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Operator: Greetings, and welcome to Limbach Holdings Fourth Quarter and Full Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeremy Hellman of the Equity Group. Please proceed.

Jeremy Hellman: Thank you very much, and good morning, everyone. Yesterday, Limbach Holdings announced its fourth quarter and fiscal year 2022 results and filed its Form 10-K for the year ended December 31, 2022. The company would also like to note that an updated investor presentation is available on the Investor Section of the company website at www.limbachinc.com. Management will refer to select slides during today’s call and encourages investors to review the presentation in its entirety. During this call, the company will be reviewing those results and providing an update on current market conditions. Today’s discussion may contain forward-looking statements, and actual results may differ from any forecasts, projections or similar statements made during the earnings call.

Listeners are reminded to review the company’s annual report on Form 10-K and quarterly reports on Form 10-Q for risk factors that may cause the actual results to differ from forward-looking statements made during the earnings call. Also, please note that during the question-and-answer session at the end of the call, we will only be taking questions from our analysts. With that, I’ll turn the call over to Charlie Bacon, the President and Chief Executive Officer of Limbach Holdings. Please go ahead, Charlie.

Charlie Bacon: Good morning, everyone, and welcome, and thanks for joining us. Joining me this morning is Mike McCann, partly our COO and Incoming-CEO; and Jayme Brooks, our Chief Financial Officer. We’ve reported another solid quarter and exceeded the upper end of our adjusted EBITDA guidance for the year. For the past several years, we have met or exceeded our adjusted EBITDA guidance, and I credit that to the risk management practices we installed in the business as well as our game-changing strategy of rapidly expanding our owner-direct revenue or ODR segment, as we call it, and focusing on the quality of the General Contractor or GCR backlog. The financial results being produced from our rapid ODR revenue growth, coupled with our earnings for better GCR project selection have led to a steadily improving cash position, all of which helps demonstrate our strategy is working.

One significant event during Q4, I’d like to comment on is we successfully resolved one of our significant claims and expect to collect approximately $10 million in cash. There are two legacy matters that remain that exceed $30 million, and we are patiently yet aggressively working those opportunities to maximize our outcomes. As you know, this will be my last earnings call leading the conversation. After 19 years as CEO of Limbach, it’s trying to take on some other challenges and opportunities that life offers. Mike will be stepping up to the CEO role on March 29. The work he and I have done over the past three years getting ready for this with the full support of the Board is one of my highlights of my career. I think we have executed the CEO selection well.

In addition to the succession planning work, Mike and I have been working together to build out a senior leadership team with the full support of the Board. We have built a very strong and capable team of leaders. We strongly believe that the strategy, we have deployed – has Limbach well positioned for its next chapter, which will be one of value creation, expansion and cash generation. I’m extremely happy to be handing the leadership of the company off to Mike and look forward to transitioning from my role as CEO to that of a shareholder with a sizable position. I greatly care about the company and all the employees and look forward to watching this next chapter of the company under Mike’s leadership. Let me now turn the call over to Mike and Jayme to share the results of the quarter and the full year as well as the outlook for 2023.

Michael McCann: Thank you, Charlie. It’s been a pleasure working with you, especially over the last few years as we’ve set our ODR transformation in motion. I also want to thank the Board of Directors for their support and appointing me as CEO. I’m excited about our plans for Limbach and note that our new investor presentation has some expanded discussions about our vision. Turning to our results, I want to provide some high-level comments on our performance in 2022. Jayme will follow with some further financial highlights, and then I’ll return to discuss what lies ahead before we open up to questions from our analysts. As Charlie noted, we closed the year with a strong fourth quarter that resulted in adjusted EBITDA exceeding guidance for the year.

That marks the third consecutive year of meeting or exceeding our guidance for this line item, which we think is a direct result of our emphasis on bottom line performance. We continue to be focused on growing our OTR segment while aggressively pushing margins as a, primary project selection criteria in GCR. Within GCR, the emphasis on margins continues to result in an expected modest top line contraction. In GCR, as results demonstrate, our rigorous project selection criteria, has gone hand-in-hand with quality execution in the field, driving improved gross margins in the segment. Given that success, along with the makeup of our backlog, we have updated our target GCR gross margin range from 12% to 13% to 12% to 15%, which is summarized on Page 7 of our investor deck, which shows our target gross margin range per segment.

