Limbach Holdings, Inc., Q3 2018 Earnings Call, Nov 20, 2018

Limbach Holdings, Inc.
NasdaqCM:LMB
FQ3 2018 Earnings Call Transcripts
Tuesday, November 20, 2018 2:00 PM GMT
S&P Global Market Intelligence Estimates
-FQ3 2018- -FQ4 2018- -FY 2018- -FY 2019-
CONSENSUS ACTUAL SURPRISE CONSENSUS CONSENSUS CONSENSUS
EPS (GAAP) 0.46 (0.46) NM 0.47 0.47 1.54
Revenue (mm) 140.92 135.06 (4.16 %) 140.25 542.70 576.00

Currency: USD
Consensus as of Nov-20-2018 12:31 PM GMT
- EPS (GAAP) -
CONSENSUS ACTUAL SURPRISE
FQ4 2017 0.36 0.12 (67.57 %)
FQ1 2018 0.06 (0.60) NM
FQ2 2018 0.29 0.09 (68.97 %)
FQ3 2018 0.46 (0.46) NM
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Contents
Table of Contents
Call Participants .................................................................................. 3

Presentation .................................................................................. 4
Question and Answer .................................................................................. 12
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LIMBACH HOLDINGS, INC. FQ3 2018 EARNINGS CALL | NOV 20, 2018
Call Participants
EXECUTIVES
Charles A. Bacon
President, CEO & Executive
Director
Jeremy Hellman
Senior Associate
John T. Jordan
Executive VP & CFO
ANALYSTS
Brent Edward Thielman

D.A. Davidson & Co., Research
Division
Gerard J. Sweeney
Roth Capital Partners, LLC,
Research Division
Justyn R. Putnam
Talanta Investment Group, LLC
ATTENDEES
Unknown Attendee
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Presentation
Operator
Greetings, and welcome to the Limbach Holdings Third Quarter 2018 Earnings Call. [Operator Instructions]
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mr. Jeremy Hellman of The Equity Group. Thank
you. You may begin.
Jeremy Hellman
Senior Associate
Thank you very much, and good morning, everyone. Yesterday, Limbach Holdings issued the
announcement of its 2018 third quarter results and filed its Form 10-Q. The company will also be using
a slide presentation to accompany this earnings call. The presentation can be found in the Investors
section of the company website at www.limbachinc.com. The company encourages everyone to review the
forward-looking statement disclosure on Slide 2 of the presentation.
With that, I'd like to turn the call over to Charlie Bacon, CEO of Limbach Holdings. Please go ahead,
Charlie.
Charles A. Bacon
President, CEO & Executive Director
Good morning, everyone. Thank you, Jeremy, and welcome, and thanks for joining us. Joining me today
is our Chief Financial Officer, John Jordan; and our Executive Vice President of Acquisitions and Capital
Markets, Matt Katz.
As Jeremy mentioned, we'll be using a presentation deck and I'll note which pages we are on. So let's go
to Page 3 or Slide 3.
We have 5 key areas of focus for our prepared remarks. Number one, first and foremost, we're going to
hit the Mid-Atlantic business unit and what's happening there. Number two, comments around our solid
performance we see across the company and other business units. Number three, we'll update you on the
company's management initiatives to address our continuing growth. Number four, John will provide a
detailed set of comments around our results and our focus on financing. And finally, number five, I'll wrap
up with some preliminary thoughts on 2019.
Let me start off with some global comments. Our revenue for the quarter was strong for both Construction
and Service segments. Our SG&A is tracking as expected, but we incurred substantial write-downs late in
the quarter on several major projects in our Mid-Atlantic region leading to our loss in the quarter. When
isolating Mid-Atlantic, the balance of our business is performing very, very well and in fact, beating our
plan with strong year-on-year growth.
Let me start with Mid-Atlantic. I want to give you a thorough explanation of the background, where we are
and what we see going forward.
So I'd ask that you now move to Slide 4. First, let me provide some context around Limbach and the
region. Currently, Limbach is managing hundreds of projects across the country, and we separate these
projects by branch, location or region. The Mid-Atlantic is one of Limbach's largest and historically has
been one of the most profitable. However, as we have reported in the past, certain projects began to see
higher-than-expected costs, and we took certain write-downs in the first half of 2018.
We thought the majority of our challenges within Mid-Atlantic were starting to get behind us. In late
September, during our normal monthly project review process, several teams reported further delays
on the completion of their projects, the majority of which were outside of our control along with quality
control issues. Our local management team then notified senior management.
This was very late in September. We agreed to a work plan to get to the bottom of the problems and
review work completed in late October. We wanted to understand the issues that were causing the delays
and cost impacts and provide a better projection from the information on hand to project the final cost of
these projects as well as to identify recovery options.
