Q4 2023 Limbach Holdings Inc Earnings Call

Participants

Michael McCann; President, CEO & Director; Limbach Holdings Inc

Jayme Brooks; CFO, Executive VP; Limbach Holdings Inc

Rob Brown; Analyst; Lake Street

Gerry Sweeney; Analyst; Gerry Sweeney

Presentation

Operator

Yes, good morning and welcome to the Fourth Quarter and Fiscal Year 2023 Limbach Holdings earnings conference call. (Operator Instructions) I will now turn the conference over to your host, Julie catagory of Financial Profiles. You may begin.

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 10K for the period ended December 31, 2023. Both documents as well as an updated investor presentation are available on the Investor Relations section of the Company's website at Limbach, Inc. Dot 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(technical difficulty) by words such as will, be, intend, believe, expect, anticipate, or other comparable words and phrases or 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.
For 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 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 eight K with the SEC.
With that, I will now turn the call over to Mike McCann.

Michael 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 a loan bucket to a value added solutions partner to building owners to command higher margins while delivering greater returns for our stockholders. And second, to positioned Limbach into a less competitive volatile markets, creating a stronger, more resilient company through disciplined execution of this strategy.
Today, we are partnering with building owners to provide critical services and will 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, health care, industrial manufacturing, data centers, life science, higher education and cultural entertainment.
These are large and growing markets with sustainable demand drivers were systems failure is not an option we operate two business segments, our owner-direct relationships, segments and ODR, where we work directly building owners provide Building System Solutions, which now accounts for over 50% of our total revenue in our general contractor relationship segment or GCR, where we work directly with general contractors. We are focused on growing our OTR 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 costs and drive energy efficiencies. This positions us to handle near near term maintenance needs at the same time, developed risk mitigation and cost saving strategies for the future.
By adding more value over time, we become it. 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 because it gives us opportunity to become more selective when evaluating our lower margin TCR projects.
As a result, we expect to see our 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 health care facilities.
Our relationship started out as a small engagements, 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 customer on all aspects of OpEx and CapEx planning decisions where we can have a tangible impact on their operational goals.
We are executing our strategy from an advantaged position between property managers, selected pure generalist OEMs who sell proprietary equipment and traditional contractors. Our objectives to provide unbiased object objective analysis and recommendations on the integrity and opportunities improve their entire system, including HVAC, electrical, plumbing and engineered systems. This is where we add value. Our customers know our goals to recommend optimal cost effective solutions to ensure uninterrupted service.
We believe our OTR 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 a long-term growth plan. We take a disciplined and 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, their good cultural fit. We are establishing a track record of making acquisitions that follow our specific strategy. In 2023, we made two acquisitions actually industrial 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 or expand our geographic footprint in North Carolina, providing additional ODR customer relationships with customers, 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 mix shift to ODR from GCR ahead of schedule, which we see as definitive evidence of the success of our mix shift strategy. Odr accounted for 50.7% of our full year revenue for 2023, exceeding our 50% ODR target.
We're 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. Full year gross margins were 29% for the year, which exceeded our target range of 25% to 20%. Tcr 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 Jamie to provide detailed financial highlights before I return with additional commentary, Jamie.

Jayme Brooks

Thank you, Mike. Our fourth quarter and 2023 earnings press release and Form 10K, which were filed yesterday, provide comprehensive details of the Company's financials. I will focus on the fourth quarter and full year 2023 highlights. During the quarter, we generated consolidated revenues of $142.7 million versus $143.5 million in 2022. Consolidated revenues declined by 0.6% as ODR revenue grew 22.8% and GCR revenue declined 19.4% as we executed our mix 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 revenues 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 42.6% 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. Pcr gross profit decreased $2.3 million or 19.1% improved revenue with our focus on high-quality, quick turning projects. Pcr 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.
Full year gross profit increased $21 million or 38%, driven by an increase in revenue and expanded gross margins of 29% from 25.5% in 2022. Pcr gross profit increased $4.6 million or 11.9% due to higher margins, although from a decline 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 for $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 with 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 and 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 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 were $0.64 per diluted share in 2022, representing 205.3% growth in net income and 135% 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% 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 operations 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 celebration of our ODR strategy.
Turning to our balance sheet at the end of Q4, we had $59.8 million in cash and cash equivalents in 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.