Our consolidated yearly revenue came in just shy of our guidance range, which is primarily driven by supply chain-driven equipment delivery delays, which put some revenue from late in the fourth quarter into 2023. We don’t think those delays indicate any deterioration of the supply chain conditions and remain focused on providing our customers additional visibility and guidance in this area, both in terms of longer-range capital equipment planning and the need to be highly proactive in maintaining existing equipment. As we have noted on our last couple of calls, this paradigm has resulted in strong demand for our service and maintenance capabilities. Our customers often have facilities where they simply cannot be in a position where they need to close due to broken mechanical systems.

As shown on Page 5 of the investor deck, the key end market attributes we seek are favorable demographic support, good secular trends and most importantly, the facilities infrastructure is mission-critical. This is driving plenty of work for us, especially time and material work as we keep those systems operational. Over the mid to long-term, we believe this continued deferment of capital equipment replacement also represents pent-up demand for Limbach. As equipment becomes available, we anticipate working with our customers to provide those equipment change outs. Among the verticals we consider our primary markets, the positive attributes we look for are supporting strong demand in healthcare, data centers, R&D facilities to cite a few. In some cases, infrastructure development in adjacent markets does not directly impact us, but it’s contributing positively to an overall positive demand curve for our skilled labor, allowing us to realize improved margins.

I’ll now pass it off to Jayme to provide some financial highlights, and then I’ll return to address the macro outlook in our guidance for 2023, along with some comments regarding my vision for the company before we take questions. Jayme?

Jayme Brooks: Thanks, Mike. Our press release and Form 10-K, which was filed yesterday, will provide extensive detail on our financials. So I’ll focus on some key highlights. Overall, our ODR transition continues to track well with the ODR segment up to 43.6% of the consolidated revenue for the full year. And more importantly, the ODR segment accounted for 58.8% of the consolidated gross profit for the year. We closed the year with a solid fourth quarter. Most notably, adjusted EBITDA for the quarter was $11.6 million, resulting in adjusted EBITDA for the full year of $31.8 million, which exceeded the high end of our guidance. Our free cash flow conversion as a percentage of adjusted EBITDA was approximately 78% for the quarter and 74% for the full year.

Focusing on the income statement, our gross margin continued to trend positively. Consolidated gross margin during the fourth quarter was up to 20.4%, resulting in full year gross margin of 18.9%. This success continued to be underpinned by our strategic focus on our higher-margin ODR segment, which accounted for 44.6% of the fourth quarter consolidated revenue compared with 30.8% in the year ago quarter. As I mentioned earlier, for the full year, ODR accounted for 43.6% of consolidated revenue. That’s up from 28.6% in 2021. SG&A expense in the fourth quarter was $21.8 million, up $3 million from the year ago period. Full year SG&A expense was $77.9 million, up $6.4 million from the prior year. Digging into the significant driver of the net increase in our SG&A, the majority of the $6.4 million increase from 2021 to 2022 was the full year effect of SG&A expense from the Jake Marshall entities, which is approximately $5.9 million.

We have also made strategic investments in 2022, which are reflected in the SG&A of the ODR segment, consisting of mostly salespeople and supported staff. Given that segment’s general profile of quicker hitting small dollar value work than historically has been the case with GCR, it requires more selling and transactional support to grow the relationships, drive revenue and those margins and those investments were also a factor in the increased SG&A for the full year. When looking to model 2023 SG&A, the full year should run at a similar rate as a percentage of revenue to 2022. Consistent with our prior year, our revenue in the second half of the year is expected to be stronger than in the first half which will cause SG&A expense to be a higher percentage of revenue in the first half of the year.

In addition, the first half of the year will include non-recurring CEO succession costs associated with the transition that was announced in January. These costs are expected to be over $1 million with the majority of the costs hitting in Q1. These costs will run through SG&A and will be an adjustment to our EBITDA calculation and will impact net income and earnings. Additionally, during 2022, the restructuring that took place to wind-down our SoCal operation in our GCR segment in Eastern Pennsylvania negatively impacted our income and earnings before income taxes by approximately $6 million. The majority of those costs and distractions are behind us. However, there have been some delays in wrapping up certain projects and claims, and we will see some continuation of costs into 2023.

Once those are completed, we expect to see a positive impact on the business and, in particular, our gross margins. The fair value of contingency consideration for Jake Marshall acquisition also negatively impacted net income and earnings in 2022. However, the fact that the first earn-out target was met as of December 31, 2022, is very positive as it was well earned by the Jake Marshall team as they exceeded their planned EBITDA for the year. For 2023, we expect minimal expense related to the earnout as the majority of the earnout for 2023 is already accrued on the balance sheet. Turning to cash flow, as we have discussed before as a general rule of thumb, we expect our free cash flow conversion to, continue to be approximately 70% of our adjusted EBITDA when viewed on an annual or trailing 12-month period.

