Greetings! And welcome to the Limbach Holdings Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeremy Hellman with The Equity Group. Please go ahead, Jeremy.

Thank you very much and good morning everyone. Yesterday, Limbach Holdings issued the announcement of its 2019 second quarter results and filed its Form 10-Q. The company will also be using a slide presentation to accompany this earnings call. The presentation can be found in the Investors section of the company Web site at www.limbachinc.com. The company encourages everyone to review the forward-looking statement disclosure on Slide 2 of the presentation. With that, I'd like to turn the call over to Charlie Bacon, CEO of Limbach Holdings. Please go ahead, Charlie.

Thank you, Jeremy. Good morning to all and thanks for joining us. Joining me today is our Chief Financial Officer, John Jordan. As Jeremy mentioned, we'll be using a presentation deck. We’ll note the page we're referencing in our commentary. We’ll begin with Slide 3. As we’ve noted previously, the company continues to benefit from the diversity of our operations and that remains a key thing for this quarter. During the first half of this year, we experienced solid revenue and new construction contract award growth in several of our regions, particularly in Orlando, Tampa, Ohio, Eastern PA, Los Angeles and our new Southeast Florida office where activity in the healthcare market appears to be accelerating further. While revenue for the quarter was down primarily due to planned reductions in the Mid-Atlantic region, during the quarter we booked four new hospital projects at attractive margins which we believe reflect the favorable supply and demand imbalance globally. One of those projects is a preconstruction work for a very large hospital in our Ohio region. Several years ago we completed another very large hospital on that same campus. It’s great to see the repeat business with that institution and general contractor. We believe that we have demonstrated to them that we are very capable of managing budgets on large complex projects through the preconstruction and engineering phase through the support of Limbach Engineering and Design Services, or LEDs as we call it. LEDs continues to be a strong differentiator for us. Our backlog includes the preconstruction base fee for this large hospital project. The actual construction value will be booked in a later period once we agree upon the contract value. Growth in the New England region was driven in part by our strategic expansion into plumbing trades in 2018, which was…

Thanks, Charlie. Good morning, everyone. I’ll pick up the review on Slide 5. As Charlie noted, the planned reduction in Mid-Atlantic revenues massed growth elsewhere and our backlog continues to give us visibility when it comes to top line growth. Overall, our second quarter revenues declined 4.9% to 132.8 million from 139.5 million in 2018. To give that some additional context, our revenues in Mid-Atlantic were 13.4 million lower in the second quarter of 2019 compared to the second quarter of 2018. So absent that, revenues from our other nine regions was up 6.7 million or 6.2% year-over-year. Year-to-date consolidated revenues, including Mid-Atlantic, increased 2.5% to 266.7 million as the diversity of our operations overcame the managed softness in Mid-Atlantic. Due to generally improved execution and a business mix richer in service work, gross margins in the second quarter improved 180 basis points to 13.1% despite the net write down to 1.6 million in the quarter. We expect write ups and write downs in each period which is normal course. We certainly want to see more write ups than write downs. In the quarter, our Southern California branch faced some setbacks on a few projects, including some in their new plumbing offering which was added in 2018. While we are disappointed with the outcomes, we have corrected our approach to our plumbing services in that market and we expect improvement in the coming quarters. We are pursuing open change orders and claims on a few of the Southern California projects and we expect recovery in a future period. Historically, our recognition of contract amounts related to change orders that are in the approval process with the customer and claims have turned out to be conservative and in almost all cases have maintained the book margin or produced upside in future…

Thanks, John. Turning to Slide 9 and some final thoughts. First, we are on track to hit our operating and financial goals for the year. To that end, we are reaffirming guidance for the year which is for revenues of approximately 560 million and adjusted EBITDA of 22.5 million. Diversification continues to be a primary focus for us as diversity has set us up well for continued growth. Second, I want to return to the topic of retention payments we incurred in the quarter. Those of you that followed Limbach for some time know that last year we had one region that really struggled and that weighed on our business overall. The struggles of that one region did impact business decisions we made at other branches, especially when it came to variable compensation. At a time when the economy was growing nicely and our industry was also doing very well, we had to go to the employees in those other nine regions and inform them we did not make our annual bonus payments. Within that one branch that struggled, we have many outstanding employees that did their jobs admirably day-in and day-out representing Limbach very well. Our management team and the Board of Directors places a great deal of emphasis on our corporate culture with worker safety being a paramount concern but also the day-to-day worker happiness and satisfaction. We want to attract top talent in our industry and have those folks be proud to come to work in a Limbach truck, wearing a Limbach hardhat every day. We just finished our annual employee survey known as the We Care survey and despite the setback of not paying bonuses, we had the highest employee participation at 81% and received the best numerical score in the 15 years we have conducted…

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions]. Our first question today is coming from Alex Rygiel from B. Riley FBR. Your line is now live.

