Limbach Holdings Inc
NASDAQ:LMB
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Limbach Holdings Inc
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Good morning, and welcome to the Third Quarter 2024 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 now begin.
Good morning, and thank you for joining us today to discuss Limbach Holdings' financial results for the third quarter 2024.
Yesterday, Limbach issued its earnings release and filed its Form 10-Q for the period ended September 30, 2024. 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 the call to 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 financial performance 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 non-GAAP measures. You can find the reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in our third quarter earnings release and in our investor presentation, both of which can be found on Limbach Investor Relations website and have been furnished in the Form 8-K filed with the SEC.
With that, I will now turn the call over to President and CEO, Mike McCann.
Good morning, and welcome to our stockholders, analysts and interested investors. We appreciate you joining us today.
Execution has been the key to our success. This was evident in our third quarter results with each part of our 3-pillar strategy contributing to our strong financial performance for Q3. Our strategy of shifting revenue to owner direct relationships, or ODR, evolving our offerings, and scaling the business through acquisitions had led to EBITDA growth and margin expansion.
We're proud of what we have achieved. We continue to have opportunity to grow organically, to add high-margin offerings, and to make acquisitions that expand our footprint, while expanding and deepening our customer relationships.
The first pillar of our strategy is our shift to ODR. Year-to-date, 67% of our revenue and 77% of our gross profit is from ODR. We continue to be on target to reach 65% to 70% of revenue from ODR for fiscal year 2024.
Our second pillar is focused on evolved offerings and margin expansion, which positively impacts not only our organic growth but also the profitability of those companies that we acquire. Our 3-year strategy to evolve our offerings is well underway.
Our focus for 2024 has been on offerings that complement the operational budgets of the building owners, which includes on-demand services, critical system repairs, data-driven solutions, and general maintenance and operations. To do this, we've invested in account managers who gain a deep knowledge of our customers' facilities so that we may immediately react to our customers' needs.
Being onsite and gaining the understanding of these facilities then gives us the opportunity to work with our customers to proactively develop their long-term capital plans. Assisting our customers with their long-term capital planning is our focus going to 2025. We will strive to create additional value by providing MEP capital project solutions along with equipment upgrades and professional consultant services.
Another offering investment we made during the first half of the year was $4 million in rental equipment for indoor climate control, more specifically air-cooled chillers and air-handling units to support our customers' needs. We see an opportunity to grow this offering due to the demand for large temporary-use air chillers. And to meet this demand, over the next 12 months, we are planning to invest an additional $4 million to purchase more equipment and add personnel. This is a scalable offering with high returns on invested capital.
Our third pillar is scaling through acquisitions. We're creating value through acquisitions by acquiring businesses for single-digit EBITDA multiples even before taking into account the synergies we expect to achieve through both sales mix shift and scale. With 4 acquisitions completed, we expect to get a more even deal flow and also be opportunistic when looking at potential transactions that could expand our offerings or include larger businesses in general.
While our pipeline for acquisitions activity is robust, we are disciplined in our rigorous diligence process and our careful analysis of cultural compatibility between our organization and the target companies. We want the right fit at the right price. Our acquisition in early September of Kent Island Mechanical was a great example of how a tuck-in acquisition complements our organic growth and creates value for our stockholders.
As soon as we closed the deal, we began integrating Kent Island into our local operation and the Limbach platform. Within weeks of the announcement, our local leaders from both companies had met with a lot of key customers in the Washington, D.C. metro area. By combining the capabilities of Kent Island and the local Limbach office, we strengthened our relationship with all of our key owner accounts in that market.
For example, 1 key account is a joint health care customer. Kent Island's relationship was with the hospital staff who procured the larger capital project, while our branch relationship rested with the facility director. We were proactive in getting in front of that customer and positioning Limbach as their total solutions provider. And as a result, we were able to pick up market share. We believe this process is repeatable in many of the markets we serve.
Including contingent earn-outs, we paid approximately 5x the 2025 projected EBITDA for the Kent Island business. Post deal close, we believe we have created a value creation process that we've been perfecting over the past several transactions. Our long-term objective is to buy companies at a very accretive valuation and, over a 3-year period, increase the profitability of that asset.
