Limbach Holdings, Inc. Q2 FY2025 Earnings Call

Good morning, and welcome to the Second Quarter 2025 Limbach Holdings, Inc. Earnings Conference Call and Webcast. I will now turn the conference over to your host, Lisa Fortuna of Financial Profiles. You may begin.

Good morning, and thank you for joining us today to discuss Limbach Holdings financial results for the second quarter of 2025. Yesterday, Limbach issued its earnings release and filed its Form 10-Q for the period ended June 30, 2025. Both documents, as well as an updated investor presentation, are available on the Investor Relations section of the company's website at www.limbachinc.com. Management may refer to select slides during today's call and encourages investors to review the presentation in its entirety. On today's call are Michael McCann, President and Chief Executive Officer; and Jayme Brooks, Executive Vice President and Chief Financial Officer. We will begin with prepared remarks and then open the call to questions. Before we begin, I would like to remind you that today's comments will include forward-looking statements under federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate, or other comparable words and phrases. Statements that are not historical facts, such as those about expected financial performance, are also forward-looking statements. Actual results may differ materially from those contemplated by such forward-looking statements. A discussion of the factors that could cause a material difference in the company's results compared to these forward-looking statements is contained in Limbach's SEC filings, including reports on Form 10-K and 10-Q. Please note that on today's call, we will be referring to non-GAAP measures. You can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in our second quarter 2025 earnings release and in our investor presentation, both of which can be found on Limbach's Investor Relations website and have been furnished in the Form 8-K filed with the SEC. With that, I will now turn the call over to President and CEO, Mike McCann.

