s another top five or 10. For each location, the top five or 10, there's going to be some synergy with branch to branch or location to location. And with every acquisition, we're adding continued customers. The customer list continues to build. We’re always trying to force ourselves to be as disciplined as possible to ensure that we're providing the best service to those customers.

Got it. So to summarize my words, your top five, I'm just making an upward number. I mean, you're looking at – you're probably, I don't know, 25%, 30%, 40% penetration and there's that extra runway just to grow internally or grow further with those top five.

Yes, that generally makes sense.

Got it. Switching gears to GCR. Obviously, very good margins. In the last couple of years, you've been less or more being very selective. How much of that is that selectivity? Are you seeing better pricing, lower project size, maybe just underwriting your projects to a higher degree? I'm just curious if you could bucket that out. And a follow-up to that. Is there opportunity for actually some incremental growth going forward? Because it sounded as though there's a ton of projects out there. Sorry, a lot there. I apologize.

Sure. Yes. So the margin – there are a number of different things driving the margin. The first one is really our ability to be selective, driven by the fact that we're directing sales and marketing resources towards owner-direct. They come to us and ask us if we can really do this. The second thing is we're very careful from a risk perspective right now in the GCR projects, really looking at size and duration, as well as the amount of labor that we're actually installing on those projects. So there's definitely a rigorous approach that continues to be more rigorous. Those are really the two considerations. The third thing is our teams are performing really well. We’ve got a great group of teams. What’s nice about the staff is they've been able to flex between owner-direct and GCR work. That flexibility has been paramount to this shift happening and the continued shift, so those are probably the three big pieces of it. From a growth perspective, we still look at it that even though it's 12% to 15% and maybe in certain quarters, we performed better than 15%, the owner-direct still provides almost double the margin, and that's what we're going to continue to push towards. Just because we're at 25% to 28% doesn't mean there isn't still future opportunity beyond that. So we're going to continue to push towards owner-direct. I think our next target is to really get to that 70%. It looks like the right return on people and investment to ensure we move to the higher-margin segment.

Got you. That makes sense. And one more, and then I'll jump back in line. It's just a sort of follow-up. You talked about ODR and GCR guys being able to flex back and forth. Is that work for 100% sort of fungible between those two businesses? Or is there a certain percentage that will always sort of be in GCR, and GCR will always be a component of revenue?

I look at it where we have our definitions of our segments from a revenue perspective. But from the people side of it, it comes down to our people. I think sometimes it's perceived in the industry that there are certain people that do this work and certain people that do that work. We've found that our staff has been completely adaptable and flexible, and that's allowed someone who worked on a large project the ability to work at a facility every day as an account manager. It’s been a big shift. It’s a big evolution. We have great people who are looking to provide value to customers, and that ability to flex has been paramount.

Got it, super helpful. I appreciate it. Thank you.

Thank you, Gerry.

Thank you. That concludes our question-and-answer session. I'll turn the floor back to management for any final comments.

Thank you, everyone, for your continued interest in Limbach. If you have any additional questions, please reach out to Jeremy Hellman of the Equity Group. Thank you, everyone. Have a great day.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.