Limbach Holdings, Inc. (NASDAQ:LMB) Q4 2023 Earnings Call Transcript
Limbach Holdings, Inc. (NASDAQ:LMB) Q4 2023 Earnings Call Transcript March 14, 2024
Limbach Holdings, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to the Fourth Quarter and Fiscal Year 2023 Limbach Holdings Earnings Conference Call and Webcast. [Operator Instructions] I will now turn the conference over to your host, Julie Kegley of Financial Profiles. You may begin.
Julie Kegley: Good morning, and thank you for joining us today to discuss Limbach Holdings financial results for the fourth quarter and fiscal year 2023. Yesterday, Limbach issued its earnings release and filed its Form 10-K for the period ended December 31st, 2023. Both documents, as well as an updated investor presentation are available on the Investor Relations section of the company's website at limbachinc.com. Management may refer to select slides during today's call and encourages investors to review the presentation in its entirety. With me on today's call are Michael McCann, President and Chief Executive Officer; and Jayme Brooks, Executive Vice President and Chief Financial Officer. We will begin with prepared remarks and then open up the call for analyst questions.
Before we begin, I would like to remind you that today's comments will include forward-looking statements under federal securities laws. Forward-looking statements are identified by words such as will, be, intend, believe, expect, anticipate, or other comparable words and phrases. Statements that are not historical facts, such as statements about expected improvement in profit and operating margins, are also forward-looking statements. Actual results may differ materially from those contemplated by such forward-looking statements. A discussion of the factors that could cause a material difference in the company's results compared to these forward-looking statements is contained in Limbach's SEC filings, including reports on Form 10-K and 10-Q.
Please note that on today's call, we will be referring to some non-GAAP measures. You can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in our fourth quarter earnings release and investor presentation, which can be found on Limbach Investor Relations website and has been furnished on Form 8-K with the SEC. With that, I will now turn the call over to Mike McCann.
Mike McCann: Good morning, everyone. I'd like to welcome our stockholders and analysts, as well as those who may be new to Limbach. Thank you all for joining our call today. A few years ago, we saw an opportunity to leverage our construction and engineering service experience, relationships and knowledge to build a pure play building system solutions firm. Our objective was twofold. First, to transfer Limbach into a value-added solutions partner to building owners to command higher margins while delivering greater returns for our stockholders. And second, to position Limbach into a less competitive, volatile market, creating a stronger, more resilient company. Through disciplined execution of this strategy, today we are partnering with building owners to provide critical services and/or need to maintain uninterrupted operations in their facilities.
We provide building owners with solutions and services to maintain and upgrade their mission-critical mechanical, electrical, and plumbing infrastructure. We are focused on six key vertical markets; Healthcare, Industrial & Manufacturing, Data Centers, Life Sciences, Higher Education, and Culture & Entertainment. These are large and growing markets with sustainable demand drivers where systems failure is not an option. We operate in two business segments, our Owner Direct Relationships or ODR, where we work directly with building owners to provide building system solutions which now accounts for over 50% of our total revenue. And our General Contractor Relationships segment, or GCR, where we work directly with general contractors. We are focused on growing our ODR business for several reasons.
First, our direct customer relationships give us access to key decision-makers. While the initial engagement may be small, we have a strong value proposition and the opportunity to build long term relationships. As we become embedded into our customers' businesses, we are often on-site collaborating with their teams to develop customized solutions that reduce cost and drive energy efficiencies. This positions us to handle near term maintenance needs, at the same time develop risk mitigation and cost saving strategies for the future. By adding more value over time, we can become an indispensable partner to our customers, helping them avoid their biggest nightmare, business disruption due to systems failure. In turn, with these types of ODR relationships, we generate reoccurring revenue at higher margins.
As we grow our ODR business, this gives us opportunity to become more selective when evaluating our lower margin GCR projects and as a result we expect GCR revenue to decline. We are focused on building relationships with our top five building owners in each of our locations. Our target customers have multiple facilities, which opens the door to developing long term, mutually beneficial relationships. A recent example of our successful ODR model at work is with one of our Florida healthcare facilities. Our relationship started out as a small engagement and they are now one of our top five customers for one of our Florida locations. We have fully embedded teams working on site closely with this customer on all aspects of OpEx and CapEx, planning and decisions where we can have a tangible impact on their operational goals.
