Greetings. Welcome to Limbach Holdings Fourth Quarter 2021 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Jeremy Hellman of the Equity Group. Thank you. You may begin.

Thank you very much and good morning, everyone. Yesterday, Limbach Holdings announced its fourth quarter and full year 2021 results and filed its Form 10-K for the fiscal year ended December 31, 2021. During this call, the company will be reviewing those 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. With that, I will turn the call over to Charlie Bacon, the President and Chief Executive Officer of Limbach Holdings.

Good morning, everyone and thanks for joining us. Joining me today is our Chief Financial Officer, Jayme Brooks; our Chief Operating Officer, Mike McCann; and our Acquisition and Capital Markets, Executive Vice President, Matthew Katz. We closed out 2021 with a strong fourth quarter despite the ongoing challenges of operating through a pandemic and dealing with acute supply chain issues that are impacting our industry. Our fourth quarter results built on the excellent third quarter we reported in November and continue to demonstrate the successful execution of the strategy we have laid out for our stakeholders over the last 2 years. With the year now complete, we can report that we met financial guidance we presented last May for both consolidated revenue and adjusted EBITDA. Mike and Jayme will discuss our financial results in more detail, but for now, I’d like to point out a few financial highlights from the fourth quarter. ODR revenue grew by 10.6% compared to the prior year quarter and ODR backlog grew by 92.5%, with year-on-year sales up over 25%. ODR gross margin was 28.5%, above our modeling range of 25% to 28%. The GCR gross margin was 16.4%, well above our modeling range of 10.5% to 11.5% and our consolidated gross margin was 20.1%. Ultimately, our focus on growing the ODR business while concurrently rationalizing the GCR business to focus on higher margin work is all about driving bottom line profitability. Our segment results bear this out as GCR segment revenues declined 20.6% for the full year, yet gross profit improved by approximately $300,000. As we have said previously, over the near-term, we are prepared to trade lower GCR revenue for higher GCR gross profit dollars and that’s what we saw in the fourth quarter. Fourth quarter net income of $4.3 million set another…

Thanks, Charlie. Our earnings press release and our Form 10-K contain a detailed review of our financials. And with that in mind, I will focus my discussion on some key areas. I’ll start with gross margins. During the fourth quarter, we realized an ODR margin of 28.5%, which was slightly above the 25% to 28% range, we think is appropriate for modeling purposes. Gross margin was down 130 basis points sequentially from the third quarter, and we attribute that to project and service mix. As noted on prior calls, it has been our expectation that ODR margins would revert to the lower end of the range. As the business mix, within the ODR segment, shifts toward a greater contribution from midsized and large ODR projects. Those projects carry comparatively lower margins with maintenance contracts and timing material work. GCR margin was 16.4% in the fourth quarter and 13% for the full year, which is well ahead of the 10.5% to 11.5% range we have previously discussed. The GCR gross margin in Q4 should not be extrapolated out as the quarter benefited from an ideal mix of project cycle timing and the positive impact of a disputed claim that settled from $1.3 million above the amount that was carried on the books, resulting in a write-up. Within our GCR segment, we have referenced in the past that we have disputed claims on several projects where we incurred delays and financial impacts due to others. We continue to aggressively pursue the other outstanding disputes and the timing of dispute resolution on these claims is always a challenge. However, on a positive note, we recorded no new significant disputed claims in 2021. Gross margin results for the full year were also positively impacted by our continued focus on project selection and the emphasis…

