Good day, ladies and gentlemen. Welcome to the Limbach First Quarter 2023 Conference Call and Webcast. [Operator Instructions] I would now like to turn the call over to your host, Jeremy Hellman of the Equity Group. Jeremy, you may begin.

Thank you very much, and good morning, everyone. Yesterday, Limbach Holdings announced its first quarter 2023 results and filed its Form 10-Q for the period ended March 31, 2023. The company would also like to note that an updated investor presentation is available on the Investors section of the company website at www.limbachinc.com.Management will refer to select slides during today's call and encourages investors to review the presentation in its entirety. During this call, the company will be reviewing 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. Also, please note that during the question-and-answer session at the end of the call, we will only be taking questions from our analysts. With that, I'll turn the call over to Mike McCann, Chief Executive Officer of Limbach Holdings. Please go ahead, Mike.

Good morning. Welcome, everyone, and thanks for joining us. Joining me this morning is Jayme Brooks, our Chief Financial Officer. 2023 is off to a solid start with adjusted EBITDA pacing well ahead of the first quarter last year and also the year before that. Top line revenue was up modestly year-over-year, while gross margin continued to expand, driving the bottom line expansion. Our local teams continue to provide best-in-class services while always living our values. On the whole market conditions remain much of the same when we spoke to you two months ago, and we continue to focus on managing the business, expanding our relationship with building owners who recognize the value in having a partner to manage their mission-critical building assets.Q1 was characterized by solid and consistent execution of our plan, which drove the sort of margin and bottom line success we continue to talk about. This success rests on three key pillars; First of these is segment mix. We continue to push towards a greater proportion of our revenue coming from our higher-margin ODR segment, and if successful in doing so, we expect gross margin to continue to improve in the long run. Our results during the recent periods have proven that we can grow our bottom line while our total revenue remained relatively flat, even with modestly declining revenue in the GCR segment. In our updated investor presentation, we have a new slide number 9, which shows this visually. However, we certainly aim to grow our top line going forward as our higher growth ODR segment outpaces the contraction in our GCR segment. For example, our Q1 revenue was up from the prior year and the midpoint of our guidance would also represent year-over-year growth. The second of our three pillars is gross margin, which is…

Thanks, Mike. Our press release and Form 10-Q, which were filed yesterday provide extensive details of our financials, so I will focus on some key highlights. Focusing on the income statement. During the first quarter, the ODR segment accounted for 48.5% of total consolidated revenue. That compares with 44.6% in the fourth quarter of 2022 and 43.6% for the full year 2022. So we are continuing to make good progress towards reaching the 50-50 revenue split milestone with a long-term goal of our ODR segment, contributing 70% or more to total consolidated revenue. Consolidated gross margin during the first quarter was 21.7% as a result of both the increasing contribution from our higher-margin ODR segment and strong margin performance within each segment. For the quarter, GCR gross margin was 16.6% while ODR was 27.1%. So again, in our view, very good performance in both segments. Also to expand on Mike's comments regarding GCR margins. A year ago, we were talking about GCR gross margin in the 11% to 12% range, and we increased that to 12% to 15%. This is a result of continuing to not only focus on execution, but also the selection of projects. As a result, we expect to see margins fluctuate quarter-to-quarter depending on the timing of those newer projects as we have a mix of new, higher-margin projects and older, lower-margin projects in backlog. SG&A expense in the first quarter was $21.1 million, up from $18.7 million in the year ago period. The $2.3 million increase included approximately $811,000 of costs related to the CEO transition and $534,000 increase in stock-based compensation expense, primarily due to an increase in the grant date stock price year-over-year. On our last call, we noted that 2023 full year SG&A should have a similar run rate as a percentage…