We are executing our strategy from an advantaged position between property managers who act as pure generalists, OEMs who sell proprietary equipment, and traditional contractors. Our objective is to provide unbiased objective analysis and recommendations on the integrity and opportunities to improve their entire system, including HVAC, electrical, plumbing, and engineered systems. This is where we add value. Our customers know our goal is to recommend optimal cost effective solutions to ensure uninterrupted service. We believe our ODR business has significant organic growth opportunities as we continue to expand our customer relationships. For example, as I indicated in our earnings press release, in 2024, we have invested approximately $4 million in portable HVAC rental equipment to provide urgent and critical system solutions for our customers.
This is a strategic investment to expand our service offerings and grow our market share with existing customers. Strategic acquisitions are also an important component for our long term growth plan. We take a disciplined and a selective approach to acquiring companies that meet four key criteria, expanding our geographic footprint and service capabilities, supporting our ODR growth strategy, and most importantly, they are good cultural fit. We are establishing a track record of making acquisitions that follow our specific strategy and in 2023, we made two acquisitions, ACME Industrial and Industrial Air. ACME was a tuck-in acquisition that provided new owner direct relationships with on-premise teams at Fortune 500 caliber customers in manufacturing vertical.
Industrial Air expanded our geographic footprint in North Carolina, providing additional ODR customer relationships with consumer goods or textile manufacturing facilities. We believe that successful strategic acquisitions along with organic growth will drive profitability and create shareholder value. Now that I've outlined our strategy and how we create value, I'd like to talk about 2023, because Limbach had a great year. The company demonstrated significant earnings growth and cash flow while maintaining a strong balance sheet by accelerating our mixed shift ODR from GCR ahead of schedule, which we see as definitive evidence of the success of our mixed shift strategy. ODR accounted for 50.7% of our full year revenue for 2023. Exceeding our 50% ODR target, we are making great progress towards our 2024 -- '25 ODR revenue target of more than 70%, as we exited the year with the ODR revenue accounting for 55.1% for the fourth quarter.
We expanded total gross margins by 420 basis points in 2023 to 23.1% from 18.9% in 2022. ODR gross margins were 29% for the year, which exceeded our target range of 25% to 28%. GCR margins were 17% for the year, also exceeding our target range of 12% to 15%, as we honed in our focus on high margin, quick hitting projects. I'll now turn it over to Jayme to provide detailed financial highlights before I return with additional commentary. Jayme?
Jayme Brooks: Thank you, Mike. Our fourth quarter and 2023 earnings press release and Form 10-K which were filed yesterday, provide comprehensive details of the company's financials. So I will focus on the fourth quarter and full year 2023 highlights. During the quarter, we generated consolidated revenue of $142.7 million versus $143.5 million in 2022. Consolidated revenue declined by 0.6% as ODR revenue grew 22.8% and GCR revenue declined 19.4% as we executed our mixed shift strategy towards ODR. In the fourth quarter, ODR revenue was 55.1% of consolidated revenue, up from 44.6% in 2022. For the year, we generated consolidated revenue of $516.4 million, compared to $496.8 million in 2022. Revenue grew 3.9% as ODR revenue grew 21.1% and GCR revenue declined 9.3%.
ODR revenue accounted for 50.7% of consolidated revenue for the year, up from 43.6% in 2022. Gross margin on a consolidated basis for the fourth quarter was 23.3%, up from 20.4% in 2022. ODR gross profit increased $6.4 million, or 36.8%, driven by higher revenue with expanded gross margin in Q4 to 30.1% versus 27% in 2022. GCR gross profit decreased $2.3 million, or 19.1%, due to lower revenue with our focus on high quality, quick turning projects. GCR gross margins were flat at 15% year-over-year. For the year, gross margin on a consolidated basis was 23.1%, up from 18.9% in 2022. ODR gross profit increased $21 million, or 38%, driven by an increase in revenue and expanded gross margins of 29% from 25.5% in 2022. GCR gross profit increased $4.6 million, or 11.9%, due to higher margins.
Although revenue declined in the GCR segment, gross margin expanded to 17% for the year versus 13.8% in 2022. As I mentioned earlier, the ODR segment made up 55.1% of consolidated revenue for the quarter. However, the ODR segment contributed 71% of the total gross profit dollars, or $23.7 million, for the quarter. This is the mix shift strategy. During the quarter, SG&A expense increased approximately $3.2 million to $25 million from $21.8 million in 2022. As a percentage of revenue, SG&A expense was 17.5%, up from 15.2% in 2022. While there are some smaller puts and takes, the increase was driven primarily by higher payroll and incentive-related expenses associated with accelerating our ODR strategy as well as expense incurred as a result of the acquisitions of ACME and Industrial Air.