Thanks, James, and good morning. First, I want to acknowledge all the Limbach employees for their outstanding work during the fourth quarter and all of last year. We set ambitious goals, both financially and strategically, and we accomplished the majority of those. I’m very proud of our team members. Supply chain issues continue to be at the forefront of many people’s minds, so I want to provide some color on how we’re reacting to those issues, our primary challenges with equipment deliveries. In the ODR segment, much of our work consisted in selling equipment like chillers and air handlers. Lead times for chillers have nearly doubled compared to what they were pre-pandemic. In addition to extended lead times, there has also been an increase in miss delivery schedules, scheduling adjustments due to unforeseen delays in equipment deliveries results in reduced efficiency and costs and added costs. In talking with our suppliers and manufacturers, we don’t expect relief on production and delivery times until late 2022 and into early 2023. We’re responding to these market conditions by adding in varying levels of contingency into our scheduling. Given the reality we’re seeing in the field, it makes sense to expect and plan for these disruptions, which we expect to slowly resolve over the course of the year. We are also urging our customers to make their equipment selection decisions as quickly as possible, and where necessary, we’re supporting customers in identifying and evaluating equipment alternatives. When I look at the ongoing impacts of this, I see revenue shifting from the first half to the second half of the year. One interesting benefit we’ve realized from the supply chain issues is that our time and material services have experienced a 44% increase year-over-year. That trend seems to be continuing to Q1 of 2022.…

Thanks Mike. So first, let me take a moment to further comment on Jay Marshall, and then I’ll pivot to acquisition activity and the M&A environment more broadly. First, with respect to Jake Marshall, the business has really only been a part of the Limbach family now for a few months. But in that short time, the team in [indiscernible] has just been terrific, and we really couldn’t have asked for a better partnership there’s been no shortage of learning opportunities going in both directions, as Mike explained. And there’s also no shortage of business opportunities in that market. That’s proven to be consistent with how we expected the year to develop coming out of the industrial cycle trough in early ‘21. It’s very busy there, and the team continues to sell really good work. And just the market environment in the Tennessee footprint generally is as strong as I think it’s really ever been, and we continue to feel really good about being there and the opportunities that, that market presents. So stepping back and looking at the M&A environment, and more broadly, in general across the universe, we’re seeing strong levels of activity in what I would describe as the prospecting phase, the exploratory phase and also the nurturing phase vis-à-vis potential acquisition candidates. It feels like a really healthy, but balanced market right now. Not everything that we’re looking at is going to get to the finish line, but the volume of interesting businesses that we are exploring and speaking with is really as strong as I can ever remember having experienced. We are pretty picky acquirers and not every great business is going to turn out to be a great business for Limbach. But we like being busy, and we certainly are at the moment, and we’re pleased to be looking at businesses with this quality and led by folks that really share the same core values as we do. So expect to continue to be busy through the first and second quarters and into the back half of the year.

Thanks, Matt. I’m going to close with some comments on our sales activity, and then we’ll open it up for questions. Recall that a year ago, there was a significant pause in activity as everyone was still feeling their way through how to operate in the pandemic. Proposal activity thus far in 2022 is well above what we were seeing at this time last year. And in response, we continue to evaluate needed sales resources in the markets that offer the most attractive returns. With the global supply chain issues, we have seen a nice increase in time and material work as aging equipment requires additional maintenance. Until the supply chain issue is resolved, we expect to see a strong contribution from time and material work. While the T&M revenue was good news, the supply chain matters continue to impact our ability to secure quick hitting equipment change-out projects if a customer is locked into certain specified equipment. As of right now, we see this beginning really an issue into early 2023. Looking at 2022 thus far, Limbach has been awarded several major building project contracts totaling approximately $95 million, which will be executed on into 2024, including a new pharmaceutical research and development facility in Boston, and two central utility plants, one in Washington, D.C. and the other in Marco Island, Florida. Also included in the total is $22 million of new awards secured by Jake Marshall for various industrial and institutional projects in the Tennessee market. This is quite a nice start for the year. In the ODR segment, our maintenance base continues to grow, and as a reminder, those maintenance contracts can lead to other higher-margin, quick-hitting, small-capital projects, which are often performed on a T&M basis along with emergency repairs. What I refer to investment to…

Thank you. [Operator Instructions] Our first question is from Rob Brown with Lake Street Capital. Please proceed.

Good morning.

Good morning, Rob.

On the current environment, just wanted to get a sense of, are you seeing projects just shifting out, but you maintain your projects, but the timing gets delayed a little bit? Or do you see projects really new starts getting delayed? Or what’s the impact of sort of supply chain issues at this point?