Thank you. Good morning, Charlie and John; very nice quarter.

Good morning.

Charlie, it definitely sounded like your backlog is “understated.” Could you dig into that a little bit further so we can better appreciate what you mean by commitments and what the timeline of those commitments is going to be as it comes through your P&L?

Sure. We’ve always, since we went public, commented on each earnings call about our promised and probable figures. So this particular quarter it’s roughly 400 million of additional commitments we have from customers where we haven’t agreed upon the final construction price yet, but we’re working our way through preconstruction and engineering basically negotiating the deals. Once we have a firm fixed number and we have the paperwork in hand, we’ll book those projects. Historically, we haven’t seen anything fall out of bed that’s already promised. Generally we’re committed. What’s happening in our marketplace right now is you have a lot of customers out there that have woken up, mainly the building owners, that the traditional process of designing something, putting it out for bid and then having construction happen is a flawed process. What happens in just about every project you have an owner who has a desire to build something, they hire the design professionals and design professionals are also – they create great things and we’ve got to go build them. We love that. But from a budget management perspective, the client – the building owner has a general view of what it’s going to cost and they’re thinking about financing at a certain number. But when they go through that first round of budgeting where they actually bid the project, they find out they’re way over budget. And quite frankly we love that because our engineering group comes in and then we reengineer the project and get it back into budget. But what’s happened is owners are now waking up that that process is flawed. Why not bring Limbach in early and have them work with the architects, with the owner, with a general contractor if they have one onboard, because sometimes we’re hired before the…

Sure, it does; very helpful. And could you also comment on sort of the longer-term outlook for the margin profile of the two businesses? Obviously construction’s had some years in the past that was, call it, mid-single digits driving towards higher single digits. Services business is already in that high single digit range. So long term, could you bracket some ranges for those two segments and where you think margins can get to?

Let me break each one down. First of all with construction, we see more opportunity there and what we’re doing right now where we have in particular regions a pretty solid backlog for the future and where we see a solid pipeline, we’re increasing our pricing. It’s basic supply and demand theory, right. And we have labor and the general contractors need that labor. So in one particular case, we just reviewed two projects in one of our regions and we looked at their backlog and we basically said to them, look, we see opportunity here and let’s push the envelope. So we increased the margin by 200 basis points and we’ll see how that plays out. Maybe we won’t land the work and we may have to rethink that, but if we secure the work that’s great and that should flow through to our bottom line. So there’s the opportunity where we’ve been pricing – I don’t want to say how we’re pricing our construction parts publicly, but we do see opportunity for improvement there whether it’s 100 basis points, 200 basis points, we see that opportunity in front of us in a number of regions. On the service side, we’re pushing pretty hard – we actually went through a bit of a transformation in our company. Service was a slower portion of our business years ago. And when you look at the difference between construction and service, service margins are much higher. Now we actually moved some of our great construction people over to our service side of the house, but quite frankly they were used to the lower margins in construction. So we had to kind of get those guys thinking, look, you don’t price things at X%, you basically price it at that number when it…

Very helpful. Thank you.

Thank you.

Thank you. Our next question is coming from Zane Karimi from D.A. Davidson. Your line is now live.

Hi. Good morning, gentlemen.

Good morning.

So you talked a little bit about backlog there and the growth opportunities, but how far into 2020 do you have visibility with the current backlog status?

Geez, I don’t have that at my fingertips in terms of a percent cover. What I can tell you is that we’re actually entering our planning process right now. We kicked it off two weeks ago. It’s a three-year planning process that we do. Our goal around September when the plans are due in and we start our review process, getting ready for the future Board presentation, we want to see 65% coverage of our forecasted revenue for next year. John, I don’t know if you could comment any further. I just don’t have any figures because we just haven’t done that work yet. Can you add any other color to that or respond to that question differently here?

Yes, to your point, Charlie, we really haven’t gotten that deep into it yet but we can see with the burn that’s going to occur in 2019 for the coverage coming from the existing backlog, it does give us considerable coverage sitting here in the middle of August for 2020. We just haven’t scheduled out that far yet at a global level. The branches do revenue burn on a project-by-project basis, so we have the data. We just haven’t collected it all into the planning process as Charlie was referring to. But as we go through that process over the next four to six weeks, we will be able to quantify that in the future.