Michael McCann

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 to $53 million. And to help with modeling, we are targeting segment revenue mix to be 60% to 70% for LDR by the end of 2024, with GCR being between 30% to 40% as we continue to shift the revenue and be selective, which you see our projects. We expect total gross profit margins to land between 24% to 26% for 2024, although there is always demand for build and maintenance and repair.
There's some level of seasonality to our business. The fourth quarter is usually strong in the first quarter in the back half of the year as you as you started in 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 continued 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 evolves offerings and market share growth through strategic acquisitions.
Finally, I want to thank all of 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.

Question and Answer Session

Operator

Thank you. We will now be conducting a question and answer session. (Operator Instructions)
Rob Brown, Lake Street.

Rob Brown

Good morning and congratulations on a strong progress.

Michael McCann

Morning, Rob.

Jayme Brooks

Hi, Rob.

Rob Brown

Of that split follow up a little bit more on the ODR kind of our great organic growth view. How do you sort of see the organic growth in that business kind of playing out for the next years?

Michael McCann

As we mentioned earlier today, our next target is by the end of 2024 to get to a 60% to 70% ODR mix. So right now, our focus is really within our six vertical markets. And our strategy is really based on embedding our key personnel into those facilities to make sure that we're really capturing all of the up OpEx as much as possible. If you look out to future years, I think we are thinking about how we can not only capture the OpEx but the CapEx as well, too.
And then kind of tied together and above with an account manager. So I look at things to from a vertical market. We're very disciplined to our six vertical markets from a couple of them right now that we're very focused on. One is health care. And the second is industrial manufacturing those are two vertical markets that are very important to us that are going to really help us drive our customer growth.
And even from a health care perspective, that's usually see it doesn't go up and down very much at dependable vertical market, understand the capabilities we're bringing to the marketplace. Industrial Manufacturing obviously has been very strong for us as well, too so it really comes down to making sure that we're building these long-term relationships from the strong foundation and allowing those and really growing with those customers over a period of time.

Rob Brown

Okay. Okay, great. Thank you. And you talked a little bit about our rental business expanding and maybe some of the some of the service expansions you're doing. Could you elaborate on sort of what that rental opportunity is and what you're doing?

Michael McCann

Yes. Absolutely. We're excited about this. We've always had three pillars mix shift of all the offerings and expanded margin and strategic acquisitions. We've talked a lot about, obviously the mix shift than acquisitions. But the second pillar of our strategy, I think this is just one piece of that that will allow us. So and yes, at the end of the day, we're there in front of those customers and having them having the capability of having our initial rental fleet allows us to be much more of a single-source provider for before, we'd have to go to a supplier to get that rental.
Now we've made the initial investment of $4 million into the rental fleet will be able to offer quick service to these customers able to capture the additional gross margin that comes from it as well, too. So it's we feel like it's a really good fit with capturing that OpEx in that emergency step type work, and it going to be a real value added offering for our customers.

Rob Brown

Okay, great. And last question is more of on the overall demand environment. I know you're shifting to order direct service some maybe that's helping. But what do you see in terms of the demand environment? How much. Is there a shift in the demand environment in Greece is still still seeing strength in the new new project activity?

Michael McCann

Sure. The demand environment is still really good. It's sometimes it's dependent on the vertical market sector. And again, I think one of the key reasons that we've really shifted our business to these mission critical type customers is because that demand becomes durable, um, so probably the best way to kind of explain this kind of goes with our strategy is to give a couple of customers examples and done one of the customers examples and one of our vertical markets with a life science customer.
And it's interesting, we dealt with that customer, declared ourselves, put our resources in front of the customer and that's the first thing that that customer told us a lot of cuts, a lot of clients or suppliers make this promise. But when the big job comes, they leave all their resources and move on. And one thing we ensured this customer is that we're going to dedicate resources and we're going to stick with you. And it's amazing. I think you start to see the POs coming in and they just want that attention.
So I'll give you a healthcare example as well, too, which is we're into working an older facility in the mid-Atlantic market and done one of the customers felt trapped at the head supplier. That was an OEM supplier that was giving them a decent amount of a little bit of attention but the end of the day, they felt trapped by the proprietary products and services. And we've been really able to expand our market because we've had this consultive type on relationship as opposed to a transactional relationship where they feel like they're stuck. And what's nice to is we're not competing against the less sophisticated competition.
We're competing against an OEM as well too. So there's so many different examples, and I always break it down. You know, our model is not based upon, you know, we want our model to be as resilient as possible not based upon macroeconomic demands because it really comes down these individual customers in these individual vertical markets where they absolutely need us, we build the relationship and demand becomes durable over time.

Rob Brown

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

Michael McCann

Thank you, Rob.

Operator

Thank you. Gerry Sweeney, Roth Capital.