Just given the nature of our business, cash flows can be volatile over short periods. So we really urge everyone to focus on 12-month period or longer when evaluating our cash flow performance. Our ODR shift is having the intended effect on our operating cash flow performance. Fourth quarter operating cash flow was $12.4 million and full year operating cash flow was $35.4 million. The primary use of cash we generate continues to be the reduction of debt. We paid down $13.4 million of our term debt during 2022. At December 31, total debt outstanding was $31.8 million and total cash was $36 million, allowing us to finish the year with the net debt balance of zero. We also used $2 million during Q4 on our share repurchase program, repurchasing approximately 180,000 shares of our common stock.

As Charlie mentioned, we also settled one of our outstanding claims in Q4 equal to the carrying value of the claim that was in the contract asset account on the balance sheet as of September 30. Therefore, there was no impact to the income statement and the customer was billed for the amount in Q4, which is now included in accounts receivable as of December 31. We expect to receive the cash payment of approximately $10 million for this receivable in the first half of the year. This is two claims outstanding with a total gross value north of $30 million. And I’ll remind everyone that the outcome of those settlement negotiations is something we cannot forecast, including the terms of the settlement amount, the timing of when the cash will actually be collected.

Our balance sheet is strong. And with the business expected to continue to yield free cash flow, we currently expect to have the strategic flexibility to pursue our acquisition program without needing to turn to equity financing. And as part of our capital allocation strategy, we continue to evaluate and discuss additional share repurchase programs with our Board of Directors. I’ll now hand it back to Mike.

Michael McCann: Thank you, Jayme. As noted in our press release, we are introducing financial guidance for 2023. We expect full year revenue to be in the range of $490 million to $520 million. We also expect adjusted EBITDA to range from $33 million to $37 million. Underpinning the confidence in our outlook for 2023 and also the next several years, there are a few key drivers to note. First, the outlook of our industry remains favorable. Demand for building construction retrofit, maintenance and service is strong and expected to remain so for the foreseeable future. Limbach is also very focused on being disciplined in working – with customers where their systems are mission-critical and have needs regardless of the macroeconomic environment.

In these type of buildings, the owners can defer large capital expenditures, but they can’t avoid immediate repairs. This allows us to flex between repairs of existing equipment and infrastructure upgrades. The second leg of our thesis rests on our positioning of Limbach based on a differentiated business model that combines engineering, craft labor and a true partner approach, all of which – creates value for our customers. I want to emphasize this point – as we think we’re creating a unique differentiated model that combines elements of traditional non-residential construction, building service and maintenance, energy services, data analytics and property management. We have talked for some time about our customer relationships, and my focus as CEO will squarely be on maximizing those relationships as we work to be an indispensable partner to those customers through our provision of these cross-disciplined products and services.

As shown on Slide 10, as our building owner customer relationships evolve from reactive transactional relationship to a proactive trusted adviser, we expect to have an opportunity for further margin expansion. We have tremendous customer base that we’ve built over the last few years and are very focused on delivering value for them allows us to drive an appropriate return on our assets here at Limbach. Third, our balance sheet is in excellent shape, providing us strategic flexibility to pursue quality acquisitions while also investing in the growth of our business. We’ve done a lot to reduce our risk and improve our cash dynamics, which sets us well to attack our strategic plan. We have built a large pipeline of opportunities, but we’ll continue to be very selective, ensuring that each potential acquisition has the proper – synergy with our strategy.

We learned a lot from our successful integration with Jake Marshall. We have built an integration team, and we’ll be looking to apply some of those same principles and future acquisitions. As shown on Page 12 of the investor deck, there are four key areas where we look to improve quality of earnings post acquisition, data-driven decision-making, implementation of standard operating systems, solution selling to owners and a niche-based customer mindset. When we stop to consider the state of the market, it is clear that in recent years in particular in response to supply chain issues, building owners have become more attuned to the need for value-added service and maintenance of their building systems. This has created an excellent opportunity for us here at Limbach to leverage our relationships with these building owners to become an indispensable partner in helping them extract maximum value from their physical assets.