Our value creation process is built around creating a common operating and strategic platform across all our locations. After a 3-year period post-acquisition, we want the acquired entity to be performing and offering similar to our organic location. Initially, we apply lessons learned from a risk management perspective and benchmark their gross profit against what we see with our other business locations.
Our model is built around each location focusing on their local niche and passing on work that is outside of their vertical markets. Our go-to-market strategy is built around expanding relationship with customers to industries that have mission-critical infrastructure that cannot fail. Many businesses we look at have a divisional model with several P&L departments that act independently.
In deals that we've completed, we quickly realized the best way to unlock value with these new organizations is to remote or hire a sales manager, who coordinates the sales effort to bring the divisions back together. This role determines and researches what accounts we deploy our onsite account managers. These account managers are assigned to the top 5 accounts of newly-acquired company and gain detailed knowledge of the facilities, becoming the go-to problem-solvers for building owners.
We have seen that over time as we continue to dedicate these resources, our customers will give us additional revenue opportunities. This is our goal, to provide bundled solutions that combine our capabilities.
One example of this is a health care customer in the Boston area. Over the past 2 years we have expanded our relationship by performing various maintenance type and project services. We recently signed a bundled service contract that goes well beyond traditional maintenance, to include engineering services for capital planning, maintenance for several systems, staff augmentation, and proactive analysis. Over the next 12 months, we anticipate creating more bundled offerings like this with additional customers.
We believe our customer relationships can expand to a broader scale. We believe we can transition our local relationships into national customers, and we're starting to see some traction on this initiative. Two customers have asked us to expand our reach, 1 in the data center vertical and the other in health care.
Our local presence combined with a common strategic platform will enable us to support these customers in multiple locations. Our suite of professional services, coupled with our acquisition program, allows us over time to become an enterprise solutions provider for these national customers.
Turning to our outlook. Based on our strong performance for the first 9 months of the year, we now expect total revenue to be in the range of $520 million to $540 million. This compares to our previous guidance of $515 million to $535 million. Adjusted EBITDA is now expected to be in the range of $60 million to $63 million, up from $55 million to $58 million.
We expect full year gross margin to be 26% to 27%, compared to previous estimates of 24% to 26%. Jayme and I have had many investors ask us this year what our growth rate looks like going forward. We haven't provided long-term guidance because we've been in a state of transition as we've moved away from general contract relationships, or GCR, business toward owner direct business. In 2024 we've made tremendous progress over the mix shift.
We've also transformed how we go to market through account manager based sales and customer engagement, focused on the top customers in each market. We'd like to establish a track record with this new model before we give more specific guidance on anticipated future growth rates.
What I can tell you is that we believe over time we can expand overall gross margins, similar to other building systems solutions firms, at the same time growing consolidated revenue. The consolidated revenue growth is a combination of organic growth and acquisitions, and we expect to see top line revenue growth starting in 2025.
I'd like now to turn the call over to Jayme for our financial report.
Thanks, Mike. Our third quarter 2024 earnings press release and Form 10-Q, which provide comprehensive details of our financial results, were filed yesterday and can be found on our website. I will focus on the highlights from the third quarter. All comparisons are third quarter 2024 versus third quarter 2023, unless otherwise noted.
During the quarter, we delivered total revenue of $133.9 million, representing 4.8% growth from $127.8 million. ODR revenue grew 41.3% to $93 million, while GCR revenue declined 33.9% to $40.9 million. The decline in GCR revenue reflects our intentional selection of higher-quality, shorter-duration projects.
ODR revenue was 69.4% of total revenue, up from 51.5%, while GCR revenue was 30.6%, down from 48.5%. As Mike stated, we are executing our mix shift strategy and on track with a target of 65% to 70% of revenue coming from our ODR for 2024. The increase in ODR revenue is driving our gross profit and adjusted EBITDA results.
Our ODR backlog at quarter-end was $209.8 million, compared to $147 million at December 31, 2023. GCR backlog was $161.5 million, compared to $186.9 million at December 31, 2023. The increase in ODR backlog and the decrease in the GCR backlog are due to our continued focus on accelerating the growth of our higher-margin ODR business. Keep in mind that the backlog in the ODR segment does not reflect our complete book of business. Many ODR projects are short term in nature and can be sold and executed before becoming part of the backlog at the end of the quarter.