Good morning, and welcome, everyone. Thank you for joining us today. Limbach plays a critical role in ensuring the reliability of mission-critical infrastructure within our customers' buildings and facilities. Our expertise lies in optimizing and sustaining the performance of existing systems so they function flawlessly, especially when the stakes are high. As we've consistently noted before, our growth and expansion strategy is anchored by three key initiatives: number one, scaling our ODR business organically as we become a trusted partner to our customers; number two, driving profitability through enhanced product and service offerings; and number three, making strategic acquisitions that expand our market presence and brand. Since we started our shift from GCR to ODR, ODR revenue as a percentage of total revenue has increased from 21% in the second quarter of 2019 to 76.6% in the second quarter of 2025. For the first half of 2025, ODR represented 72.4% of total revenue, which is in line with our 2025 guidance of between 70% and 80%. This strategy is driving margin expansion and earnings growth while also enhancing our risk profile. Over the past year, we have begun to implement this land-and-expand strategy, which we believe will fuel Limbach's next phase of growth. As a result of organic growth and strategic acquisitions over the past several years, we now have 21 locations and customers in 17 metropolitan service areas or MSAs. This includes several national customers with multiple locations across different states and complex maintenance needs given the mission-critical nature of their businesses. Our results continue to reflect the meaningful progress we've made in this transformation. Compared to the year-ago period, second quarter 2025 total revenue grew 16.4%, ODR revenue rose 31.7%, gross profit increased by 18.9%, and adjusted EBITDA grew 30%. Jayme will go into more details on the financials shortly, but we're pleased with the strong consistent momentum we've achieved over the past six years. Turning to the broader environment. We continue to navigate ongoing macroeconomic uncertainty with performance varying across end markets. Operating primarily across six distinct verticals provides diversification that helps us mitigate volatility and reduce reliance on any single industry. Next, I'd like to provide a quick update of what we are currently seeing in some of the key verticals we serve. In health care, deferred maintenance is driving quick or emergency repair and replacement work. We are starting to have proactive discussions with customers to avoid emergencies. The goal is that even if some customers are reluctant to spend immediate dollars on short-term capital projects, we are helping them plan their spending for future years, and this gives us visibility into their future requirements. For industrial manufacturing customers, we are performing upgrades to existing manufacturing lines and providing labor for industrial shutdowns. These shutdowns are being performed as planned, and customers continue to invest in their facilities. And in Life Science and Higher Education, we primarily support our customers by maintaining essential systems, upgrading critical infrastructure, and minimizing downtime, especially in mission-critical environments. In higher education, we are currently seeing the majority of our revenue in laboratory building environments. To support the ongoing expansion of ODR business, we've scaled our sales organization over the last year with the addition of 40 new salespeople, which primarily consists of on-site account managers. This marks a pivotal evolution in our go-to-market strategy and how we engage with customers, emphasizing a deeper understanding of their facilities and anticipating their operational needs. To support our expanding sales team, we recently hired Amy Dorsett as Senior Vice President of Sales. Amy brings over 20 years of experience as a strategic results-driven sales leader with expertise in business development and client relationship management. She has a proven track record of expanding business portfolios and strengthening existing relationships to drive sustainable growth. Her prior roles include sales leader positions for major OEMs, including Honeywell, Trane, and Johnson Controls, while consistently delivering high-impact results. We're excited to welcome Amy to the Limbach team. This type of expertise will be instrumental in advancing our national account capture strategy and enhancing the capabilities of our existing sales staff, particularly in developing capital plans with building owners and driving proactive sales training. Amy will also play a key role in supporting our vertical market focus. Our sales efforts are intentionally concentrated on existing customers that have complex high-demand facilities that require ongoing system enhancements and continuous upkeep. We believe our current footprint represents just a fraction of the total opportunity within these environments. Importantly, our growth isn't dependent on new construction. It's driven by the recurring needs of long-standing customers. These relationships offer the greatest potential for organic growth, and our account teams are committed to strengthening them further through reliable service, proactive engagement, and high-impact solutions. One of our major initiatives for 2025 is strategically expanding from a reactive support model to a proactive partnership approach. Our goal is to play a more strategic role in shaping customer budgets ahead of the next planning cycle to turn OpEx spend from small quick-hitting emergency projects into proactive capital programs. We believe this evolution will not only deepen our customer relationships, but also enhance visibility and predictability to our sales pipeline. Transitioning from an OpEx-type spend to a capital program isn't immediate and could typically take six to twelve months. It could require a facility assessment, energy benchmarking, and/or asset spend analysis. Additionally, these capital programs are typically sold to the C-suite or VP level within an organization as part of an overall budget as opposed to OpEx spend, which is sold at the facility manager level based on existing budget. Our approach is to have a local and/or national account executive working with the on-site account managers to develop the program and deliver this financial sale to the customer. With Amy's executive presence and sales expertise, we are confident in our ability to help coach our sales team to turn a technical sale into a financial sale. As an example, we were recently hired by a national health care owner to perform energy and facility assessments for over 20 different properties. Our sales team will conduct the assessments and then present capital project solutions to help build this customer's long-term spending program. Projects won't be immediate, but this important work should set up for several years of spending that will be more predictable than OpEx reactive spending. The second element of our growth strategy focuses on broadening our service portfolio to position Limbach as a one-stop shop for building owners to capture rising customer demand and tap into higher-margin opportunities. Last quarter, we invested approximately $2 million to expand our climate control rental fleet, positioning ourselves to meet seasonal demand as temperatures climb. This initiative represents a growth opportunity and highlights our commitment to evolving beyond conventional service lines. We continue to make investments to drive ODR revenue growth and increase our value to these customers. Offerings such as digital solutions that manage and monitor the performance of building systems, including data analytics, energy consumption, and sustainability, will allow us to develop new revenue streams, leverage our professional service capabilities to support multi-location regional and national customers in core end markets, and drive energy retrofit and performance optimization for building owners. The third part of our strategy is M&A. We remained active. In July, we completed our largest acquisition to date with the addition of Pioneer Power. As a reminder, Pioneer provides industrial and institutional mechanical solutions to the health care, food, power, utility, oil refining, and other verticals in the Greater Twin Cities region and the Upper Midwest. This transaction directly aligned with our disciplined acquisition criteria. Pioneer brings specialized expertise in our core verticals, and the majority of their business is already focused on working directly with building owners. Additionally, Pioneer expands our footprint in the core Midwest and extends our reach into a new geographic market in the Upper Midwest, bringing our MSAs to 17. Its technical capabilities and service offerings complement ours, and we see strong cultural compatibility between our teams. We are excited to welcome Pioneer's approximate 300 colleagues to our family. The integration process is well underway in terms of systems and operational processes, and our teams are already working together. Since going public in 2016, we have completed six highly selective acquisitions, each the result of disciplined diligence and strategic fit analysis, and have continuously fine-tuned our integration process with every transaction. Behind those six deals are dozens of opportunities we have deliberately passed on, whether due to valuation, limited strategic alignment, or concerns around cultural fit. Our proven integration playbook unfolds in two distinct phases. Phase 1 focuses on system integration, driving fixed cost reduction and leveraging a unified organizational structure and common platform. In addition, we apply gross profit benchmarking and implement robust risk management tools in an effort to ensure operational efficiency and financial discipline. This is typically a 1- to 2-year process. During Phase 2, we establish targeted account strategies, deploy on-site account managers, and introduce evolved Limbach offerings. We also completed the full build-out of dedicated account teams to deepen customer engagement. The duration of Phase 2 can take between 2 to 4 years. Through these ever-evolving value creation actions, our goal is to enhance Pioneer's performance and eventually bring its margins in line with ours, ultimately creating additional stockholder value by acquiring a scalable business at an attractive multiple. We are prioritizing the successful integration of Pioneer while we continue to build and monitor an active M&A pipeline for the future. Overall, our acquisition strategy is grounded in a thoughtful and methodical approach, targeting high-quality companies that align with our values and culture and are committed to building long-term relationships with building owners and delivering essential solutions. This strategy has yielded meaningful results for us. At the same time, we've worked to build the Limbach brand in the market as a trustworthy principal partner. Our goal is to become the first choice for distinguished enterprises looking to join a bigger platform. With a strong pipeline of opportunities, we expect strategic M&A to continue to play an important role in our growth strategy. I would now like to turn to guidance, where we have revised our 2025 outlook. For the full year, we anticipate generating between $650 million and $680 million in revenue with adjusted EBITDA projected in the range of $80 million to $86 million. While integration efforts remain on track with Pioneer, this represents the largest acquisition in our history as a public company. We are approaching our initial projections with a conservative measured outlook. As we gain greater visibility over the coming months as we work through Phase 1 of the integration of Pioneer, we expect to provide an update on the next quarterly call. Additionally, revenue and adjusted EBITDA contributions for the company are not expected to be evenly distributed between the third and fourth quarters as we anticipate a heavier weighting towards Q4. In summary, we are gaining strong momentum and remain committed to creating long-term value for building owners by fostering enduring relationships and becoming an indispensable partner in managing their mission-critical systems. Once again, by operating in 17 MSAs and 6 independent verticals, we ensure there's no single market that defines our trajectory. This structure enables us to absorb location or sector-specific fluctuations while sustaining consistent performance across cycles. For the balance of 2025, our key priorities are threefold: first, drive top-line revenue growth; second, expand relationships through Evolved solutions, which requires training up the sales force to evolve a technical sale into a financial sale; and number three, continue the execution of Phase 1 of the Pioneer integration and build our acquisition pipeline.

