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Operator: Good morning. And welcome to the Second Quarter 2024 Limbach Holdings Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] I would now like to turn the call 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 second quarter of 2024. Yesterday Limbach Holdings issued its earnings release and filed its Form 10-Q for the period ended June 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 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 growth and 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 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 second 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 Mike McCann.

Michael McCann: Good morning, and welcome to our stockholders, analysts, and interested investors. Thanks for joining us today. We are very fortunate to have long-term stockholders who have been with us for several years, as well as strong interest from new investors and those who are just learning about Limbach. So I think it’s important to recap our strategy because this is the heart of everything we’re doing as a company. We have a three-pillar strategy to change the way we do business. It differentiates us in the engineering and construction space. First, we are shifting our focus away from new construction towards maintenance, repairs and upgrades of mission critical infrastructure on existing buildings, which lowers our risk profile.

Our goal is to work directly with building owners to provide solutions that create value for them, which gives us the opportunity to earn higher margins. At the same time, we are intentionally scaling back our work on new construction projects, which are typically sold through a bidding process that results in lower margin, higher risk work. As we shift away from general contractor relationships or GCR work, which is primarily new construction, towards owner-direct relationships or ODR work, which are primarily existing facilities, we are building a stronger business that can deliver consistent results across economic cycles. As an example, recently one of our data center customers approached us about performing additional work. Due to our focused account-centric approach, we and the building owner carved out several existing building capital projects that fit our profile, providing solutions and value to our customers.

By executing our strategy, we continued to develop our partnership with our customer and demonstrated firsthand the value that Limbach can bring to the table. Because of this, the building owner now deploys our team on the most technical projects at their facility. In the first quarter, we set a target by the end of this year. ODR would comprise of 65% to 70% of our revenue. That compares to 50% last year. For Q2, we are at 67.7%, so we are well on our way to making this strategic transition a reality. We have seen ODR revenue grow at 19.3% CAGR from 2019 to 2023. I believe in the future, when the mix of the businesses hits approximately 80% of ODR and 20% GCR, which would include the acquisitions, we see the topline total revenue growth and continued margin expansion.

The second pillar of our strategy is to further expand gross margins by evolving our service offerings to better support our customers. During the first half of the year, we invested approximately $4 million in rental equipment for indoor climate control, more specifically air-cooled chillers and air handling units. Our customers have often requested equipment procurement assistance from us in the past to avoid downtime. Now we can provide this service directly at attractive margins. This service offering expansion has proven quite successful as we have now deployed the entire fleet. We have a three-year plan to layer on additional value-added services as our customers increasingly see us as an essential partner in maintaining their building’s critical infrastructure.

The third pillar of our strategy is to scale the business, add key service offerings, and expand our footprint by making strategic acquisitions. Although it appears we have made limited progress to date, we can assure you that our acquisition pipeline is very strong. We remain disciplined in our selection of targeted companies and our due diligence process to ensure we achieve the right cultural and business fit. It takes time, but the pipeline is robust and we are not standing still. We focus on six key verticals, healthcare, industrial manufacturing, data centers, life sciences, higher education and cultural entertainment. These industries require uninterrupted building operations that cannot fail. We provide building owners with solutions and services to maintain and upgrade their mission-critical mechanical, electrical, and plumbing infrastructure.

We believe we have the right strategy and the right verticals to not only grow earnings while increasing margins, but also improve the quality of our business while simultaneously reducing risk. Our approach is to establish strong relationships with our customers. Our customer profile typically falls within our six target vertical markets as a mix of old and new buildings and as a multi-location footprint. They consider their infrastructure to be critical to the operation of their business and will spend money to avoid downtime. In several cases, these building owners have other buildings that overlap with our location. Our branch managers focus 80% of their time and energy on their top five to 10 key customers, which provides diversity to overall customer base by geography, as well as by market vertical.

Additionally, each acquisition has a new customer base with the same type of focus on their top customers, which promotes additional diversity. As our footprint grows through acquisition, the ability to capture market share should increase significantly. This approach allows us to capitalize on synergistic opportunities while maintaining a level of diversity to our geographic footprint. As we expand our relationships with these top customers, our business grows, and we’ve become a more integral part of their operations. In 2024, we made a major investment in onsite account managers who are focused on learning customer facilities and capturing the operating spend needed in their facilities. Gaining the knowledge of our customers’ facilities provides us a distinct advantage when the need arises to develop capital projects.

Recently, one of our industrial clients needed to improve the environment of their production floor. Limbach presented a proposal that combined the utilization of our rental fleet with a custom design-build infrastructure project solution. Despite attempts from the owner to obtain competitive pricing, we presented a value-based solution that could not be compared and therefore commoditized. The account manager relationship is key. We are successfully transitioning staff from the GCR side of the business to onsite account managers on the owner direct side. These team members manage the account relationships and are onsite every day. This embedded relationship helps us develop trust with the building owner, leading to increased market share by expanding our services from operating spend to capital projects.