The other thing I’ll just throw [ph] one there, but the promised work that we talk about, there’s some terrific work there that will be burning up some in 2020 but a lot of it’s given us backlog coverage for '21 and '23. The big, big hospital project we landed we’re in preconstruction on that and engineering, we will really resolve that final cost figure probably to the middle of next year, maybe even to the third quarter, maybe a year from now. It’s that big of a job, it’s huge and we’re really excited about that. But that will give us some very nice coverage going into '21, into '22 and a little bit into '23. So we’re starting to see visibility way beyond '20, which is great to have that visibility.

Yes, it sounds great there. And then you talked about a little bit about Orlando, Tampa and New England, but in particular can you point to a certain region where you’re experiencing the fastest growth and are you seeing a slowdown in any region? And then with regards to the Mid-Atlantic progression, how is the ramp up in activity in the Mid-Atlantic progressing and how are you managing the growth there?

So let’s just talk about where the fastest growth is happening. Right now I’m blown away with Florida. It’s just absolutely amazing what’s going on down there. Just last week I read another article that in St. Petersburg, a developer just presented a $2 billion redevelopment of an area just south of the main business district. And we’re seeing the whole Tampa waterfront is being redeveloped by Jeff Vinik who’s the owner of the hockey team and he’s doing an amazing thing to regrow or basically just redevelop Tampa. It’s amazing what’s going on down there. You got the whole Central Florida area going crazy with all the theme parks. There’s a massive spend at Disney and I mentioned Epic Universal. And then you finally have Southeast Florida, we opened up an office which we refer to as the West Palm Beach office, but it’s really Boynton Beach. And we decided to open up the office there last year which we did this year to really get a foothold in Southeast Florida. And we don’t do any condominiums. We just won’t touch those with a 10-foot pole, but healthcare, higher education it’s amazing the opportunities that are in front of us. We’re not playing in the transportation area down there, but that’s another market for us. All the airports are going crazy down there with redevelopment. So it’s kind of a backup sector, if you want. But I want – and I could comment on Detroit. It’s amazing what’s going on up there with the rebirth of Detroit. Columbus, let me just go there for a moment. I was there three weeks ago and I met with our number one customer in that market. That particular customer has in backlog over $1 billion of work and they went and told…

Okay. I appreciate that. And one last one, if I may. How do you feel about M&A today? I know you mentioned it a little earlier and when do you begin getting comfortable with new opportunities?

Yes, so we started – after we got through what we had to get through in '18, we entered '19 with a plan to get back into the marketplace looking at opportunities and Matt Katz who’s our Executive Vice President in charge of Acquisitions and Capital Markets, he continued to keep things warm through '18. But as we entered '19, we got aggressive on some different opportunities. We have several different companies we’re looking at that we like. We think strategically we’re still interested and looking at the Southeast and also we’re intrigued with industrial and that’s on the heels of the work we did last year on the other opportunity that unfortunately we couldn’t get the closure on. But industrial gets us closer to the owner, closer to the owner which is a big driving strategic play here at the company, be it service or having those owner direct relationships with a shotgun marriage, as I mentioned earlier, but industrial tends to be quick-hitting, in and out plant type work and we’re very intrigued with that. We do a bit of that right now in certain regions but we think that might be an opportunity for us to – a better toehold by looking at an acquisition. So we’ve got some different things in play. I’m not going to put a timeline on anything, but we are definitely on the hunt.

Thank you.

Thank you. Our next question today is coming from Gerry Sweeney from ROTH Capital Partners. Your line is now live.

Good morning, Charlie. How are you doing?

Good morning, Gerry. Good. Yourself?

I’m doing well. Thanks. Just wanted to touch a little bit more on the margin front and specifically your guidance. Taking a look – we’ve talked about client demand, pricing going up, et cetera, but by maintaining your guidance for the rest of the year, specifically on the EBITDA side, it sort of implies maybe a step up in margins in the second half of this year. How do we look at that and is that a fair sort of view that I’m taking on?

Yes. Well, first of all I just want to – again, we thought it was the right thing to do in Q2 to make the retention payment and we felt comfortable doing that with maintaining guidance based on how things are looking for the company in terms of our backlog coverage and also the pipeline. In regards to margin, when you actually dissect last year 2018 and we look at the second half of '18 and pull out Mid-Atlantic where we took our hit, it was a remarkable second half. We did extremely well. John, I don’t want to misstate a figure, but if you remove Mid-Atlantic from last year’s second half, do you have that number available?

As far as the gross margin percentage?

Gross margin percentage and actual number or I don’t know if we can share that.

I’ll do some research, Gerry, and we can circle back on that.

Okay.