Rob, thanks for the question. It’s interesting. I think this partially relates to our shift to. In general, the biggest factor right now in our industry is definitely equipment. We had commodity type questions that were 12 to 18 months ago. But right now, it’s equipment and the equipment lead times are nearly double what they were before. That especially impacts on the owner-direct work, which tends to be more equipment-driven versus the larger GCR work, which has equipment, but has an additional labor component that the owner-direct work tends to be at less risk. So we’re really closely watching equipment lead times. I think at some point here, as I mentioned, they will start to have some relief on those. But I think from an owner direct percent – owner direct side, there’s older equipment that has to be replaced. So I think any deferred capital expenditures that happen, we’re finally in a position now where those expenditures – those building owners have to make those investments. It’s just a matter of getting the equipment in order for them to make those investments. It’s kind of the position that we’re in right now. Larger projects, we continue to be very selective. I think price certainty is – from a perspective on larger GCR work is definitely on the forefront of a lot of building owners’ minds. So completely equipment-driven really at this point, and we’re really closely watching it.

That’s great color. Thank you. And then you talked about being selective on projects. How is the margin profile of new projects looking at this point? Do you feel like that margin can continue to improve sort of on average? Or do you feel like it’s stable? How would you characterize it, I guess, specifically around GCR?

Yes. Look, I think the better returns that we’re presenting now a result of what we’ve done over the past couple of years between risk management, proper selection of projects, higher quality jobs. But we’ve been pushing the margins on the ODR front, we continue to push, and it’s going to be interesting to see the results over the next couple of years as we really educate our sales force to go for it just increased the margin by 200 basis points, give it a shot. On the GCR side, we are pretty much holding firm on certain levels of margin. Of course, we always look at the risk and opportunity but we are pushing hard to beat that range that we’re providing for modeling purposes. And we’re winning work on a regular basis. We’re losing some work. And so people get disappointed that we lost the project, but we’re like, no, that’s fine. Let’s deploy our human capital on the projects where we can get the greatest return. So that’s the way we’re looking at it right now, Rob, is to just really get the greatest return off of our great people that work for this company. It’s almost a worrying for our staff when they get on a job that maybe doesn’t give us a good return. And it becomes a tougher project, and I think our staff are pretty pumped up that we’re holding firm that we want them to get on healthy projects that are going to have really strong outcomes. And yes, we lose one, that’s okay. Let’s go after the next one. And quite frankly, the market is that busy. We can be selective, and that’s what we’re doing.

Excellent. Thank you. I will turn it over.

Thanks, Rob.

[Operator Instructions] Our next question comes from Chip Moore with EF. Please proceed.

Hey, good morning. Thanks for taking my question, guys.

Good morning, Chip.

What to ask about GCR margin is obviously very strong this quarter and you called out some of the mix and the claims settlement. Maybe you can expand on that and help us think about a normalized margin just for the quarter, but then for the year, 13%, very strong. You talked about 11% to 12% now as a conservative starting point. What are some of the puts and takes there and potential to outperform?

Yes. On the claim resolution, we were quite pleased. We held firm. We were hoping to get that resolved quicker but we held our ground and we left that claim situation, quite frankly, in a very good position. Very proud of the people that negotiated that. They did a great job. And we’ve got several more that we’re working on. So that created some nice upside to the business, no doubt. So that pushed the margin up. But I think the modeling between 11% and 12%, and we increased it slightly for a conservative view from previous modeling guidance, but we think that’s the proper way to look at it right now. And as our quarters go by, we’ll provide further updates on our progress. But when I look at – again, I’m going to reinforce this. A couple of years ago, we put the risk management processes in place for better project selection. We’re pushing the margins up. We want to continue to execute and execute well and deliver improving margins. But I think, from a modeling perspective, Chip, we think the 11% to 12% is the way to go right now.

Got it. That’s helpful. And maybe if I shift to some of the supply chain impacts, I guess, particularly on the ODR side, you talked about the lead times for chillers and air handlers and things like this. Did that hold back sales materially at all this quarter? And then as we think about sort of that second half weighting this year, any color you can give us there would be helpful? Thanks, guys.