Our strategy wouldn’t work, however, if we weren’t providing value and high-quality work to our customers. The value and quality gives us the ability to expand our margins as we shift from GCR to ODR. We expect future margin expansion as we introduce new service offerings. Jayme will get into specifics of our second quarter results, but our record second quarter total gross margin and improved free cash flow conversion are evidence that our strategy is working. The alignment and commitment to the company’s strategy by our amazing employees makes our success possible. I’ll now turn it over to Jayme to provide more detailed financial highlights before I return with additional commentary. Jayme?

Jayme Brooks: Thanks, Mike. Our 2024 second quarter earnings press release and Form 10-Q, which provides comprehensive details of our financial results, were filed yesterday and can be found on our website. I will focus on the highlights from the second quarter. During the quarter, we generated total revenue of $122.2 million versus $124.9 million in Q2 2023, and as we expected, total revenue declined by 2.1% due to our purposeful shift to our ODR business. ODR revenue grew 40.8% to $82.8 million, while GCR revenue declined 40.3% to $39.5 million. As Mike indicated, the decline in GCR revenue is intentional as we continue to execute our strategy to ODR. In the second quarter, ODR revenue was 67.7% of total revenue, up from 47.1% last year.

This increase from Q2 2023 is driving our gross profit and adjusted EBITDA results. Our ODR backlog at quarter end was $177.7 million, compared to $147 million at December 31, 2023. GCR backlog was $151.6 million, compared to $186.9 million at December 31. The increase in ODR backlog and decrease in GCR backlog are due to our continued focus on accelerating the growth of our high margin ODR business. It’s important to keep in mind, however, that backlog is the ODR segment does not reflect our full book of business, as many ODR projects are short-term in nature and get sold and completed before becoming part of the backlog at the end of the quarter. Total gross profit increased 17.5% to $33.5 million for the quarter, from $28.5 million in Q2 2023, reflecting our mixed strategy to ODR.

ODR gross profit comprised 75.7% of total gross profit dollars or $25.4 million. ODR gross profit increased $8.1 million or 47.1%, driven by higher revenue, with expanded gross margin in Q2 to 30.6% versus 29.3% in Q2 of 2023. GCR gross profit decreased $3.1 million or 27.7%, due to lower revenue with our focus on smaller and higher quality projects with better margins. This enabled GCR gross margin to expand to 20.6% from 17.1% in Q2 2023. As a result, total gross margin for the second quarter was a record 27.4%, as Mike mentioned, up from 22.8% in the prior year. During the quarter, SG&A expense increased approximately $2.8 million to $23.2 million, from $20.4 million in Q2 2023. As a percentage of revenue, SG&A expense was 19%, up from 16.3% in 2023.

Approximately $1.5 million of the $2.8 million increase was primarily due to our two recent acquisitions that were not part of our company in Q2 2023. The remainder of the increase was driven by payroll, stock-based compensation, and travel and entertainment expenses. For 2024, we are still targeting SG&A expense as a percentage of total revenue of around 18% to 19%, as we continue to invest in our ODR business to drive growth. Adjusted EBITDA for the second quarter was $13.8 million, up 16% from $11.9 million in Q2 2023. Adjusted EBITDA margin for the second quarter was 11.3%, up 180 basis points from 9.5% in Q2 2023. Net income for the second quarter was $6 million or $0.50 per diluted share, compared to $5.3 million or $0.46 per diluted share in 2023.

This represents 12.1% growth in net income, compared to the second quarter of 2023. Turning to cash flow, we had $16.5 million of cash flow from operating activities during the second quarter, compared to $16.9 million in 2023. This difference was primarily driven by the timing of accounts receivable, buildings and collections. Cash flow from investing activities reflects $1.5 million allocated to the purchase of rental equipment during the quarter, which we mentioned earlier and during the first quarter earnings call. Free cash flow for the quarter was $10.9 million, compared to $8.8 million in Q2 2023, an increase of 23.8%, which we define as cash flow from operations minus changes in working capital and capital expenditures. This excludes our investment in rental equipment, which was approximately $1.5 million in Q2.

The free cash flow conversion of adjusted EBITDA for the second quarter was 78.7% versus 73.7% in the second quarter last year. For 2024, we continue to target a free cash flow conversion rate of approximately 70%, excluding our investment in rental equipment, which is approximately $4 million. We continue to expect capital expenditures for 2024, excluding the investment in the rental equipment, to be approximately $3 million, due to the acceleration of our OGR strategy. Turning to our balance sheets, at the end of Q2, we had $59.5 million in cash and cash equivalents and $10 million on our $50 million revolving credit facility at a weighted average interest rate of 5.72%. For the quarter, interest income exceeded interest expense. Our balance sheet remains strong and we are well-positioned to make necessary investments to drive our continued ODR expansion and to make strategic acquisitions.

Now I’ll turn the call back to Mike for closing remarks.