Following management's work, our auditors commenced their work and we notified our bank group and
the surety of our issues. The auditors' review led to confirming all charges are properly accounted for
within the quarter due to the impacts realized in the quarter due to the delays or rework.
To restate, I want everyone to know this region has been a strong performer for Limbach. In fact, from
2004, when I took on leading the company, the region in one particular year delivered one of the largest
single bottom line contributions in the company's history. Over the period of 2008 through 2017, this
region provided average revenue in about the $60 million range and delivered an average 6% EBIT over
the period. It had both stellar years and some tight years during the recession, but on average, a solid
performer.
So what happened? The region's capacity to deliver was stressed with revenues growing to over $100
million in 2017 and that number will repeat again in 2018. We just didn't have enough human capital on
the mechanical and plumbing side of the business to deal with what was sold, while realizing all the delays
that stacked up against us.
Our normal craft manpower in the region is in the range of 175 to 225 craft professionals. At our peak,
earlier this year, the headcount swelled to over 350. That was an incredible challenge for the business unit
in the booming construction industry.
For those of you that have traveled in and around Washington D.C. over the past several years, you can't
help but notice all the tower cranes. The region is just simply booming. Within the Mid-Atlantic region,
we self-performed mechanical piping, plumbing and electrical, with electrical being a small part of our
business.
We subcontract out our sheet metal fabrication and installation. Our losses are coming out of the
mechanical piping and plumbing work. I wanted to reinforce we have terrific, terrific talent in the office
and craft workers in the Mid-Atlantic business unit. For years, they have produced good returns for the
business with some great customers. They just could not handle all the work at once in the heated labor
market. In my 22 years of running businesses in that region, I think it's one of the most -- best profitable
markets in the USA.
Limbach has had a steady presence in the market for years dating back to the air and space museum,
which we built with the Gilbane Building Company back in the 1980s. We have a strong local brand and
reputation for both service and construction and more recently with electrical.
So where do we stand on the projects that have had the larger financial impacts? The Columbia Place
Marriott Hotel opened earlier this month. It was originally scheduled for September, but due to drywall
concerns, we just couldn't finish our work and it dragged out into this month.
Our National Institute of Standards turbine project continues to face delays, but we believe after
Thanksgiving, we should be able to have the initial start-up, which triggers substantial completion.
Our rail to Dulles project, where we're installing the HVAC and plumbing on 7 stations, will substantially
complete in Q1 of 2019.
Finally, a large hospital project, which faced numerous delays upfront with very little relief on the back end
of the schedule will have the majority of the rough-in of our systems complete next month.
Our manpower is now down to 240, and we expect to see that drop to our normalized levels next month.
Finally, regarding the D.C. United Soccer Stadium, which we completed last July, we are in active
conversations with the general contractor, Turner, to resolve our outstanding change orders and 2 claims
we submitted.
We have just about $17 million in outstanding change orders with our customers, which are continuing to
be negotiated. We expect to see many of these change orders cleaned up between Q4 and Q1 of 2019.
In addition, we have several claims assembled and others potentially in development to recover from the
impacts caused by others. This is all future capital coming into the company to improve our balance sheet.
Depending upon negotiations, we could realize additional revenue and profit in future periods. To be clear,
we have very few claims in the overall company. When we all burnt due to forces outside of our control,
we do aggressively pursue recovery. An example is a long delayed project known as Santa Monica [ AET ].
We recently resolved the claim, which took over a year to resolve. It will lead to additional capital coming
into the business in Q4 along with a modest profit upside recognition for our Southern California business.
Concerning actions we have taken within Mid-Atlantic, let me go over 4 key moves we have made:
Number one, while we continue to sell our profitable service and maintenance work direct to building
owners and our smaller electrical projects, we are only selling larger complex HVAC and plumbing projects
that start after June 30, 2019. We have sufficient backlog through that period, which allows us to stay
within our acceptable craft manpower range. Number two, we have a new leader in the business unit
and have an additional Operations Manager from another region there weekly to support the branch's
completion of the project work and assist in change order negotiations and claims recovery process.
Number three, we commenced weekly reporting to monitor the completion of the remaining work and
collection of our capital. Number four, as previously mentioned, across the company, we have increased
our training of our staff along with auditing our operations. But specific to Mid-Atlantic, we are providing a
focused training effort, especially with our superintendents and foremen to reinforce our proven Limbach
management processes.
These 4 actions involve stronger leadership, a focus on profitability collecting our outstanding capital and
creating a scalable business unit for the long term.
To wrap up my comments on Mid-Atlantic, our goal is always to be transparent, timely with information
for our investors and open about our strategy and focus on the future. We understand that timeliness
matters.