Thank you, Jayme. As noted in our press release, we are reiterating our financial guidance for 2023, which consists of total revenue for the year in the range of $490 million to $520 million and adjusted EBITDA in a range of $33 million to $37 million. We are also currently continue to expect second half results to exceed the first half as Jayme highlighted, which would guide us to the upper end of the range. As I noted at the onset, industry conditions are much as - much the same as when they were when we spoke two months ago. That said, we know conditions will always change, but our focus is on engaging customers. The systems are mission-critical and have needs regardless of the macroeconomic environment. In these type of buildings and customers, the owners can defer large capital expenditures, but they can't avoid immediate repairs. This will allow us to flex between repairs of existing equipment and infrastructure upgrades. When supply chain demand eases, there will be an opportunity for many building owners to execute their infrastructure upgrades, and we believe Limbach will be well positioned to capitalize. In many cases, building owners are looking to reduce their operating costs and improve the energy efficiency of their buildings, but they need equipment to be readily available in order to execute their plans. In the meantime, we are still able to provide them on-demand services and continually monitor and repair their older equipment. In short, we are intensely focused on executing our strategy, which combines a disciplined approach with engineering solutions and craft expertise. By delivering value to our customers from front-end solutions to timely quality work in the field, we cement ourselves as an indispensable partner. Taking that approach to the market will be a focus on mission-critical building assets, is something we are confident we will win in our end market verticals. As we do this, we expect to earn a return of assets commensurate with the value we are providing. In some ways, this drives a new way of thinking in our industry, and we are excited to be at the forefront of this metamorphic. With that, operator, please open the Q&A session.

[Operator Instructions] Your first question comes from Rob Brown of Lake Street Capital.

Good morning. Congratulations on all the progress.

Good morning.

Thank you, Rob.

Just wanted to get a little color on kind of the demand environment and maybe focus on owner direct, but overall demand environment, how has that been trending? And obviously, with the strong results has been good, but what's the demand environment and sort of visibility like?

Yes, Rob. The demand environment is still really strong. And I think one of the things that we're really focused on, and I mentioned this is we want to make sure that our customers have mission-critical systems. And if you kind of look at the vertical markets that we're in, sometimes each one of these vertical markets will shift towards short-term repair work versus long-term capital expenditures. And right now, we have a diverse enough group of vertical markets that each one of them is operating a little bit differently, but they all have demand. The question is the demand short term or long term. And just as a couple of examples of this, Health care, still high demand but more of a quicker turn. The data center, mission-critical market, they're investing in long-term capital expenditures. It's maybe hedged a little bit towards that direction. From a manufacturing standpoint, a lot of it is customer dependent, whether they're short term or long term, but we're well positioned because we're - because those customers are mission-critical because we positioned ourselves. And then lastly, if you look at higher Ed and life science, on Higher Ed, we typically work for - if we're working for a university, it's going to be lab style work. And that market has kind of changed a little bit but the demand is still there. It's gone from maybe less of a corn shell to a fit-out spec lab, and it's also kind of tailored. So the biggest thing is our teams are really focused on working for mission-critical customers that have equipment that can't go down. And we always use this example internally. If they have a call on Saturday and equipment goes down to 3 o'clock. If they can wait until Monday or Tuesday, then they're not mission-critical. So we use that as a simple guide. But demand is still really strong.

Okay. Great. Thanks for the color there. And then on the M&A effort, you talked quite a bit about some of the parameters there. But how does that pipeline look? What are you sort of looking for more near term there? And what's some of the status of where that's at?

Sure. The pipeline is really strong. We really refocused probably six or nine months ago. And I think the most important thing is we want to make sure that the acquisitions are a cultural fit, number one. And number two is they kind of fit into the mold of the rest of the branches. And we have - we completed Jake Marshall, I think, about 16 months ago, and we've kind of dialed into two different types of acquisitions. The first type is a new geography which we have a lot of footprint right now that we - a lot of opportunity from that standpoint. And then the second type that we've also been focused on is tuck-in locations. So is there a tuck-in acquisition adjacent to an existing business that we have that we can add market share. So we're really looking at those two different types. We've also been very patient to. We're asking a lot, and we want to make sure that we really culture them and make sure they're going to be a fit.

Thank you for everything. I'll turn it over.

Thank you.

Your next question comes from Chip Moore of EF Hutton. Chip, your line is open.

Good morning, and congrats on a good start to the year as well.

Good morning.