Sure. So first of all, on sales with supply chain, what’s kind of interesting right now. We’re using that to our advantage at pushing our customer base to make decisions. In other words, if – in the past, you might have a customer take 3 or 4 months to make a decision on a piece of equipment and to go forward with a retrofit. Now we’re urging them, look, we need to lock this in at the pricing today because the pricing will go up, plus we don’t know what’s going to happen with manufacturing, could it improve or could it get worse? So that’s actually working in our favor to get decisions quicker. Unfortunately, though, if I look back at the late half of Q3 into Q4, there was about $20 million of revenue, approximately $20 million of revenue of higher-margin work that got pushed forward because we couldn’t get the equipment, they missed their delivery dates and that was unfortunate, we could have a much better year last year. But from a standpoint of kind of that continuation of the supply chain problem, we don’t expect that to improve until early – maybe late this year or early ‘23. We just had a senior management call with Johnson Controls, who is a major equipment supplier for us last week. We had four of their senior executives on the call, one person in particular who was responsible for equipment production. And he reinforced the issue of anything custom you’re looking at a year to get anything custom. So if we sell a project today, that is a custom piece of equipment, it’s going to revenue next year. As far as some positive news, though, he did share that they’re starting to catch up with standard equipment, meaning off-the-shelf equipment. It’s not back anywhere near what it was pre-pandemic, but they’re starting to see come to log jam eats a bit, and they’re starting to catch up with demand. So that was really positive news for us. We’re going to have to talk to our customer base that they have a need for an equipment to switch out or, for that matter, even new construction. We’re going to try to convince them to go with the off-the-shelf product as opposed to a custom piece of equipment. Unfortunately, in many cases, with some of the sophisticated projects we work on, it has to be custom. But where we can push for the alternative, we’re going to be doing that. So again, it’s – supply chain is kind of interesting. We’re taking advantage of it in certain respects. It’s also pushing our T&M up, as we mentioned in our prepared remarks. We’re pushing clients to make decisions quicker, but unfortunately, some of that work is going to continue to lag as we wait for the equipment to come in.

Understood. No, that’s super helpful. And maybe if I could sneak just one last one in that you did talk about Jake Marshall and some of the opportunities you’re seeing there. I know it’s early, but I think you also called out some of the building in the auto sector. Are you actively bidding on some of those opportunities?

Well, first of all, Jake Marshall is very busy, which is great, and it was great to see them pick up $22 million of new works here at the beginning of the year, which was just awesome to see. There is the Ford plant that’s being built out there, that’s a $6 billion investment. That’s currently kind of in planning, and when it goes into construction with areas that we would be interested in, we will look at it. We will price it appropriately. If we can pick some of it up, that would be great, but Tennessee seems to be a hot spot of activity right now. We are pretty excited about it, whether it’s things like the EV plant for Ford or all the ancillary plants that go around a big production facility like that, there is going to be quite a bit of opportunity. So, the answer is, we are looking at it. And if we could find the right opportunity, right margins that we are looking for, we will take it on.

Perfect. Alright. Thank you very much.

Thank you.

Our next question is from Jon Old with Long Meadow Investors. Please proceed.

Hi everyone. Thanks for the call and congrats on the fourth quarter. Charlie, I am just curious, do you see the GCR segment after sort of the rationalization in the last year and purposeful decline for margin expansions, do you see that leveling out now, or do you think that will continue? So, do you think the business sort of plays flat or grows a little bit going forward, or is it – are you going to continue to maybe line to…?

Great question, Jon. In fact, thank you for asking it. When we look at the business, first of all, you got to understand our mission at this point is to keep growing that ODR piece as aggressively as we can. I was very pleased with the sales. We are up 25% year-on-year for the ODR segment. The GCR segment we are really looking at each business unit and rationalizing their execution. Can they produce the margin, can they produce the cash that we need them to, so in the branches that have been very successful over the years, whether it’s building small or large-scale projects, we are going to continue. And the branches that we look at them and they are saying, I can get some GCR work, but it’s at this margin, it’s going to be maybe negative cash flow, we are just not doing it. One particular branch we looked at last year, we just decided, look, just go straight ODR, straight ODR. You are going to do so much better. And it didn’t take long in that conversation to just work through the math and show them the numbers and everybody agreed. So, we shifted those assets over to ODR, including the SG&A. So, as we go forward, I can see GCR in certain business units continuing to grow. In other units, we are going to continue to contract or maybe even stop. There is no question about it. ODR produces much better margin, much better bottom line and positive cash flow. It’s just much better. Mike, do you have anything else you would like to share on that?