As a result of a number of moving parts around the Mid-Atlantic region, we worked diligently with our
team since hearing of the news coming out of the project reviews in late September for the preparation
of the third quarter to be as accurate and our assessment of the write-downs of the region, which totaled
$9.6 million in gross margin during the quarter. This was a major exercise for the company in the month
of October.
We certainly understand the questions from all the investors will be. Do you have a handle on the Mid-
Atlantic cost and is there a strategy to address these challenges? We work diligently to be as accurate as
we could in assessing the region with the information on hand and have laid out our activities and strategy
and certainly are open to any questions surrounding the region at the end of this call.
All right, I'm going to move on to Slide 5 now. And this is some terrific news. Overall, the business is
performing well absent the write-down challenges in Mid-Atlantic.
On Slide 5, you will see we are maintaining our full year 2018 revenue guidance of $530 million to $550
million. With year-to-date revenues of $395 million and construction and service project backlog of $487.5
million at September 30, I'm confident we'll reach our guidance.
Gross profit was down for the quarter due to the Mid-Atlantic write-downs. When you remove Mid-Atlantic
from the mix, the rest of the business is performing at our targeted gross profit margin of 15.3% with
year-on-year performance growth of 31.8%. As previously stated, we expect to see gross profit margins in
the 15% to 16% range.
Year-on-year comparison of sales bookings as of September 30 has construction of 50 basis points.

Service is down by 70 basis points due to several larger service projects being booked. Our margins on
maintenance contracts are up 100 basis points and our spot or T&M service contracts are up 300 basis
points. We continue to push up margins where we see the opportunities.
Now moving on to Slide 6. Our pipeline remains very robust with over $3.4 billion being tracked. The level
is remaining steady across the company, which is allowing us to be more selective in what we pursue.
When we look at combining our aggregate backlog of $487 million plus our promised work of $354 million,
we have a combined $841 million of work ahead of us.
Speaking specifically on the Construction segment, our backlog at September 30 was $435.8 million. To
reach our segment revenue goal for the year, that means we need to burn about $124 million of backlog,
although we typically see some quick-hitting book and burn projects, which will add to these figures. As
the graphic on the slide shows, if we burn the whole $124 million in the quarter, this leaves us with $655
million of work for 2019 through 2021.
Looking forward, we have several major opportunities we're pursuing, such as the next phase of a mega
data center, 8 major healthcare projects with HCA, UHS and several regional players. We also have a large
healthcare project at Ohio State University. Several years ago, we secured and successfully delivered a
hospital with a total constructed value in excess of $1 billion at OSU. This is a similar sized product, and
we believe we have a very strong chance of securing it.
The Bedrock opportunity in Detroit, which we mentioned in our last call continues to develop in our
preconstruction services. While the engineering and preconstruction services are in backlog, these projects
will provide revenue to our mission and operation through 2022.
We're also tracking a number of Disney projects in Orlando, where we continue to be viewed as a very
respected mechanical contractor on the Disney properties. As previously commented, there is a major
update to EPCOT that is going on, and we're pulling in our fair share of that business.
Florida is red-hot right now and we have done a really terrific job at staying disciplined with smart
profitable growth. Our expansion into Southeast Florida is going extremely well, actually better than
expected. We're also looking at our next step in Florida for possible expansion into Jacksonville where
we're completing our first net zero building.
Of our 12 business units, 10 reported year-on-year growth in the quarter with Southern California, New
England, Ohio and Florida tracking ahead of plan. I want to note one engagement that occurred during
the quarter in New England. You may recall the [ utility and ] gas explosions that occurred recently in the
greater Boston area. We were hired by Gilbane to inspect residences and businesses throughout the region
to check on systems to get the service back on. We have been engaged with the program since September
on a time and material basis. We have 60 plumbers plus management staff working overtime, engaged
in the program and it will continue through early December. This is the testament to our reputation in
the region. It will also help us with improving our bottom line results for the year. That work was not
expected.
Turning now to Slide 7. On this slide, we provide a recap of our year-to-date results as reported,
comparing those same figures by excluding Mid-Atlantic. In the third column, we also have our plan for
the year for the business excluding Mid-Atlantic. As you can see, revenues are a bit ahead of plan but EBIT
is a remarkable 66% ahead of our plan. Our success in controlling our SG&A expense coupled with upward
pricing by us is translating into improved profitability, excluding Mid-Atlantic.
Let's move on to Slide 8, where I'll address the Service segment where all aspects of the segment are
performing well. Year-to-date service sales of $83.3 million were up 46% from the prior year. Maintenance
contract sales for the year as of September were just above $3 million, a record amount year-to-date
since we started our rapid service expansion program back in 2013.