For the year, SG&A expense increased by approximately $9.5 million to $87.4 million compared to $77.9 million for 2022. As a percentage of revenue, SG&A expense was 16.9%, up from 15.7% in 2022. The increase was driven primarily by higher payroll and incentive-related expenses associated with accelerating our ODR strategy, an increase in stock-based compensation expense, and expenses incurred as a result of the ACME and Industrial acquisitions. For 2024, we are targeting SG&A expense as a percentage of revenue to be around 18% to 19% as we continue to invest in our ODR business to drive growth. Interest expense for Q4 was $0.4 million and $2 million for the year. Interest income for the quarter was $0.6 million and $1.2 million for the year, driven by the company's investment strategy in placing our excess cash in overnight repurchase agreements, U.S. treasury bills and money market funds.
Adjusted EBITDA for the fourth quarter was $12.6 million, up 8.8% from $11.6 million in 2022. Adjusted EBITDA margin for the fourth quarter was 8.8% compared to 8.1% in 2022. For the year, adjusted EBITDA was $46.8 million, up 47.3% from $31.8 million in 2022 and we exceeded our 2023 adjusted EBITDA guidance of $42 million to $45 million. Adjusted EBITDA margin for the year was 9.1% compared to 6.4% in 2022. Net income for the fourth quarter was $5.2 million or $0.44 per diluted share compared to $3.8 million or $0.35 per diluted share in 2022. This represents 37.8% growth in net income and 25.7% growth in diluted EPS. For the year, net income was $20.8 million, or $1.76 per diluted share compared to $6.8 million or $0.64 per diluted share in 2022, representing 205.3% growth in net income and 175% growth in diluted EPS.
Turning to cash flow. Our operating cash flow during the fourth quarter was $13.9 million compared to $12.4 million in 2022, representing a 12.2% increase. Operating cash flow for the year was $57.4 million compared to $35.4 million in 2022, representing a 62.2% increase. Free cash flow, defined as cash flow from operating activities, less changes in working capital and capital expenditures for the year, was $36.7 million compared to $23.4 million in 2022, an increase of 56.6%. The free cash flow conversion of adjusted EBITDA for the year was 78.4% versus 73.8% in 2022. Free cash flow conversion of net income was over 100%. For 2024, we are continuing to target a free cash flow conversion rate of approximately 70%, which we define as cash flow from operating activities minus changes in working capital minus capital expenditures, excluding our investment in rental equipment, which is currently approximately $4 million, divided by adjusted EBITDA.
We expect CapEx for 2024, excluding the investment in rental equipment, to have a run rate of approximately $3 million, primarily because of the acceleration of our ODR strategy. Turning to our balance sheet. At the end of Q4, we had $59.8 million in cash and cash equivalents and short and long term debt, net of debt discount of $22.3 million. Our balance sheet remains strong and we are well-positioned to make the necessary investments to continue to work towards our ODR expansion and acquisition strategy. Now I will turn it back to Mike for closing remarks.
Mike McCann: Thank you, Jayme. Before opening up the call to questions, I'll cover our full year 2024 guidance and modeling considerations. For the full year 2024, we expect revenue of $510 million to $530 million, and adjusted EBITDA of $49 million to $53 million. And to help with modeling, we are targeting segment revenue mix to be 60% to 70% for ODR by the end of 2024, with GCR being between 30% to 40%. As we continue to shift the revenue and be selective with GCR projects, we expect total gross profit margins to land between 24% to 26% for 2024. Although there is always demand for building maintenance and repair, there is some level of seasonality to our business. The fourth quarter is usually stronger than the first quarter and back half of the year is usually stronger than the first half.
We also expect revenue and EBITDA to gain momentum after the first quarter because we continue to see strong secular tailwinds from deferred maintenance and capital projects coming to the forefront. 2023 was a year of significant growth and achievement. We believe we are in the early innings of our long term opportunity. We are excited about 2024 and are positioned for continuing progress on all three pillars of our strategy. We need to continue to shift the mix by growing organically, as well as expanding our margins through evolved offerings and market share growth through strategic acquisitions. Finally, I want to thank all the employees. Our excellent performance in 2023 was a direct result of your hard work and dedication. That concludes our prepared remarks.
Operator, please begin the Q&A session.
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