Gerry Sweeney

Good morning, Jeremy and Mark, thanks for taking my call and

Michael McCann

Good morning.

Jayme Brooks

Morning.

Gerry Sweeney

I just wanted to stick on on some of the same topics. Robert just mentioned and specifically ODR growth. And Mike, I think you and I have talked a little bit about this, but I wanted to retouch just get freshened up. I'm just curious how deep you are some of your current customers. I think there's a wallet share play here. So and my question is this how much more wallet share do you have with existing customers how much of this ADR growth can come from wallet share? Then the third part sort of is just maybe new entrants or new opportunities Nucryst?

Michael McCann

Sure. It's interesting. I've always said before that we're in the early innings of our strategy in some sense that really equates to where we are from a customer bases perspective. So we've talked to tons of customers and I'm based upon describing what we do. And there's no doubt in my mind that the desire to have the type of services and relationships that we want to have with our customers. So I look at it from where we've grown from just from our ODR revenue segment. A lot of that has really come from the expansion of existing relationships.
So on at the end of the day, we're targeting relationships that have long term spend opportunity, multiple buildings. I mentioned some of this in the script, but they want we're very much at the early stages of those relationships with our customers. So I would tell you come back around to your wallet share question placed customers. We have a small amount of market share and wallet share, but there's a tremendous amount of opportunity and there's the demand there to expand it, expand it. It's up to us to make sure that we continue to dedicate those resources that example I used previously before about that life science customers kind of a perfect example.
It's going to start with some smaller POs and it's going to build to larger capital projects over a period of time. But we'll always have that steady OpEx work as that top line on a CapEx work builds over a period of time. So from this from a new opportunity even from a customer basis. A lot of those relationships right now are based on recommendation.
So working on a lifestyle facility or health care facility from everybody knows everybody. And they see that we're doing a good job of providing a high level of service we've had. We started up people call and say, Can you come over to my building as well, too. So it's very much in the early innings, and there's a tremendous opportunity to gain market share and wallet share as we continue our journey

Gerry Sweeney

Got it. And then the follow-up, Peter, this is just discussing opportunities to expand into some adjacent services, OBVIOUSLY rentals, prime example. Just curious what are the opportunities, but I think also as importantly, how do you decide what to what opportunities to pursue? I mean, given your size you're still down small-cap, you've got some great wallet share to go, but how do you decide what is the appropriate business to go after while still staying focused on that early on is a broader core ODR opportunity?

Michael McCann

Sure. So in our in our investor deck, we have a new slide that talks about our unique offerings up slide 10 in there. And there's, I think, 10 different offerings in the way that we've kind of separated out Jerry, is that there's three or four of them that are direct related to OpEx, the rental critical services, data-driven solutions. There's a note for group of them that's really related to the CapEx, which is MEP infrastructure projects, equipment upgrades and products. We have our PM services that we're doing program management and then there's kind of the more evolved offering.
So we've kind of separated our mine high-grade, give you everything I want to make sure it's very measured and it's got to make sure that it aligns with the customers. So very, very much thinking about this OpEx, some type of smaller project work. And then we're really setting ourselves up for next year for the capital project work. And again, some of these more evolved offering. So it's a very measured strategy over a period of time. We're always trying not to do too much at once.

Gerry Sweeney

Got it. And maybe one quick question for Jamie. Obviously you gave the guidance $49 to $53 million on the adjusted EBITDA side. I believe there are a couple of add backs or write-ups of projects sort of flat competitor on one timers in 2023 results.
I had a right in front of me, but I think it was especially in Q3 or could you go over some of those and add-backs from 2023 because I think that gives a little bit better apples to apples comparison on the EBITDA increase, projected EBITDA increased '24 over '23?

Jayme Brooks

Yes, good point, Jerry. So yes, our adjusted EBITDA was $46.8 million. And then we did have some non-recurring events that we did talk about and disclosed where we had the claim recovery in California that we had an upside from that of $1.2 million. And then we also had some projects and some other upsides that we took that would be nonrecurring as well. And that was about another $1.2 million in Q3. And then we also had about [500,000]. So in total, if you look at that in the adjusted EBITDA really is closer to like 43.9 if you take out those one-time events.

Gerry Sweeney

Got it. Super helpful. That saves me a few minutes, so I appreciate it. I'll jump back in queue. Thank you.

Operator

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Michael McCain for closing comments.

Michael McCann

Thank you all for your continued interest in Limbach. We look forward to seeing many you have the ROTH Conference next week. Give any additional questions, please reach out to Julie Kelly at Financial Profiles. Thank you and have a great day.

Operator

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