Our growing maintenance base at September 30 is now a record $14.8 million, positioning us well to hit
our 2018 exit goal of $15 million. This brings our year-on-year growth for our maintenance base to a
healthy 15.6% growth. We ended the quarter with Service segment backlog of $51.7 million, which was a
sequential increase of 9.5%.
The service pipeline continues to expand from the investments made with additional sales personnel and
we see no shortage of opportunities. We believe the tax cut is fueling some of the expansion especially on
the project side of our Service segment.
Our revenue split between segments are tracking 19% Service, 81% Construction. We remain focused on
moving the Service revenue to 25% of overall revenue in the midterm.
I'm now moving on to Slide 9. I'd like to fill you in on several of the moves the company has made or
in the process of making. The company has doubled its size organically since 2014 and we expect that
growth to continue. We decided to step back, look at the management structure and policy and processes
to allow us to continue our growth, both organic and through acquisition.
Here is summary of the actions taken. Number one, we employed a consultant in August to review our
construction project administration around our policy and processes. They found we have very strong
daily, weekly and monthly management practices, which candidly were not properly executed in Mid-
Atlantic. Number two, we have been engaged with the review of those processes since Q4 of 2017 to
further refine it and the introduction of better forward metrics. We refer to this as our Big Data project.
More timely data and holding people accountable to core indicators will allow us to improve profits. We
have piloted the program in our Florida business units since late 2017. In 2018, our Florida business
through September had only $206,000 in write-downs and over $2 million in write-ups on approximately
$63 million in revenue. Timely data is making a huge difference in our financial performance. Number
three, we are moving into the center additional training and audit resources in 2019 to better assist
with orientation of new staff and the development of human capital to execute the Limbach standards.
Number four, we are continuing to take advantage of our engineering resources and employing technology
to minimize field fabrication. In 2019, we'll be assembling a plan to introduce manufacturing centers
to reduce the need for field craft levels, which will improve profitability and allow safer construction
execution. Basically, more plug-and-play like our corridor racking systems. Number five, we instituted
12-month labor look-aheads, staying within our capacity to deliver self-performed work or determining a
subcontracting plan like we did on the Red Wings arena, the largest contract in the company's history.
In terms of recruitment of human capital, our executives and our company have stellar reputations in our
local markets.
Limbach is a very, very attractive employer. However, in this heated labor market and the booming
construction industry, we have to be more careful in looking at our forward projections for our needs for
manpower. And again, we need to determine how many people we can hire within a region in a given
period, and we expect to continue to grow but also employing more subcontractors to execute our work
and we maintain excellent relationships with our subcontracting community.
We are also reintroducing superregional oversight. Prior to the Great Recession, Limbach employed
regional presidents with 1:4 ratio with the business units. With the growth we have experienced along
with the expected continued growth, we are reintroducing that structure and elevating a proven existing
business unit manager to be Co-Chief Operating Officer. This will take effect December 1. This move is
coming out of our management review tied to the needs of our 2019 business plan.
And now turning to Slide 10. I want to spend a few minutes introducing our LEAP program. LEAP stands
for Limbach Energy Assessment for Performance. For years, Limbach has performed various energy
performance-related projects known as performance contracting. We also installed building control
systems. During our acquisition pursuits, we came across a technology solution that would enhance our
ability to sell more building automation systems, energy projects and service related work all direct to
building owners. We have piloted the program earlier this year and the results have been very positive.
As we move into 2019, we'll be launching Limbach Energy Assessment for Performance or LEAP into
a couple of our business units. This service sets us apart from our competition by collecting energy
performance data on various pieces of equipment in complex buildings, allowing us to recommend projects
to building owners to achieve optimal building performance.
We will be focused on ramping up the service in our Ohio and Michigan business units, providing we realize
the continued success where we'll introduce the offering to our other business units. It allows us another
offering to expand our direct-to-owner services, which tend to be the most profitable and cash flow well
for us.
At this point, I'm going to hand our comments off to John for review of our balance sheet and financing
discussions.
John T. Jordan
Executive VP & CFO
Thank you, Charlie. Before getting into the details, I just want to remind everyone to please see our 10-
Q for a full breakdown of our results, and also note that the presentation accompanying our remarks
contains appendix pages, which contain further data we think you will find helpful.
Let me begin right away to address our current plans surrounding the refinancing of our senior debt
obligations.
During the period, our managing bank Fifth Third made us aware that they wanted to work with us to
ensure smooth transition to a new senior lender. We have enjoyed a 2.5-year relationship with the existing
bank group and an 8-year relationship with Fifth Third. We appreciate their support as we work through a
transition. This has been a supportive and productive process so far.