No, I would agree. It’s – I think when we look at the return in the gross profit margins, our employees, from a strategic perspective, we are on a journey here to make sure that we are putting our people in a position to be most successful. And I think when you step back a couple of years, we talked about doing – we talked about the mix of the business. In ‘21, it was really about making the necessary SG&A adds from a sales perspective. And really in ‘21, from a sales focus, we are focused on maintenance base. We are focused on introducing ourselves to new customers, and we feel like we are positioned going into ‘22 once we have already been introduced those customers to sell an expanded suite of services to them as well. So, this is a journey that we are on. And as Charlie mentioned, project selection and obviously, trying to make sure we have the greatest return, and we have our people in the best position is ultimately what we are focused on.

Jon, I want to tell you a quick story and for everybody on the call that I think is really important because it demonstrates the importance of GCR, but more importantly, ODR. So, it’s Disney, and you have heard us talk about Disney in the past. Back in, I think it was 2010, we had an opportunity to do the mine train ride renovation. And it was a small project, $2 million, ended up wrapping up at about $4 million value. There were a lot of change orders. We got paid well. It all worked out well. And I ended up having dinner with the Head of Imagineering for Disney after that project. And I was shocked to hear how impressed they were. Maybe I shouldn’t have been so shocked, but they were thrilled with what we did for them. And I don’t have time to get into all the details, but we really did some creative stuff for them. So, you fast forward today, we are still working for Imagineering, whether it’s at the Magic Kingdom or over, but we are now working for the four divisions within Disney that maintain all the facilities throughout their properties in Orlando. So, what started off with a small little opportunity has now expanded into good-sized GCR work, where we don’t work for general contractors. But Disney is pretty much telling the GC use our services. And now it’s grown into this great presence on the property for all of this other maintenance, renovation, retrofit type work, and it’s become a nice part of our business. So, the reason I shared the story is that’s the model. So GCR, what’s important about it is we get involved on a project, make sure we understand who the owner is and then let’s figure out how we could start leveraging that relationship with that owner, listen to them and start providing more and more services, much better margin, much better cash flow. So again, the whole program is important, GCR, ODR, but I also have to emphasize that without GCR in certain business units, there is so much opportunity in those markets where we just – we go direct. We don’t need the GC. We are just knocking on the doors of buildings, getting ourselves introduced and developing those long-term relationships. And I am quite frankly, extremely pleased with what we have done over the past couple of years. It’s really, really start to blossom.

Great. Thanks for that color. And then just following up on cash flow, Jayme, obviously, the last 2 years, where 1 year was way balance to the positive last year to negative. Going forward, do you think cash flow will more closely approximate the existing results, in other words, EBITDA conversion to cash flow will be more normalized in ‘22 and going forward?

Yes. Thanks. So, trying to give more color on that is really explaining the over-bill and under-bill. And so as Charlie mentioned, from a risk perspective as a shift to ODR as well as we are shifting to ODR, it’s not as volatile. So, as we work towards that 50-50 split, we expect and anticipate that will be more neutral billings. So, that’s helpful from the cash flow perspective. So, I think a good way to look at the cash from like kind of our daily operations from the business is to using that income as an approximation. And then from there, we do have the debt payments that we need to make, but then we also have our revolver as well that we can work off and that we have nothing borrowed on at this point. So, I think that’s probably the best way as we are making that shift, and we have that volatility right now between the billings being over-billed and under-billed that kind of gets you comfortable where the cash is going to land.

Okay. Alright. I appreciate it. And then, Matt, maybe you could just give us a little more color on the acquisition activity. What you guys expect going forward, maybe one or two deals a year? What that means to the company if you can execute that over a long period of time and really provide a tremendous growth boost to the business?