Total gross profit increased 15.6% to $36.1 million from $31.2 million, reflecting our emphasis on ODR. ODR gross profit comprised 82.1% of the total gross profit dollars, or $29.6 million. ODR gross profit increased $10.4 million or 53.8%, driven by higher revenue and expanded gross margins of 31.9% versus 29.3%. GCR gross profit decreased $5.5 million or 46% as a result of lower margins and our focus on mix shift and selectivity on GCR projects.
Total gross margin increased to 27%, up from 24.5%, mainly driven by the mix of higher-margin ODR revenue, continuing to be more selective when pursuing GCR work, and the impact of acquisitions.
SG&A expense increased approximately $2.8 million to $23.7 million from $21 million. As a percentage of revenue, SG&A expense was 17.7%, up from 16.4%. The increase in SG&A expense was primarily driven by a $1 million increase in SG&A expenses from Industrial Air as they were not part of the company during the prior-year quarter, a $1.1 million increase in payroll-related expenses, $0.5 million increase in stock-based compensation expense, and a $0.4 million increase in professional services fees.
For 2024, we are still targeting SG&A expense as a percentage of total revenue to be around 18% to 19% as we continue to invest in the ODR business to drive growth.
Net income was $7.5 million, an increase of 4.1% from $7.2 million in 2023. Diluted earnings per share was $0.62 compared to $0.61 in the same quarter last year. Adjusted EBITDA for the third quarter was $17.3 million, up 27.2% from $13.6 million, and adjusted EBITDA margin was 12.9%, up 227 basis points from 10.7%.
Turning to cash flow. We had $4.9 million of cash flow from operating activities, compared to $17.2 million. This difference primarily was driven by the timing of changes in working capital. Cash flow from investing activities reflects the $12.7 million net purchase of Kent Island and capital expenditures of about $351,000.
Free cash flow for the quarter was $13 million compared to $11.2 million, an increase of 16.6%, which we define as cash flow from operations minus changes in working capital and capital expenditures, excluding our investment in rental equipment which was minimal in Q3. The free cash flow conversion of adjusted EBITDA was 75.3% in the third quarter versus 82.1% in the third quarter last year.
For 2024, we continue to target a free cash flow conversion rate of approximately 70% excluding our investment in rental equipment. We invested $4 million earlier this year in rental equipment and plan to invest an additional $1 million by the end of this year. With the additional investment in rental equipment this year, we expect total CapEx for 2024 to be approximately $8 million, which includes the expected total investment in rental equipment for 2024 of $5 million and approximately $3 million in other CapEx related to the acceleration of our ODR strategy.
Turning to our balance sheet. At the end of Q3, we had $51.2 million in cash and cash equivalents, and $10 million borrowed on our revolving credit facility at a weighted average interest rate of 5.72%, which reflects our interest rate swap agreement. For the quarter, interest income exceeded interest expense.
Our balance sheet remains strong, and we believe we are well positioned to support investments and acquisitions to drive continued ODR revenue growth and margin expansion. In keeping with what we think is good housekeeping capital planning and governance, we took steps to file a universal shelf Form S-3 registration statement in connection with our quarter-end, as our previously filed Form S-3 registration statement had expired due to its age.
As noted, our current liquidity position remains strong, and we currently have no plans or intentions to conduct any type of registration offering on this Form S-3. This is a routine action to ensure that we provide future funding optionality to the company should we need it in the future.
That concludes our prepared remarks. I'll now ask the operator to lead Q&A.
[Operator Instructions] Our first question is from the line of Rob Brown with Lake Street Capital.
Mike and Jayme, congratulations on all the progress. I guess first question is on kind of the overall demand environment, a very strong quarter. Where are you seeing kind of activity in the demand environment and maybe what areas are maybe not as good?
Yes. Do that a couple of different ways. One is from a vertical market perspective. Our 3 verticals, just to touch upon, the continued strong demand, are data centers. health care and industrial manufacturing. So each one of those continues to be strong.
And I think for us, it really comes down to our attention and focus to these accounts. We've spent a couple of years now really dedicating resources. And I would say both from a local and also from a national level too, to connect relationships too.