Michael McCann: Thank you, Jayme. We believe Limbach is well-positioned for sustained profitability, continued growth and stability through economic cycles. But I think the genuinely exciting part of our story is there’s still much more to be achieved in our business transformation. There is more to come as we move towards the optimal business mix between ODR and GCR, add additional service offerings and growth through acquisitions. The potential I see is extremely encouraging. As we continue to pick up the pace on transition to business, we’re increasing our total revenue and adjusted EBITDA guidance ranges for the full year 2024. Adjusted EBITDA for the full year is now expected to be in the range of $55 million to $58 million, which is up from our previous guidance of $51 million to $55 million that we presented in Q1.

And our expected full year total revenue guidance range is now $515 million to $535 million, up from $510 million to $530 million, which is our previous range. We’re maintaining our annual goal of 65% to 70% ODR revenue as a percentage of total revenue. That concludes our prepared remarks. I’ll now ask the operator to begin the Q&A.

Operator: Thank you. [Operator Instructions] And our first question comes from Rob Brown from Lake Street Capital. Go ahead, Rob.

Rob Brown: Good morning and congratulations on a good quarter.

Michael McCann: Good morning, Rob.

Rob Brown: First question is on sort of the strength areas you’re seeing in terms of verticals that you’re in. I know there’s the shift going on, but where are you seeing kind of market strength and demand as you plot your strategies?

Michael McCann: Sure, Rob. I — when I think about our verticals, I always think about the nature of the customers, and they’re mission critical. They can’t afford downtime. And I think that’s really helped us. So just to kind of go through them at a high level. Healthcare, every one — just to remind, every one of our locations, that’s a vertical market that they’re super focused on. So we like the ability to be relatively stable. The other thing I think we’re seeing within healthcare is tremendous deferred maintenance. That deferred maintenance has probably gone on for three years or four years. We’re talking to a lot of our customers about the fact that they need to continue to reinvest in their buildings, so that’s going to produce future capital projects.

And I think our ability to deploy onsite account managers is going to allow us to really get to know their building and be well positioned from a capital project in the next couple years. Industrial manufacturing continues to be strong in the middle of the country for us. Continuing reinvestment in facilities, upgrades, different lines that are being added, so that continues to be strong. Data centers, as I mentioned earlier, not necessarily in every one of our locations, but there’s some strength that we’re seeing from existing infrastructure upgrades from that standpoint. And lastly, I would say in the higher ed, life science type market, the customers that we have that have those mission critical labs that can’t afford downtime, they continue to be good, durable spenders.

So, in conclusion, the vertical is definitely having that mission critical, can’t afford downtime, again, I think really helps us and should help us in the future.

Rob Brown: Okay. Thank you. And then in terms of your kind of EBITDA margin expansion has been very strong, what’s sort of the goal that you think this can get to in terms of EBITDA margin as this makeshift fully takes hold?

Michael McCann: Rob, when you think about our strategy, I was — and I mentioned this obviously before too, you think about in terms of our three different pillars. The first pillar is obviously shifting from primarily GCR to primary owner direct and we’re well on the way for that. And that’s going to be able to obviously produce some lift and that’s what’s really helped us the last couple years. The second leg of the stool is really our ability to evolve offering to produce a lot higher margin. So, that’s going to produce another ability from a gain from that perspective. And then you think about the third piece of it from an acquisition perspective. That’s going to help us enhance offerings that we’re looking to introduce, as well as scale, footprint and eventually leverage over a period of time.

So, we think there’s lots of room to go and I think about where we’re at even from our first pillar. Getting through that first pillar, we’re all on our way from that, but I think there’s a lot more to come down the line as well too.

Rob Brown: Okay. Thank you. And then last question is really on the rental fleet. That’s expanded nicely. How much sort of investment do you foresee doing there and what can that business become?

Michael McCann: Yeah. So, I think, we’ve seen — there’s a couple things with the rental. Obviously, we invested this year $4 million in rental equipment and it’s really nice to see this summer that this equipment is really starting to move. One thing I think from, so I think, obviously, it’s working. Then we’re going to be thinking about, obviously, we’re going to take a hard look and think about that going forward as well too. That would be a good business decision. But one thing I wanted to point out in one of the examples that we gave, when I think about rentals and we think about rentals, it’s just another piece that we can bundle into an overall solution. We have an industrial client that they were looking for upgrades, and sometimes the clients will take some time to make decisions.

Meanwhile, they have a need their facilities down. That’s where the rental fleet comes in perfectly. We can really provide that end-to-end solution. Here’s the rental equipment and cooling equipment you need to keep going. That allows you and gives you a little bit of time to make a decision and it just makes a lot of sense while we’re providing the rental equipment for us to get the infrastructure upgrade as well too. So, we’re going to wait and see how it goes this summer, but we’re really very excited about our deployment so far. And again, building these rental fleet into an overall bundled solution is obviously something that we’re looking forward to in the future.

Rob Brown: All right. Thank you. I’ll turn it over.

Operator: [Operator Instructions] At this time, I see no further questions. I’d like to turn it back to Mike for any closing remarks.

Michael McCann: Thank you, everybody, for joining the call today and your interest in Limbach. If you have any additional questions, please reach out to Julie Kegley at Financial Profiles. Thank you, everyone. Have a great day.