Good morning, Chip.

Congrats on the good start to the year as well. I wanted to ask about the ODR path. I think you talked about 70% longer term. You've obviously gotten closer to 50 quicker, quicker than most people thought. I guess you covered acquisitions, but maybe more on the organic investment side, what you can do there and how that helps that path?

Yes. And you're right. It's a combination of acquisitions plus organic. But from an organic side, and I think I've mentioned this in the past, I just want to reinforce this. We have gained a ton of customers in the last four or five years. Our customer count well over 1,200.And at this point, we're really looking to make sure that we picked the right relationships and this we have kind of a criteria. Again, is the equipment mission-critical, is there availability for long-term spend and basically, we're really focusing our locations is pick your top 10 customers, make sure your top 10 customers fits the attributes that we're looking for and then focus resources on them. And we have so many customers that you can't provide a high level of service and provide that value that we want to provide, and we're really focusing on the top 10 per location, that's still a tremendous amount of customers if you add up all our locations. And the other thing, too, that I've been - I was visiting a bunch of customers in the last four or five weeks, and it's interesting. We have a lot of - and I talked about this a little bit in the script, but we're trying to change our relationships from reactive to proactive. And just as an example of that, we could be doing reactive calls for a customer for six or nine months, and we could be getting a lot of revenue and gross profit out of there. But really been challenging our teams to say, okay, take a look at the information, the data that you received from the customer, the spend that you've said, meet with that customer, sit with them and co-author more of a long-term plan with them. That's where we're really going to be able to embed ourselves, and that's where we're really going to be able to grow this owner direct side of it, even more than we are. And I think there's not only from the revenue side but also from our margins. So just to kind of summarize, it's really focusing our customer list, listening to them and making sure that it's just not a reactive that it's co-authoring a long-term spend plan. So it's a number of different factors. We're really super focused on it. All of our sales and marketing efforts are really focused around owner direct. And we're getting there, but we also have a long way to go, too.

Awesome, thanks for that color, appreciate it, Mike. And maybe if I could ask one more on more sort of near-term margin mix in backlog in the GCR side with the outperformance in Q1 and obviously, the stronger outlook in the second half? Just anything to take in mind on project activity near term. Thanks.

Yes. No problem - so from a GCR margin perspective, one of the - there's a bunch of different factors that have really helped us. But as we've - we're going to approach 50-50 and beyond, it allows us to be really selective from a GCR perspective. So being selective, allows us to really raise our margin. The second piece of it is we are getting a position now where the owner is recommending that they use Limbach. It puts us in a different position going forward. So the - from a margin perspective, we still think there's opportunity there. But really, the strategy fits really importantly into the margin. And I would add, too, that our teams are - continue to execute really well. and all the risk management processes that we've put in place, combined with the fact that our strategy really emphasizes the fact that we're trying to be selective. We're trying to focus on building owners. And there are times and needs where they have to have us. And when they have to have us, obviously, it changes our value proposition and changes the way that we can approach from a margin perspective as well, too.

Fantastic. Okay. Thanks again.

Your next question comes from Gerry Sweeney of ROTH Capital. Gerry, your line is open.

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

Good morning, Gerry.

Just wanted to circle back, ODR, Mike, you mentioned proactively active and really a couple of questions around just ODR as a segment, right? I think even in the presentation, a highlighted opportunities about getting data-driven subscription and that - those offerings would assume help you to become more proactive. So the questions are really what exactly do you need to become more proactive? And then secondarily, I'm just curious about just assets on the ground. - including do you need more sales? How is your equipment utilization? Do you have enough to support growth? Or should we be - how do we look at that on a go-forward basis as well?