So I think the other thing, from an account-centric type model that we have, is kind of building that durable demand. We talked a little bit today in the prepared remarks about how we had extreme focus on OpEx focus, making sure that we have offerings that really match our overall goal as a company and kind of drive us towards a building systems solutions company.
So I think it's really a combination of being on the mission-critical accounts where they have to spend, they have to make repairs, combined with vertical markets and also kind of building that durable demand.
Okay. Great. And then on the ODR, you talked pretty extensively in the comments about the service model that you're shifting to. But I guess maybe help characterize where you're at in terms of getting that building services solution model in place and how much is there to go, and just a sense of kind of where you're at in that evolution?
Yes. And that's really the second pillar, which is really evolved offerings, driving margins. So we still feel like we're very early on that. A lot of our margin pickup has really come from our mix shift. But we really have a 3-year plan to introduce offerings that really drive us from a typical E&C company towards a building systems solutions firm with durable demand, consistent customers.
And really this past year '24 was about OpEx focus. We've got these onsite account managers. How can we capture as much market share? How can we help staff-augment our customers? Really get to know these facilities. And this really sets us up into really, I think, going into '25 to '26, really comes down to building their long-term capital plan together.
Whether those suite of services are professional consultant services, program management, engineering services, infrastructure. Right now, I would tell you just our staff, they're thinking about how can we plan with our customers for the next 3 to 5 years, which, of course, allows us to, again, get to know the facility, but also helps us from a predictability from a revenue perspective as well too.
So we still view it as a model where we have -- it's a combination of OpEx and CapEx, but it's really kind of -- it continues to be a building block approach. And I still -- we're very early and we see -- we believe there's tons of opportunity from that perspective as well too.
And kind of moving to M&A, the Kent Island looks like a pretty good acquisition on your strategy, and you've done a number of these. What's the -- how's the pipeline look? And do you expect more Kent Islands, or do we look to maybe a little bit different mix as you start to continue with your M&A?
So Kent Island is our fourth deal that we've done since November of '21. And our -- we wanted to be -- our goal continues to be that we want to make sure we're very careful, we're very measured in our approach. And we're learning from each deal.
Our acquisition approach isn't just adding on a bunch of companies. Our goal is to integrate them both from a systems perspective, but also integrate them from a strategic platform perspective. So we've learned a lot over these 4 deals. And every one of them, we pick up things.
And that's why I think even in our prepared remarks, we really got into a lot about our value creation model. We are looking for 3 things: cultural fit; niche, they have something special in their vertical market; and then who is their customer list.
That allows us -- the cultural compatibility is tremendously important because there are changes that we're going to make together with that company. How can we make 1 plus 1 equal 3, 4 or 5, is ultimately our goal.
And then we've kind of learned over these 4 deals like what things can we apply, at what times. We want to take what the acquisition does really well, but we also want to apply what we've learned from the standard platform as well too.
So we've got a robust pipeline. We're really, after learning through these 4 deals, we really want to apply those for future deals going forward. So we, again, we're going to be measured, but we're hoping to have a much more even deal flows and a steadier pace from acquisitions going forward.
Our next question is from the line of Gerry Sweeney with ROTH Capital.
A couple of questions, probably similar to Rob, but slightly different. On the growth side. How much is growth coming from existing customers versus finding new ones? And even taking that a step further -- well, let's just leave it there and then I'll follow up.
Yes. I'll use 2 different examples to categorize that. I mean the short answer is: coming a lot from our existing customers. So 2 different ways that we're gaining market share.
One is we have lots of customers that have a local and national type feel. I mean the health care market is a perfect example of this. So we've invested in a professional service type office in the Nashville area, which is really focused on getting to the C-suite decision-makers from that standpoint. At the same time, we've been working at the local level with a lot of these health care providers. So it's a combination of kind of putting a local and national approach together.
I talked a lot about the standard platform from an acquisition perspective. I think one thing that makes us really special is we're working together on these accounts and it's very much a collaborative approach. So if we're in a local market, and we're trying to gain market share, well, we have influence at a different level that really helps us as well too. So that's a big piece.
I think data center as well as the health care, from a local market share perspective -- and again, I think planning going into next year, in the prepared remarks, I kind of used this example, but we had a health care customer. And we were offering them 4 or 5 different things. We've been at it with them, I'd say, for probably 3 years, building a relationship. We have that onsite account manager.