Our long-term opportunity centers on our ability to deliver engineering, service, maintenance and project work, much of it rooted in data analytics. Utilization of data will allow us to work with our customers to identify and design optimal systems for those assets making us an indispensable partner for them. We are confident we are uniquely positioned due to the combination of our disciplined approach, engineering solutions and craft expertise. We’re still in the early innings of this shift in our business. Hitting a 50-50 segment revenue mix in ’23 will be an important milestone, but it’s just that a milestone on a much longer journey. In closing, I want to thank Charlie and wish him the best of what lies ahead. Charlie it’s been a pleasure working with you.

With that, operator, please open the Q&A.

Operator: Thank you. Our first question comes from Rob Brown with Lake Street Capital. Please proceed. Rob, your line is live.

Rob Brown: Hi Mike, thanks for taking my question. First question is – congrats on the first quarter on the quarter. First question is about the demand environment, what are you seeing in terms of kind of the real-time demand environment? Are you seeing a shift more towards the service and maintenance side of the business, is that become more pronounced or just a sense of how the demand environment is playing out into ’23?

Michael McCann: Good morning, Rob, it’s interesting from a demand environment, one the things that’s really helped us. I think one of the things that’s, really helped us is really the vertical markets that we most from healthcare to data centers, to industrial facilities to higher end to life sciences. We see tremendous demand. And I think our ability to really focus on our key customers to dedicate resources – we see it’s helping us now and as well in the future, depending on what happens, whether they’re in a stage of whether repairing a lot of small equipment or from a large capital infrastructure position, we really looked at ourselves that we positioned. So I think the key is our focus on those mission-critical – those sectors, that mission-critical equipment. And we’re kind of excited in the future from a – demand environment from them as well.

Rob Brown: Okay, great. And then some of the margin kind of trends seemed pretty good in the quarter. How do you see those continuing into ’23?

Michael McCann: So ODR, we’ve maintained to 25% to 28%. We did raise the GCR from 12% to 13% to 12% to 15%. So we see a lot of opportunity from a margin perspective. And just to kind of go into a little bit of detail, we’re still kind of in the early stages of relationship with a lot of these building owners, and it’s much more transactional at this point. Some of them we’ve reached to the point where we think we’re in that trusted partnership position. So from the ODR segment, we look – we think there’s opportunity beyond even the margin range that we gave of 25% to 28%, but that’s going to depend upon how we evolve our relationship with our customers. On the GCR side of things, I think one of the reasons we were able to raise that margin from 12% to 13% to 12% to 15%, is that as the business shifts to being more owner-direct, it’s a lot – we’re less dependent on those GCR projects.

And we’re able to demand a lot higher margin because we can be extremely selective with that. So I give a lot of credit to our local operators. They’re really looking at making – and ensuring that we get the best return on our teams. And that’s automatically driving us towards the higher segment return on owner direct. So that kind of – is happening naturally, it’s happened over the last two or three years. So, we kind of expect that going forward. But with that being said, I think at the same time, there’s one opportunity for margin expansion both in owner-direct and GCR.

Rob Brown: Okay great, thank you. I’ll turn it over.

Operator: Our next question comes from Chip Moore with EF Hutton. Please proceed.

Chip Moore: Good morning, thanks. I guess first, Charlie, best wishers and Mike congrats on the new role.

Michael McCann: Thank you.

Chip Moore: You talked a bit about – coming in as a new CEO, but I’d love to maybe hear can you expand on what you see as the biggest focus area, continuation on execution like you’ve been doing or any new focus areas. And then particularly in relation to that sort of Limbach 3.0 slide, getting to 50% to 70% ODR over time. I assume that contemplates on M&A, but curious on your thoughts there?

Michael McCann: Sure. We’re excited that we’re unable to – we’re set up to get to the 50-50 mark two years early in 2023. So we’re looking – as you mentioned in that Limbach, we’re going to extend well beyond that 50-50 from an owner direct mix compared with GCR. From a strategic perspective, we have a lot of opportunity to really involve our offerings. Right now, as I kind of mentioned in the previous question, a lot of it is based upon just starting that trusted relationship, but there’s a lot of value beyond that driving long-term value from that perspective. So we’re really focused on our top accounts. We’re focused on – dedicating resources to those top accounts and getting to the point where the customers trust us. We’ve been really focused on assigning account management resources.

And we believe that as we gain those trusted relationships, they’ll be able to give us more information on their business, whether its data and data could extend from utility information, asset information – information coming off our analytics platform, that’s going to be paramount to allowing us to provide solutions to those customers. And we’ll be in a position, ultimately, where we’re less reactive and more proactive. That will help us both from our business and our customers’ business to, understand what their long-term spends are going to be. Provide us visibility in the future and make sure that the customers are making the right decisions. So I think it’s short, the – we’re going to continue to expand and really be focused really on those building owner relationships.