Thank you, Mike. Our Form 10-Q and earnings press release filed yesterday provide comprehensive details of our financial results, so I will focus on the highlights of the second quarter. All comparisons are second quarter 2025 versus second quarter 2024, unless otherwise noted. In the second quarter, we generated total revenue of $142.2 million compared to $122.2 million in 2024. Total revenue growth was 16.4%, while ODR revenue grew 31.7% to a quarterly record of $108.9 million, and GCR revenue declined 15.7%. As we have said before, the GCR revenue decline is intentional as we execute our mix shift strategy towards ODR. ODR revenue accounted for 76.6% of total revenue for the second quarter, up from 67.7% in Q2 2024. Total gross profit for the quarter increased 18.9% from $33.5 million to $39.8 million, reflecting the ongoing growth of our ODR segment. Total gross margin on a consolidated basis for the quarter was 28%, up from 27.4% in 2024, driven by the combination of higher-margin ODR revenue and higher quality GCR projects. ODR gross profit comprised 79.3% of the total gross profit dollars or a quarterly record of $31.6 million. ODR gross profit increased $6.2 million or 24.6%, driven by higher revenue despite lower ODR segment margins of 29% compared to 30.6%, resulting from certain ODR-related project write-ups recognized in the period last year that did not recur in the current period. GCR gross profit increased $0.1 million or 1.1% due to higher margins of 24.7% compared to 20.6%, driven by our focus on higher quality projects despite lower revenue. SG&A expense for the second quarter was $26.6 million, an increase of approximately $3.5 million from $23.2 million. This increase includes the addition of the 40 new salespeople Mike mentioned earlier and SG&A associated with Kent Island and Consolidated Mechanical that were not part of the company during the second quarter of 2024. As a percentage of revenue, SG&A expense was 18.7%, down from 19% in the same period last year. We continue to currently expect SG&A for 2025 to be in the target range of 18% to 19% of revenue due to our ongoing investment in growing the ODR business. Adjusted EBITDA for the quarter was $17.9 million, up 30% from $13.8 million in Q2 2024. Adjusted EBITDA margin was 12.6% compared to 11.3% in Q2 last year. Net income for the quarter increased 30.2% from $6 million to $7.8 million, and earnings per diluted share grew 28% from $0.50 to $0.64. Adjusted net income grew 29% from $8.7 million to $11.3 million, and adjusted earnings per diluted share grew 27.4% from $0.73 to $0.93. Turning to cash flow. Our operating cash inflow during the second quarter was $2 million compared to $16.5 million during the second quarter last year, primarily due to the timing of billings that impacted changes in working capital. Free cash flow, defined as cash flow from operating activities less changes in working capital and capital expenditures, excluding our investment in additional rental equipment, was $16.1 million in the second quarter compared to $10.9 million in Q2 last year, representing a $5.2 million increase. The free cash flow conversion of adjusted EBITDA for the quarter was 89.7% versus 78.7%. For the full year '25, we continue to target a free cash flow conversion rate of at least 75% and expect CapEx to have a run rate of approximately $4 million, primarily due to the acceleration of our ODR strategy. This amount excludes an additional investment of $3.5 million in rental equipment for 2025, of which $2.1 million occurred in the first half of the year. Turning to our balance sheet. As of June 30, we had $38.9 million in cash and cash equivalents and total debt of $33.2 million, which includes $10 million borrowed on our revolving credit facility at a hedge rate of 5.37%. At the end of June, we expanded our revolving credit facility from $50 million to $100 million and utilized our expanded credit facility as part of the Pioneer acquisition on July 1. With the expanded facility and our expected cash generation from the business, we believe our balance sheet remains strong, and we are well positioned to support continued organic growth initiatives and strategic M&A transactions.