But now it's a question of how can we bundle these offerings together. We don't go to market where we have 5 different salespeople approach the customer. We go to the market where we have that onsite account manager delivering an overall business solution to them.
So we're able to bundle capital planning, maintenance contract, staff augmentation, proactive analysis all into an overall bundle. That's going to allow us I think even going forward with more of our customers kind of to combine the offerings and to pick up market share, and I think do that in a smart, collaborative approach. So it's really 2 different pieces.
Got it. If you look at your top, say, 10 or 15 customers, how much market share or wallet share do you think you have with them? Or even say, what innings you're in with them in terms of penetration?
We're very early. I mean 1 or 2 inning, I would say, first or second inning at this point. And what it really comes down to is we are very careful. We've culled down our customer list. The customers that we're looking for, it's mission-critical, they can't afford downtime. So I always use the example, if they have a system that goes down on Saturday, they can't wait until Monday. So that's a big piece of it.
The second piece of it is, do they have enough scale? And are they looking to really invest back into their building? So most of the time we end up with customers that have a lot of scale, that have a lot of opportunity, and we are chipping away locally.
But I think kind of as I answered before, like this national and local approach, as we buy companies, as we continue to gain knowledge of the account, we're going to be able to kind of -- I think we're going to be able to pick up market share from that perspective, and basically take advantage of the investment that we've had too.
So I would say very early innings, and that's really because on purpose, because we're selecting accounts that have a lot of future scale.
Got it. I mean I would take that as a positive, being early innings. I'm going to jump around a little bit. Acquisitions. Understand Kent Island, et cetera. But would you ever look at maybe going a little bit -- a little different angle, maybe looking for a company with some specialty services that you could augment your portfolio of services to companies?
Absolutely. I mean if we can -- ideally it'd be great if we could get something that brings us -- gives us market share, gets us a location, and has services or offerings that we don't have. That is absolutely a win.
I mean we've had that a little bit with the Industrial Air acquisition that we did in November of 2023. They had an equipment product line that they really went to market as an installed solution. Then it's a triple win at that point. Customers, you've got an offering, and then you've got a location. Absolutely any opportunity that we can to kind of put those together.
I mean our objective from an acquisition perspective is multipronged. And that really, I think, is a reflection of the opportunity, not only from a -- if you look at our geographic footprint, there's lots of opportunity. But all the -- our wish list of things that we'd like to do, any way we can combine those. So we're always out there looking, we have a really robust pipeline, and trying to find those special deals.
Got it. And then final question, gross margin. I went out -- I was going to go gross margin second, but acquisitions was more pertinent. But gross margins. Can you give a little bit more detail maybe on some of the evolved offerings you're looking at? Obviously, you had the rentals, the chillers. But what else we can look for?
And obviously, gross margins have been ticking up on the ODR side into well above 30%, 31.5% or so. And just curious how sustainable that is, or were there some onetime projects or opportunities that sort of drove it in the short term?
Yes. From a long-term outlook, we think there's lots of opportunity from a margin perspective. We'd love to get to the point where our margins are up over a period of time over to our OEM-type companies.
But again, this year was about OpEx. So it's about rentals, it's about the onsite account managers. We're still working through data-driven solutions from that perspective. How can we improve our maintenance offerings? So sometimes it's a question of strengthening that.
I think looking into next year, is there equipment upgrades or products that we can offer? How can we go to market from a mechanical infrastructure project? How can we add elements of energy and decarbonization into the offerings that we have? Professional services, which we are starting -- we've kind of been at it for a little bit already, but how can we combine those together to really build that capital plan over a period of time?
So we still feel like we're -- we've got a 3-year plan. It's ambitious. But I think at the end of that, we feel comfortable that there's lots of opportunity from a margin perspective.
[Operator Instructions] Thank you. At this time, I'll turn the floor back to Mike McCann for closing remarks.
Thank you. We will be participating in the UBS Global Industries and Transportation Conference on December 3 and 4. If you'd like to arrange a meeting with us during the conference, please contact UBS conference organizers.
Thank you all for joining us today and for your interest in Limbach. If you have any additional questions, please reach out to Julie Kegley at Financial Profiles. Thank you, and I hope you have a great holiday season.
Thank you. This will conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.