Greetings, and welcome to the Limbach Holdings Call to Discuss Third Quarter 2023 Results and Update on Current Operations. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jeremy Hellman of the Equity Group. Thank you. You may begin.

Thank you very much, and good morning, everyone. Yesterday, Limbach Holdings announced its third quarter 2023 results and filed its Form 10-Q for the period ended September 30, 2023. The company would also like to note that an updated investor presentation is available on the Investors section of the company website 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 its financial results, providing an update on current market conditions. Today's discussion may contain forward-looking statements, and actual results may differ from any forecasts, projections or similar statements made during the earnings call. Listeners are reminded to review the company's annual report on Form 10-K and quarterly reports on Form 10-Q for risk factors that may cause the actual results to differ from forward-looking statements made during the earnings call. Also, please note that during the question-and-answer session at the end of the call, we will only be taking questions from our analysts. With that, I'll turn the call over to Mike McCann, the President and Chief Executive Officer of Limbach Holdings. Please go ahead, Mike.

Good morning. Welcome, everyone, and thanks for joining us. Joining me this morning is Jayme Brooks, our Executive Vice President and Chief Financial Officer. Turning to the third quarter. We continue to execute on all fronts and the result was continued margin expansion, which in turn led to solid growth in net income, adjusted EBITDA and cash flow. We continue to see our ODR transitions happening at a rapid pace. Recall that we're originally targeting a 50/50 revenue split by 2025. As we speak with you today, we appear on track to hit that target this year. And in doing so, this change in our business mix is driving the intended growth in gross margins, earnings and cash flow. As indicated in Slide 12 in our investor deck, we're now focused on shifting to a new target of at least 70% ODR. Both of our segments are performing well, and we continue to shift our sales and marketing resources towards the ODR segment as the margin advantage for ODR segment during Q3 was 1,000 basis points compared with our GCR segment. The performance improvement in our GCR segment is a product of execution, project selection, which has been made easier due to our rapid shift to ODR and ability to be extraordinarily selective. Within our GCR segment results for this quarter, was the successful resolution of our largest legacy claim. The claim resolution resulted in a $1.2 million write-up and net cash to the company of $16 million. That leaves one less significant legacy claim open. Beyond the segment shift and in segment margin enhancement objectives, the third pillar of our strategy is scale for acquisitions. We already completed the acquisition of ACME Industrial in July and are pleased to announce that we're able to close another deal this year.…

Thanks, Mike. Our press release and Form 10-Q, which was filed yesterday, both provide extensive details of our financials, so I'll focus on some key highlights. Starting with the income statement. During the third quarter, the ODR segment accounted for 51.5% of total consolidated revenue, up from 48.8% last year in Q3. ODR revenue during the quarter was up 10.3% from a year ago, while GCR revenue was essentially flat, resulting in consolidated top line growth of 4.4%. As Mike noted, we continue to see solid execution in the quarter. Consolidated gross margin during the third quarter benefited from the increasing contribution from our higher margin ODR segment, strong overall margin performance in both segments and a couple of onetime benefit that flows through the GCR segment. These onetime benefits included the settlement of one of our outstanding claims which resulted in a gross margin benefit of $1.2 million. And then we also had another $1.2 million gross margin benefit during the quarter as a result of the early completion of a project due to a reduction in scope from the customer. These onetime benefits contributed $2.4 million to the higher-than-usual GCR gross margin of 19.3%. Excluding these two items, the GCR gross margin was still solid and exceeded our target range of 12% to 15% and our ODR gross margin stayed strong at 29.3%, which was similar to Q2. Consolidated gross margin was 24.5% for the quarter, and even if we were to back out the onetime benefit, we had very strong performance and record high gross margin. SG&A expense was $21 million for the quarter or 16.4% of revenue, and was up modestly from $20.4 million in the second quarter and up from $18.7 million in the year ago period. The increase in SG&A expense was primarily related…

Thank you, Jayme. As we approach year end, we have good momentum. We’re executing well on our plan with demonstrated success in each of the three growth levers we have identified. That has allowed us to raise our adjusted EBITDA guidance for a second time this year. Recall when we began the year with a range of $33 million to $37 million, and then we subsequently raised that to a range of $38 million to $41 million last quarter. We are now increasing our adjusted EBITDA guidance again for 2023 to a range of $42 million to $45 million. The upward revision to our adjusted EBIT guidance this quarter is a function of our continued strong performance year-to-date, along with a small contribution from our two acquisitions during the second half of the year. During the third quarter, we were once again able to record gross margins above the target range in both segments. Underpinning that performance with our rigorous project selection, excellent field execution, and overarching emphasis on delivering value-added solutions for our customers. Our adjusted EBITDA also benefited from two one-time GCR gross margin benefits of $2.4 million that were booked in the quarter as Jayme discussed earlier. We’re also reiterating our revenue guidance for 2023, which consists of total revenue for the year in the range of $490 million to $520 million. We believe overall conditions in our end markets remain supportive of our services. While much of the day to day headlines focus on macroeconomic conditions, Limbach continues to see strong demand due to the mission critical nature of our end markets. As we continue our evolution of being an indispensable partner to building owners, our key customers continue to show that our services are essential and the spend is resilient. Leading customers in our alternative…

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

Good morning and congratulations on all the progress.

Thanks, Rob. Good morning.

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

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

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

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

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

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

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

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

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

Good morning.

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

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

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

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

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

Yes, that generally makes sense, yes.

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

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

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

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

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

Thank you, Gerry.

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

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

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