Our first question comes from Chris Moore with CJS Securities.

Maybe we can start with gross margin. Specifically on the GCR side, I think it was 24.7% for the last two quarters. I was anticipating a significant decline moving forward. I understand you have higher quality projects, so I’m curious about how we should view them this year and next year, and ultimately, what would be considered a normalized level.

Yes. Just from a high-level perspective, we've been really focused, like you said, on the quality to make sure that whatever work that gets sold from a GCR perspective, those opportunities are embedded; they make sense for the overall business as well, too, proper risk management, a lot of stuff that we've learned over the years. So that's part of, obviously, from a margin perspective. But Jayme, do you want to touch upon long-term for the rest of the year?

Yes, if you look back over the past year, it will ebb and flow by each quarter. So from a long-term perspective, we really only guide to the total gross profit line as being that 28% to 29% for 2025. And so you just see it ebb and flow based on how the projects burn in each quarter.

I understand and appreciate your input. Staying on that topic, with Pioneer now included, can we say that although you haven’t separated the ODR from the GCR, both are significant? The contribution of gross margins from Pioneer is likely to be dilutive to overall gross margins in the coming quarters.

Yes. Pioneer is a key part of our value creation strategy, focusing on increasing gross margins. Therefore, you can expect some impacts in the short term as we navigate our integration process and implement our strategy.

And Chris, we're really in our first little bit more than 30 days at this point. Our main focus is on the Phase 1 integration, which involves getting our systems in place, benchmarking gross profit, and ensuring everyone is on the first standard platform. We're taking a careful approach from that perspective and applying all the lessons we've learned. Each deal allows us to continue to tweak, learn, and think about the value creation process. That is definitely the stage we're at with Pioneer right now.

Perfect. And maybe I'll sneak just one last one in more big picture. Mike, you walked through the verticals. Obviously, health care, key driver, industrial manufacturing, I think Pioneer brings much there. Is there one vertical that has a chance to become much more important beyond those two over the next two to three years?

Yes, we've recognized that within these verticals, it is essential to be mission-critical. When considering our expansion, we are really focusing on these six areas due to their critical importance. Our approach has been very measured in this regard. Health care plays a significant role from a marketplace perspective. Looking ahead at potential acquisitions, Pioneer enhances our position in the manufacturer industrial space. As we explore different opportunities, particularly in the Midwest or Southeast, we expect to gain further exposure within vertical markets. The importance of working closely with customers is mission-critical. A major initiative for us right now is to shift short-term operational expenditures into long-term capital programs, which will provide us with greater visibility moving forward. This focus will be evident across all six verticals, but particularly in the three I mentioned earlier.