Our top priority right now is to finalize our negotiations with Fifth Third and expect to have an agreement
in place by November 30. Key terms of the restructured credit agreement with the existing bank group are
expected to be: the revolver and term loan maturity date will be March of 2020. The bridge loan matures
in April of 2019. Secondly, a reduction of the total revolver from $25 million to $20 million between
now and January 31. Also, simplified covenants including a minimum adjusted EBITDA in the fourth
quarter of 2018, fixed charge coverage ratios in 2019 and enhanced bank reporting. Fourthly, specific
milestone dates associated with the refinance process. Fifth, limitations on the incurrence of new debt and
acquisition activity. And finally, a potential increase of the interest rate if the amendment is not executed
by November 30.
To assist in the refinancing effort, the company has engaged a middle-market financial institution that
is currently a member of Limbach's existing bank group. This institution is seeking to underwrite and
hold approximately $15 million of a $30 million revolver credit facility and syndicate the balance of the
revolving credit facility. The $30 million revolver is an increase over our current revolver and provides
capacity to draw as needed for working capital purposes to fund organic growth.
Over the past quarter, our average revolver draw has been $7.7 million. There is capacity in the revolver
to support working capital needs and potential acquisitions as well.
The new lender will place up to a $50 million term debt. The proceeds of the new term financing will be
used to retire the company's existing indebtedness, pay fees and expenses, provide undrawn capital
for M&A financing and for general corporate purposes. The contemplated financing remains subject to
underwriting, syndication and other customary terms and conditions.
The planned refinancing with anticipated draws at levels below the total available keeps the total debt
ratios within levels we're comfortable operating the business on an organic growth basis as well as with
M&A earnings included. As of September 30, the term loan and bridge loan combined totaled $23.2
million.
Turning now to Slide 11. The company believes that it will have sufficient liquidity with its current cash
balances and borrowing capacity under the amended credit agreement and new revolver to meet its short-
term cash needs. To supplement our cash availability and borrowing capacity and consistent with the
fourth quarter of 2017, the overall volume of work being performed is increasing.
September was the largest billing month of the year. This overall increase in volume is expected to
generate positive cash flow in the fourth quarter and into the first quarter of 2019.
The gas line repair project in New England that Charlie referenced will be a big contributor to cash flow
and gross profit in the fourth quarter.
During the quarter, our net overbill position improved as well. The net overbill position increased by $8.8
million from June 30 to September 30. This improved overbilling will generate cash flow in the fourth
quarter.
Moving to the P&L. The total revenue for the quarter was $135 million, an 11% increase over the third
quarter of 2017. Year-to-date revenue was $395 million, also an 11% increase over September 30, 2017
year-to-date.
On a year-to-date basis, the Service segment grew 6.1% and Construction grew 12.9%.
Year-to-date service gross profit grew by 120 basis points to 21.3% compared to 20.1% in 2017.
Construction gross profit contracted year-over-year due to the Mid-Atlantic write-downs.
As Charlie previously mentioned, the business without Mid-Atlantic write-downs is performing well. Year-
to-date gross profit without Mid-Atlantic write-downs was 15.3% compared to 13.4% year-to-date 2017
without Mid-Atlantic.
Our selling, general and administrative expenses while up year-over-year are running below plan for 2018.
We expect that trend to continue in the fourth quarter.
Moving to Slides 12 and 13, we showed the FMI forecast for nonresidential construction and our key
verticals. This data is pulled from their Q3 2018 report and is supportive of a positive outlook for the next
several years with total nonresidential compounded annual growth rate of 5.3% for the period 2018 to
2022.
With that, I'll turn things back to Charlie for some closing comments.
Charles A. Bacon
Thanks, John. I'm now on Slide 14, folks. Let me move on to some general comments on 2019. As John
noted, macro conditions remain favorable. Overall, the U.S. economy is going well and our key verticals
are forecast to continue to grow as well.
Our booked backlog and promised work has set us up well for 2019 into 2020, allowing us to be disciplined
in our sales and execution. We have taken a conservative approach when it comes to forecasting,
particularly with respect to Mid-Atlantic. We also continue to pursue claim recoveries, where we feel we
have a strong case.
Let me now shift to a discussion on Dunbar, mergers and acquisitions and setting up Limbach for 2019.
With Dunbar, we made the seller aware of our Mid-Atlantic issues and that it would delay our ability to
close the deal in the prescribed time frame due to financing matters. As a result, their management did
exercise their right to terminate the transaction. We understand the position and look to remain in a
proactive discussion with their management to stay engaged in the process. It's a terrific company with
a great leadership team, and we continue to work on a large joint venture in the greater Toledo area
together.
In addition to the Dunbar transaction, we have 2 other transactions possibly entering the LOI stage. We
like both companies. We clearly understand we have to arrange for financing. And once that is complete,
we can concentrate once again on our focus around M&A strategy.
Mid-Atlantic is a setback for us, but we are confident we'll work our way through the current period issues
and move forward as we have in the past when faced with setbacks in the business.