Yes. I mean, you're right. The relationship always allows us to get in front of customers. But the second part of it is we have to - in order to maintain the relationship and grow the relationship, we have to provide value. So just from a data - and I would also kind of caveat to an information perspective, we'll perform work for a customer, and we'll compile service tickets, equipment history, asset history. That's one side of information that we're trying to make sure that we translate into more of a long-term plan. Also from a building automation system and analytics platform perspective, that's another avenue that we can provide information and data. And I would tell you that what we're really focused on internally is making sure it's simplified as possible. It's the simplest thing as if I've gone out to that piece of equipment for two years, - are you providing that customer feedback on how that equipment is performed? Are you just continue to repair that equipment? That's a question that we've really challenged our teams. And that kind of plays into the discussion of, okay, - are you - is the customer to the point where they trust us? Will they give us the data, even from a utility spend perspective. So we have a long way to go in that perspective, but allowing us to position ourselves to gather that data is really the spot that we're in right now. And just from an asset perspective, internally, we're really focused on switching from new business development to account managers. And I think the other big piece going forward, too, as we continue to talk to different people from a customer perspective, even further up the chain is more of return on investment. That's a question that we are getting asked more and more, and we want to make sure that our teams and our account managers are well positioned to make sure that they can answer those questions. So I think in its most simplistic perspective, it's - we've got some new business development to account managers. And a lot of those assets we have internally, we always look externally to figure out if there's a key hire or 2. I mean our primary focus is promoting from within but we also are sprinkling in some talented account managers as well, too. So just as a shift from new business to extracting as much as we can and really cementing ourselves with these customers.

So I mean, at the end of the day, it sounds like we're still - I mean, you've had great growth on ODR, but we're still sort of even in the early innings of the growth potential here so, lots of runway. It sounds even within your sort of existing customer base or your customer base that you had some type of contact with - is that sort of a fair assessment?

Yes, I completely agree. We have - and I think that kind of is a good - right now, we have a good foundation going forward. But understanding our customers, focusing on them, making sure that we are we're putting our staff in a position to meet those needs. And I think to your prior question, even from a data and information perspective, we're still trying to get to that point where they're trusting us to give that data, and that we can gather the data and then analyze it and provide solutions back. And that's ultimately we're able to kind of modify our offerings going forward. But yes, we're still really in the early innings. And I think as we continue to shift our mix - it's just going to continue to put us in a position from a foundation perspective.

Who do you compete against on the ODR side when you were doing some of this business or even the account management side that you're moving into. This - are you competing against another entity? Or is this even a game shift for your customers sort of engaging with Limbach per se.

It's - I would say it's primarily they have a provider. Every once in a while, we'll have a customer that's - is lacking. But I would say the majority of the time, there's a provider because, again, they have systems that need to be serviced and maintained, and upgrades need to happen. And that's kind of in our check box and whether that customer is the right customer for us. So typically, they have. Now is that provider giving them the quality services and the focus? Well, that's really where I think traditionally that we come in. So we've got a slide in the investor deck that kind of touches upon this and it's kind of this pie chart in each one of these relationships that we're going into have a different - may have a different provider. And the other thing I would tell you, too, is sometimes we'll be on a campus for a customer and we are embedded in them, but they'll still use another couple - two or three different people, and there's still an opportunity even on an existing customer to pick up market share. So a lot of times, it will be just the local contractor. It could be some of our some of the other mechanical publicly traded contractors. From an OEM perspective, Siemens trained Johnson. Sometimes we buy equipment and controls for them, but there's also they do compete and provide those services directly - it could be an engineering firm. And again, we look at it this way when we're talking to our customers is we can provide engineering solutions as well, but we can install the work as well, too. And then occasionally, from a property manager perspective. So it's very situational and our teams are really focused on making sure that even if we're in a - with a customer, sometimes there'll still be another provider or 2, and there's more market share to be have with the customer as well, too. So most of the time, there is a provider. It's a matter of us positioning ourselves. And if we're competing, we want to make sure that our value proposition is solid compared to one of the providers that may be there.

Got it. Super helpful. And I'll jump back in line and congrats, a really nice quarter and appreciate it. Thanks.

Thanks Gerry.

Thank you.

At this time, there are no further questions. I would now like to turn the call over to the management team for any closing remarks.

Thank you, everyone, for your continued interest in Limbach. If you have any additional questions, please reach out to the equity group. Looking forward to speaking again in August and all the best. Thank you.

This concludes today's presentation. Thank you, everyone, for attending.