But we did extremely well last year and there’s no indication that we’re not going to have a repeat of what we did last year. Across the board we’re performing extremely well. We obviously had the big hiccup last year, but we’ve got a lot of opportunity in the business right now for upside and we expect to see some upside coming to the business this year. So we’re comfortable with reconfirmation of guidance.

Okay, great. That’s it from my end. I really appreciate it. Thanks.

Okay, Gerry.

Thank you. [Operator Instructions]. Our next question today is coming from Mark Henry from Midwood Capital. Your line is now live.

Hi. Good morning. Thanks for taking my questions. I’ve got a few. Just starting with free cash flow. So you guys burned about 16.8 million through the first half of this year and on the last earnings call you said that you expected to generate between 10 million and 15 million for the full year which implies 27 million to 32 million of free cash flow generation in the back half of the year on only $15 million EBITDA. I guess what gives you confidence that you’ll be able to generate this level of free cash flow? And if you use that to pay down debt could get you from 3x trailing that leverage to under half a turn of leverage by the end of the year. Just want to understand the confidence in the free cash flow build through the back half.

Go ahead, John.

Yes, from a free cash flow, we continue to monitor that on a regular basis and it will be towards the lower end of that range that was provided in the first quarter. As far as how it’s going to be generated, we are expecting significant cash generation in the second half of the year. I made reference to some revised policies and procedures that we have in place. There are several projects that are over-billed that will continue to be over-billed which will continue to produce positive cash flow. The service business growth in the second half produces additional cash. With the excess cash, we really don’t have any plans to retire the debt early. There’s some terms in the current credit agreement that make it pretty expensive to pay it off early. So any free cash flow that would be generated would be reinvested in the organic growth of the business to continue to push the business forward.

Okay. I’m just looking at – so you said you’re going to be at the low end of the guidance. That implies $27 million of free cash flow. And then I look at your stock today, you guys have a $45 million market cap. So that’s very significant generation of cash relative to the market cap. Okay. And then number two, I guess on the write downs, looks like you guys took a $1.9 million write down on three construction projects in Southern California and just given the track record of all the write downs last year which really thrust your stock, how can you give the investment community comfort that this is not the start of another stream of write downs like we saw in the Mid-Atlantic?

Look, one was – the reason that we took a hit in Southern California it had to do with our plumbing expansion. So we got into plumbing out there like we did up in New England which went extremely well. Southern California, we started pricing some work back in 2018 and when we look at that pricing, we realized that it was probably a bit on the light side. We started getting into plumbing and it got a bit aggressive to get our market share going. We’ve since corrected that and the projects that we took the lower margins on and priced the labor a bit less than we should have, they’re nearing completion, they’re just about done. We took the pain through the books during that period. We also have another project out of LAX. It’s called the Midfield Terminal project. That project is a mega project. We’ve done many, many projects out of LAX. And historically we’ve done extremely well. That one project has faced some delays and those delays were because they’re going to expand the Midfield Terminal, there’s another terminal that goes adjacent to it. But as a result they had to slow down the project. They went through some redesigns. There were some cost impacts to that. So we had to take a conservative view in terms of our cost to complete that project, which is nearing completion through the books. It wasn’t a large portion of that hit. It was actually minor in nature. But we also have a claim in for that, for future recovery. So we’re pricing that right now, working with the general contractor who’s working with the end customer to get that all resolved. So the plumbing, that took a bit of a hit. We’ve changed our pricing strategies out there. That’s all been corrected. That work is just about complete, so the pain has been put through the books. And as far as LAX is concerned, we have a pretty good track record of positive recovery out there. We just need to work our way through the process.

Okay. And then just one last one for me. Can you guys quantify the dollar amount of cash that you guys expect to come into the business from change orders in the back half of the year?

John, I think that’s a tough figure to put on the table because some of it’s in our control, some of it’s out of our control. John, do you have a response to that?

Yes. Mark, as far as cash to come into the business from change orders, that’s really a job-by-job situation that in some cases is somewhat out of our control. It would depend on the timing of the change order approval for us to bill and that approval needs to go not only through the customer but also through the end user. I can say that we do have a fair amount of money out there in change orders, but we are continuing to convert them. There is a big push in all the regions to push change orders to contribute to the cash generation that we were speaking about earlier. We’re working through that process right now. So to try to quantify it that’s a statistic that we typically don’t track. But in general we do look for 80% of our projects to produce gross margin gains which from what they were booked at, which would indicate additional cash generation. But to try to quantify that for dollars for the second half, we really don’t track that statistic.

Okay. And just one last comment for me. So assuming no cash in change orders and assuming you guys generate the free cash flow that you guys expect for the back half, the stock is trading at 3x EBITDA. You’ve got peers trading at 7x to 9x EBITDA. How do we get from a 3x multiple to an 8x multiple? What does management believe it has to do to get that multiple in the public market?