On 2019, our business planning process is concluding and we'll be providing guidance on our next call.
What I will share with you is both segments have strong forward indicators. Our construction backlog is
strong with improving margins along with our continued robust pipeline.
Our Service segment is growing well with a strong growing maintenance base in addition to the
management expansion along with the growth in training and development and internal audit, we have
good visibility for 2019.
We expect the number of our business units to show strong growth, while stepping back in Mid-Atlantic to
bring that business back to profitability.
With that, operator, I'd like to open up the call for questions.
Question and Answer

Operator
[Operator Instructions] Our first question comes from the line of Brent Thielman with D.A. Davidson.
D.A. Davidson & Co., Research Division
Great. Charlie, thanks for all the opening commentary, very helpful actually.
Charles A. Bacon
Brent, I wanted to provide a lot of detail, so people would have a handle on where we stand.
Charlie, I guess my first question, not to be too short-term thinking, but with the guidance you're talking
$6 million to $8 million in EBITDA in the fourth quarter to get to that full year level. I mean, that's a pretty
big snap back here in the fourth quarter. Can you kind of provide us a bridge and help us get comfortable
with that sort of number for the fourth quarter?
Charles A. Bacon
Yes, absolutely, Brent. So I'm going to ask John to step in here in a moment. If you go back in history
with the company, we've always had a strong second half. Putting aside the Mid-Atlantic business, the
business did quite well, actually through the course of the year, we're doing extremely well. But the fourth
quarter of 2017 we had very, very strong results and we expect to see a similar set of results in this fourth
quarter. John, please comment a bit more.
John T. Jordan
Executive VP & CFO
Sure, Brent. As far as our expectation for the fourth quarter, as Charlie referenced, we've always been
strong at the second half of the year. Several branches are really executing well at a very high volume
but well under control. Those being the Florida operations and Ohio. In addition, the gas pipeline project
that we mentioned up in the New England region is expected to produce substantial gross profit with
basically no additional SG&A. That will be very accretive to the fourth quarter results. As well as on
some of the other branches, we have some significant projects that are wrapping up that we think will
potentially provide some additional upside on projects that we've not been able to recognize year-to-date,
just because of the project completion status as of the end of the previous quarters. So we feel pretty
confident that fourth quarter activity, to get from a roughly $2 million of adjusted EBITDA to the $8 million
to $10 million is very achievable. We started strong in September. As I mentioned, the volume, we see
that volume of just the organic business continuing to be at a very high level for the fourth quarter.
Charles A. Bacon
I guess the other thing I could add in there is -- Brent, our service business -- the sales are up 46% year-
on-year and that work is all quick hitting, so as we sold this work in the previous quarters, that work's
being executed now. And quite frankly, the pipeline on that service work isn't slowing down at all. It's
been very, very robust. And I, when we step back and we think about what's going on there, I do think
a lot of these smaller type projects are being influenced by the tax cuts and there's just a lot of deferred
maintenance that was held off. Now people are moving on it, so our service business is really cranking,
really cranking well.

Okay. And I guess, just a follow up there then, could you tell us what you're embedding for the Mid-
Atlantic operations into that guidance for the fourth quarter?
John T. Jordan
Executive VP & CFO
Brent, we have no expectation of any earnings out of Mid-Atlantic in the fourth quarter. We purposely put
that at 0, knowing some of the challenges that we've had. We don't anticipate any other changes right
now, but there is no, and no assumed earnings out of Mid-Atlantic in the fourth quarter.
Okay. Okay, great. And then, I guess, now kind of shifting to '19 and thereafter, how are you thinking
about bidding work in that region, over the next, call it 6 months? How do we think about that region
growing as a whole? And Charlie, I mean, how quickly do you think you can work though these issues?
Charles A. Bacon
Sure. Well, what we decided to do and I mentioned this in my comments that, one, let me just talk about
the business unit leader, the gentleman that's going to be running that business for us has an excellent
resume of working with businesses that have had challenging times. He's got a very strong educational
backgrounds: master's in nuclear engineering; M.B.A. and he's been working with specialty contractors
with a -- for a number of years. So we're very excited that he's joining us and he started on November
5. As far as what we did to kind of settle the business down, my uncle -- I'll never forget this advice he
gave me when I was young and my career was taking off, and he just said Charlie, you got to walk before
you run. And I told him, "Look, I like to run." And he looked at me and he said, "You'll learn." Now I was
in my 20s at that point, when I got that advice. So here we are today, dealing with a business in this
situation, we have to step back, we're going to walk before we run again. And in the case of settling it
down, on the craft level, right? So what happened here, when you really dissect it, the people we have
there are just terrific people. I mean they're very, very talented people. I think management, at a senior
level, didn't watch it close enough. And that's why we made a senior management change. But when you
look at the craft we have there, we're comfortable with the foreman at a level of 175 to 225 craft workers.