Our next question comes from Rob Brown with Lake Street Capital.

Just wanted to get your kind of sense on the demand environment, how it's trending and sort of where you're seeing some of the strength in the business?

Yes. Looking back from a vertical market perspective, our model increasingly focuses on proactive sales. We are engaged with customers who need to spend money for repairs. Our goal is to shift their mindset from being reactive to proactive. For instance, in healthcare, while they must address repairs, we strive to work with them on developing capital programs. One example I mentioned earlier involves a national healthcare customer where we are conducting assessments at around 20 locations. This is where a local relationship transitions into a national one, expanding our capital program reach. These 20 locations across our national footprint provide future access opportunities. Our strategy hinges on short-term actions creating long-term demand, and cultivating these types of relationships will enable us to leverage and establish a sustainable long-term revenue source from our customers.

Okay. Great. And then on the GCR kind of declines, I know that's been part of your strategy. But going forward, do you continue to see that business declining? Or does that level off at some point and really maintain at this level?

This year, we are aiming for 70% to 80% owner direct revenue, which translates to 20% to 30% gross commission revenue. We are strongly focusing on increasing our higher-margin owner direct business. Each of our locations is on a different path, and as we make acquisitions, they may still include some gross commission revenue. Our constant aim is to move towards owner direct. However, depending on future acquisitions, the progress of the business may vary. Nonetheless, our commitment to advancing towards owner direct remains unchanged.

Our next question comes from Brian Brophy with Stifel.

Just a quick question on the guidance. Does the change only reflect the contribution from Pioneer? Or was the organic kind of base number tweaked a little bit lower here as well? And if so, what drove the organic change?

Yes. So from the guidance perspective, a lot of this has to do with Pioneer Power. It's our largest acquisition as a public company. So we want to make sure the initial projections are conservative from a measured perspective. And I think as we go from kind of continue from a Phase 1 perspective and kind of the steps that I talked about before, we're going to kind of take a look at that as we go forward.

Okay. And then I guess on the ODR backlog, it fell a little bit sequentially here. Is there anything to call out as notable drivers? And just curious if you're seeing any sort of change in the demand environment or if this is more of just kind of a timing issue on the backlog?

Yes, I think it's really based on timing. The backlog is one component, but it's not the only factor because we could end up using work quickly, especially if it's time and materials. What we're observing is our capacity to work with customers who have budget to spend, but that doesn't necessarily mean it will directly lead to revenue for us. From a sales viewpoint, we are constantly learning. Additionally, we've recently hired our Senior Vice President of Sales, Amy Dorsett, which has been a long-awaited addition. This hire is going to be crucial for our market strategy as we leverage our expertise from various OEM companies to introduce a new element. Oftentimes, converting a technical sale into a financial one that requires return on investment calculations feels like a different language for our sales team. I believe this will be significant as we look ahead to 2026 and 2027 from a sales standpoint.

Okay. And you touched on some of this already. But in regards to some of the sales folks you've hired over the past couple of quarters, particularly the on-site account managers, just curious how that ramp-up is going relative to expectations in terms of their contribution.

Yes. I think any time we bring somebody on, there's always a ramp-up time. Occasionally, we'll be in a situation where we'll have somebody that perfectly aligns up where their account is ready to go. I think as we learn going forward, we hope that, that ramp-up time shortens. From what we've seen, I think relatively from an expectation perspective, the hires that we make to kind of get those true contributions, it takes a decent amount of time. So it's almost like you're making hires for really full year contributions for the following year. So we've done that the last three years and made a real big investment from a sales perspective. So as those accounts mature, as those salespeople mature and their experience level with the company, that's going to lead to a better return. And I think also it will help us from a ramp-up period. But generally, they performed where we thought they were going to perform.

Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Mike McCann for closing comments.

Thank you for listening today and for your continued interest in Limbach. We look forward to connecting with many of you soon. Coming up in September, we are attending the Lake Street Big 9 Conference in New York and the D.A. Davidson Diversified Industrials and Service Conference in Nashville. Have a great rest of your day.

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