Sure. So, let me give you some color here. And then I think as we move through the quarter and into the next call after Q1, we will provide some incremental comments on top of what I can pass along here. But clearly, and we have said this before, I think the Jake Marshall transaction in December is a really good prototype for the type of business that we are looking to pursue in the type of partnership we would like to form in terms of location, scale, capability, size, that sort of thing. So, the criteria, which we have been through before, again, businesses with revenue between probably $30 million and $75 million, with EBITDA margins in, call it, 8% to 10% range. So, these are transactions that have an enterprise value of roughly $15 million to $25 million, I think that’s a good digestible pipe size for us over an 18 months to 24 months, maybe 36-month period. And those businesses can be impactful to the bottom line. They are large enough to make a difference. They look like many of our other branches, but they are also small enough for us to feel comfortable with the people, with the operations, with the diligence requirements and resources and with the ability to finance the transactions and get those transactions closed. So, when I look at the environment right now and the opportunities in the market that fit that profile, there are a lot of them. They are very interesting. I think people are relieved to be largely on the other side of the pandemic. I think the capital gains tax that we went through last year has mitigated but has sort of sharpened people’s perspectives and feelings about really getting ahead of succession planning and estate planning. And…

Thank you so much.

Our next question is from George Melas with MKH Management. Please proceed.

I am fairly new to the story. So, I am trying to understand the ODR segment grew roughly 10% this year, but I believe you said sales were up 25%. The backlog is clearly growing and has increased very much. Do you continue – do you expect to see operating leverage on the ODR business in 2022, or are you going to continue this sort of strong investment, particularly in the SG&A and on the sales side to keep the growth going long-term?

Yes, George, thanks for the question. So, our view of ODR right now is it’s just a huge part of our future. Again, for all the right economic reasons, it’s amazing what it does for returns and cash production. So, when you look at what we did this past year, a little over 10% growth, I did make a comment about supply chain, about $20 million of revenue kind of pushed forward. And that’s one of the reasons why the backlog is actually much larger because we still have to burn that work. But the sales themselves were up by 25%, which is a great indicator of the future and we are not going to back off. So, where we see the opportunity to continue to expand in our different marketplaces and add staff to grow it, we are going to do that. The other part is, on the acquisition front, with what Matt was just touching on, our intent right now is to look for businesses that have a reasonable representation of ODR revenue. Jake Marshall did that for us. I believe that was roughly 60% revenue was ODR. And so we are going to continue to look for businesses that can add to that mix. Our goal by 2025 is to see our mix of 50% GCR, 50% ODR. Was that clear, George?

Yes, very much. Thank you. And then just a quick question on the contract assets and liability and the over-billing and under-billing. And is that something that as investors, we should be worried about? And the fluctuations are so significant, or is this just part of the business, and over time, it sort of take care of itself.

So, when you look at over and under-billings, that’s an ongoing thing for the industry, just it’s the nature of what we do. And a lot of it has to do with timing, George. You could have one month where we are much better, next month could be a bit worse. It depends upon kind of the cycle of a project. So, now let’s go back to the strategy. The strategy right now is to continue to be very selective on GCR where we feel that we are going to see much better outcomes, both in terms of profit and cash flow, which means strong billings. But we are also shifting this mix to ODR, and ODR tends to have a nice either neutral billing to a slight uptick on a regular basis. So, as we continue the evolution of the business and transformation to more ODR, we expect it to smooth out and not have that lumpiness, if you want to call it that. I hope that helps, George.

Okay. Very good. Thank you.

Our next question is from Chip Brown, Private Investor. Please proceed.

Good morning guys. Hey, my question is with regards to kind of winding down or shutting down Southern California. To my knowledge, that relationship is an ODR relationship with Disney, correct?

No. We have done very little work at Anaheim, I think we did some air handler change-outs and we tried getting in there. We didn’t have much success. Now the majority of our work is all in good old Orlando. Thanks for the question Chip.

That concludes our question-and-answer session. I would like to turn the call back over to management for closing comments.

I want to thank everybody for joining us this morning. And we are very proud of the quarter and the year for that matter. We look forward to speaking to you again when we report the first quarter results in May. If you have any additional questions, please reach out to Matt Katz or our Investor Relations firm, the Equity Group. Their contact information can be found on our Investor page on our website. Thank you again for your interest in Limbach.

Thank you. This does conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.