We have sufficient supervision for that. When we grew to 350, we just didn't have enough foremen and
superintendents to make sure they were installing quality work, and it just wasn't planned well and the
delays that we faced on all of these jobs, it just stacked up. We just never expected to see that kind of
craft level. And then when you take this market the way it is right now, it's next to impossible to find good
people. So the guys did a good job finding good people, we kept our customers satisfied with getting their
schedules done, but we paid a price for it. So going forward, we have slowed our sales down on major
projects. Our service group, it's going full out. We're not stopping on service, our electrical expansion, it's
not very large, but we self-perform, and that's gone extremely well, it's very profitable. And then finally,
on the mechanical and plumbing side, as I said, on the major projects, we have sufficient backlog with
work we've already sold through the middle of next year and those projects are well in hand. We're going
to bring our craft level down to that 175 to 225, and the work that we're talking to our customer base with
right now, we're only looking at proposing on projects that would commence in the second half of '19 and
then obviously, further into '20 and 2021. Brett, is that enough color on that? Does that -- did I answer
the question?
That is. No, thank you. And Charlie, I guess, outside of the Mid-Atlantic, how are you sort of dealing with
these labor issues? I mean, it seems like it's sort of a national issue, not just regional. So how are you
kind of combating that right now?
Charles A. Bacon
Sure. I think when you look at what we did on the Red Wings' arena, it's just an excellent example, and
you guys have heard us talk about this project. We just had -- we have a great leader up there. He did
a fantastic job of presenting to management how he was going to execute that project. We ended up
subcontracting out to our competitors and local businesses over 40% of that arena. And when you look
at the Bedrock program that we have up there, where we have 4 major projects in preconstruction, we're
going to take exactly the same tact. We're going to be subcontracting out a big portion of the work.
What's great about our company is our customer base really like our front-end engineered services. It's
-- very few have the capacity like we have and we have become known as the go-to guys. If you're going
to have challenging projects, we really have modular construction down, prefabrication, engineering, our
estimates are good, but we also were upfront with our customers to say, look we can take this on, but
here's our contracting strategy. And providing they want to do it, that's great, we'll take the work on.
But we are looking at that very carefully. The other thing that we instituted months and months ago, was
the issue of 12 month look-aheads. So our guys, every month have to present their business units to
management, I sit in on those calls, and they have to present how their labor's trending, they list their
jobs and their promised work, and then if they have any jobs that they're feeling really good about, that
they think is going to come into promise or into backlog, they project that out too. And then we get to see
the trends of where their labor's at. Now I expect we can continue to add reasonable labor growth, as well
as project management administration. At 8%, 10%, 12%,15%, we can do that. But to grow 30% in a
year, 40% a year, that's not manageable in this market. Maybe in a calm market where there's not much
activity going on, we have an excellent, excellent brand reputation in the industry. We're one of the safest
contractors out there. Craft want to work for us, we treat our people extremely well. And so it's not really
a huge issue. However, in this market, we can't just rest on our great reputation to get all these folks. So
5%, 8%, 10%, 15%, that range of organic growth within a business unit, that's what we're targeting. And
quite frankly, we're going to be very, very focused on our bottom line in terms of margin improvement. So
we're going to be a lot more selective with the pipeline that we have.
Operator
[Operator Instructions] Our next question comes from the line of Gerry Sweeney with Roth Capital
Partners.
Gerard J. Sweeney
Roth Capital Partners, LLC, Research Division
I want to follow up a little bit what you were just talking about, and what Brent was just asking, and
I realize, not necessarily an easy question, but at the end of the day, I think Mid-Atlantic was and is
probably, I think one of your oldest areas that you've done work, probably the most solidified in terms
of processes and et cetera, but as we move forward in growth for Limbach, and you're growing -- you're
attempting to grow in multiple different fashions, at some point, does it make sense that less is more?
Maybe go after less projects, become a lot more selective, really focus on execution across the board?