And I think even from a margin perspective, again, we’ve set that range of 25% to 28%. And to get to the higher end of that and beyond is really about changing our relationship with the customers and making sure that relationships piece – a key piece of it, but also to make sure that we’re providing a lot of value to those customers, too, and we’re providing insights into their business. So we really look at that as lots of opportunity in that Limbach 3.0 that you referenced.

Charlie Bacon: Chip, yes – with the customer base that we have today, in many, many cases, these customers have multiple locations, multiple buildings, multiple campuses yet we’re working on one campus or in one building. So the core focus right now on account management, really expanding that or as we say, gaining more wallet share with that customer is to focus on that account management, develop that relationship that we can get into all of those other buildings. And that happens naturally – you have a trusting relationship. They just start introducing the other buildings to us. So that’s – I think that’s one of our core areas of focus going forward to really expand those revenue dollars out of the existing customer base. We already spent the money selling the relationship. Now it’s a matter of expanding that relationship and gaining more wallet share.

Chip Moore: That’s helpful, Charlie. And you did mention some of the organic investment on the ODR sales – we should expect continued investment, more organic. And then also you think the assets you could scoop up that might – whether it’s a new market or something like that, that might be beneficial?

Michael McCann: Yes, Chip, just from an organic perspective, we’ve had a lot of new business type sales resources, and that’s going to really shift to expanding that to really – or shifting that to more of an account management focus. So I think we spent a lot of money. We’ve gathered this gigantic customer list. And really, it’s about kind of changing our type of relationship. With less new business development, it’s in a board of account management as we move forward. The other piece of it too is, as I talked about changing our relationships, we want to make sure that we’re being as relevant and as cutting edge for those customers as possible to even from a tech perspective as well. But as you mentioned, the other piece of us from a growth perspective is acquisitions, which is really important to us.

So – as we mentioned in the script, we’re excited that the Jake Marshall deal better than expected. And there’s a lot of lessons learned that we have coming out of the Jake Marshall deal. And we’ve really worked in the last I’d say, six or eight months to build a robust pipeline. And in that robust pipeline, we’ve seen kind of two different styles of acquisitions, one are more tuck-in type ODR centric type company. So there’s a bunch of companies in that range that’s helped us as well. And then the other piece of it is, from new geography perspective. Can you get us to places where we’re not right now. Our focus is really east of the Mississippi. And if you look at our geography, we have lots of gaps right there. So I think – the pipeline is robust.

There’s a lot of opportunity within the acquisitions. And again, if I point back to Jake Marshall, it’s gone extremely well. A lot of that is the credit to all the staff at Jake Marshall to make – that we’ve kind of learned together. But we’ve really learned about that, and we’re going to take some of those principles as we apply into new acquisitions as we move forward too.

Chip Moore: Fantastic. And maybe one last one on the guide, I assume it’s around a 50-50 split for the year ODR/GCR. I just want to confirm that. And then any more on the sort of second half waiting should we kind of think about similar to what we saw in 2022 in terms of revenues? Thank you.

Michael McCann: Sure. 50-50 is right now what we’re projecting for 2023. And just from a split perspective, there’s kind of a natural seasonality to our business, and it’s kind of a normal cadence we’ve had over the last couple of years, which is the back end is a little bit stronger than the front end of it. But again, we kind of think ourselves as a normal cadence to that as well. Jayme, do you want to add to that?

Jayme Brooks: Yes, no, yes we’re targeting that 50-50 as well as just thinking about the SG&A to, it should be relatively same as a percentage of revenue as – we mentioned in the script, but you’ll see it a little bit higher, obviously, based on that cadence of a stronger back half.

Chip Moore: Perfect, all right. Thanks, Jayme. Thanks, everybody. I’ll hop back in queue, thanks.

Jayme Brooks: Thanks Chip.

Operator: At this time, I would like to – we do have a follow-up question. One moment please. At this time, I will turn the call back over to management for closing comments.

Michael McCann: Thank you, everybody, for your continued interest in Limbach. We’re really excited about the strategy. We feel like we’re in the early innings of it, and there’s, a lot of opportunities as we go forward as well, too. So I’d like to thank everybody for their interest and all the employees of the company for successful execution in ’22 and looking forward to ’23. So if you have any questions, please reach out to our IR firm and all the best.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation, and have a great day.