Look, we took a hit last year no doubt because of what happened and we paid the price. So I was happy to see the recovery of the share price since we got through that news and we continue to trend the way we expect it to trend coming out of that hole. So I think we have to build confidence back up in the market. And two, we are looking at continued expansion organic but we’re also looking at certain acquisition activity which was always the play on being a public company. We need to leverage some of our overheads here at the company. We do expect here in the midterm we want to north of $1 billion in revenue. A piece of that clearly is continued organic growth but we’re also looking to not do a rollup but do a nice steady flow of strategic, I call them surgical acquisitions, and those are in play. So we continue to work that. And when we’re ready with the right deal, we’ll announce. But we’re going to continue to do what we said we were going to do both organic as well as on the acquisition front.

Okay, great.

Mark, just to clarify one thing. You were asking about cash generated from change orders and then you made the comment you’re assuming no cash from change orders [indiscernible] that’s a process that needs to work through negotiations with the owner and the general contractor to get resolution. But the change orders, cash generation, billing, collections is a normal process. So there will definitely be cash generated in the second half of the year through change orders. The claims on a couple of the big projects we’ve assumed no cash generation, no margin contribution from those in the second half of the year. I just want to clarify to make sure that we weren’t confusing some terms there.

All right, great. Thank you so much for taking my questions and good luck.

Thank you, Mark.

Thank you.

Thank you. Our next question today is coming from Mike Hughes from SGF Capital. Your line is now live.

Just a few follow-up questions on the last caller’s question. So what percent of your revenue in the quarter was from the plumbing business in Southern California?

Oh, geez. John, I don’t have that figure?

We don’t have that plumbing broken down, but Mike I would say it’s a pretty small percentage of the total --

…which is less than 5%?

Yes. I would say less than 5% of the total company’s revenue for the quarter.

Okay. So the write downs in Southern California as a percentage of plumbing revenue were very, very material, correct?

Yes, they were.

Okay. And I thought you had these issues behind you, so is there anything that we should take away from Southern California process, changes you’ve made so this doesn’t happen again?

Yes, that’s exactly what we’ve done. Our COO has been spending quite a bit of time out in California just looking at that particular plumbing situation. We have some very good talent out there. But what the price the projects in 2018, they just got too aggressive on kind of what we call our mix of crews, meaning you’re a full blown craft worker who’s been in the business for 20 years, very experience, makes for higher wage and then you have the apprentices that come in and you put that crew mix together and then you price it that way. What we found out is they were getting too aggressive on figuring too many apprentices and as a result we had to refigure our pricing. So what we’re doing going forward is we’ve increased our pricing on plumbing out there. We can’t do it as cheap as we thought we could and it was a bit of a learning curve and it was expensive no doubt, but we’re excited about the future out there in terms of now that we have both mechanical piping which is chilled water piping, such as that, sheet metal and now the plumbing it provides a three-trait package which is much more attractive in that marketplace which will allow us a nice steady growth by selling all three traits as opposed to just two traits. So we had to do the pricing correction, it was a mistake. It shouldn’t have happened, but we fixed it.

And when did you realize there was an issue there?

A couple of months ago during the quarter and that’s when we did a full blown review of the remaining plumbing work that they have in their backlog and we made adjustments and changes.

Okay. I guess I just have one remaining comment. There was a large sale of your stock in late May and I think two of the individuals were on your Board. Given you recognized this problem a couple of months ago that sale does not look good. That’s just my comment.

Yes, I guess when you take a look at timing, the changes that we had to do in what we had to adjust for was normal process, meaning we identified there was an issue. We do our homework and then the management does what it has to do and we recorded it properly and that’s all been confirmed with all the reviews that we have to do in our company to produce our earnings with the stringent oversight we have, it was all does properly.

I’m not questioning whether you’ve done anything improper. I’m sure the quarter really is what you just reported. The sale of the stock in late May does not look good given it involved two directors in this quarter is materially short of street expectations. That’s my only point and I appreciate your time. Thank you.

Thank you. That does conclude today’s question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.

Thank you. I appreciate all the questions this morning and I want to thank everybody for joining us. I’m quite pleased with our operational improvements in 2019. We’ve made some small investments across the business to allow our growth to continue and improve our margins in this heated market. We want to take advantage of this boom we’re enjoying, apply smart growth with our construction tied to available craft labor. Continue our rapid expansion of our service segment. And we look forward speaking with you again on the third quarter. Thank you for your interest and your participation today. 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.