Charles A. Bacon
Yes, Gerry, look, good question. We're stepping back and looking at the business as a whole. To continue
our growth, and again, we've doubled since 2014, and we weren't public during this period, just to make
it a bit more challenging. But I'm very comfortable now that we're a public company, we've got all of
our processes in place. We've reduced our overhead expenses and getting up to speed. So that's behind
us. But going forward, to continue to grow, you've got to start with leadership, and we have a pretty
good leadership development program, it's called LLDP, Limbach Leadership Development Program,
and we have annual classes, I kick off that class in January, I discuss strategy with the rising stars, our
[ CLOs ] are going to be involved just going through operations. John will be involved with finance and
we have other facilitators come in that are outside from the company to help them with some other
development. And we've seen great success with that. Many of our leaders today, whether it be at the
branch management level or the Operations Manager, General Service Manager, Project Executives,
came through that leadership homegrown program. So we're going to put a bigger focus on that this
coming year. And normally the class is around 15 to 18. We've elevated that now to 25, and we're going to
continue to push that program in a very aggressive way. So from a leadership perspective, because I think
it all starts with that, and if I look at the Mid-Atlantic region, quite frankly, the former leader fell asleep at
the switch, and it caused us this pain. I think he should have been more proactive in thinking through the
subcontracting strategy. Another point I want to make is, when you look at the business, and I've said this
in previous calls, while construction, and I'll come back to construction in a second, construction is what
our company does and we do it well, and some of our top customers, whether it be Turner Construction,
that we do a lot of business with, or Gilbane, that gas situation, they called us up and said, "Could you
get down here right away?". And overnight, we found 60 plumbers who went to work. And when I said
we found them, they were existing employees to other folks that we just networked and they came over
to help us. With all that said, coming back to the Service side of our business, we see that as extremely
profitable, and if you look at a profit per employee basis, it's about triple our construction returns. So we
want to continue to push that very aggressively, and we are. We keep investing in more staff, to get out,
to sell more maintenance in more buildings. And you can see our maintenance base keeps growing. We
want to keep pushing that very aggressively. On the Construction side, coming back to that, we're going
to be very selective in this heated market. I just want to reinforce the labor projections, that 12-month
look ahead. We [ only ] work with our top-tier customers in this market, and we have to get a decent
return for the work we're doing. So I know we've become more selective in what we're pursuing. I think
the Mid-Atlantic, it's an anomaly. If you look across our business, the success we're having, kudos to our
Florida business. There's so much work down there right now. And they've delivered, through September
30, approximately $63 million of revenue. You could easily do $100 million there. Overnight, we can do
$100 million. But we're being very careful, we're having meetings with the Disney representatives and
we're specifically saying, "We can take on this ride, that ride, and this ride. We can't take on any more
than that." Hospital Corporation of America, we're having very direct conversations with them about what
we feel comfortable taking on and what we're going to pass on. We did that a couple of years ago, they
offered us 5 buildings, and we said we could do 2, those projects are in final construction phases right
now, down in Southeast Florida. So we are being much more selective. It's a great market to be able to
do that. Sometimes it upsets our customers because they want us to bid everything. And we're basically
saying, "Look, we'll help you with budgeting because we have a long-term relationship, but in all reality,
we want that job, that job, and that job and that's it." So we're getting a lot more selective. So to wrap
it up, leadership development, big focus on that so we can continue our expansion. A big focus on the
Service expansion because it derisks the business and it's extremely profitable, and then finally, on the
Construction, being very selective, looking at the labor forecast and picking and choosing what jobs we
want to take on at good returns.
Gerard J. Sweeney
Roth Capital Partners, LLC, Research Division
Just one quick follow-up question. Any fees by either party for the termination of the Dunbar acquisition
that's material?
Charles A. Bacon
No, we had a financing contingency in there. And since we worked hard and they're great people, I really
wanted to see that deal get done and we hope we can reengage, if they want to in the future, once we
square away our financing situation, that we can get something going again. But that will be up to both
parties. But no, there is no cancellation or termination fees.
Operator
Our next question comes from [ Joseph Nicholas ], private investor.
Unknown Attendee
And sorry if this was touched on earlier in the Q&A and I missed it. One core question and then one quick
follow-up. I was wondering, if you went back to sort of mid-September, I'm just kind of curious to get a
sense of sort of how internally communications, and just sort of I guess reporting controls worked? So if
we were back in mid-September, what was sort of -- I guess, how much did you and John kind of realize
there was sort of a reoccurring Mid-Atlantic issue and just sort of how much, to what degree, and sort of
the magnitude of it relative to what the ultimate, sort of $9 million figure ended up being for the quarter?
And then just a quick follow-up.
Charles A. Bacon
Sure. [ Joseph ]. Look, it was -- when I look back at what happens in our company, right, every month,
you have a project team, they have a responsibility, we have set processes, we have things to required
standards, and the project teams have to come in and present once a month to the local management
team and present where the project stands the issues. It's a set formula, there's a set standard agenda,
including cost to complete and where we stand with profitability, change orders, with the -- just delays,
how we're dealing with that, any customer issues, and that happens every month on every major project.
So in this case, it was towards the end of September where the guys were presenting their August results.
It's actually like a one-month lag, and of course, it was other occurring things, they know what's going on
in the job during the month they're presenting, but they presented, in this particular case, late September
to the management team in Mid-Atlantic. And our COO immediately reached out to John and myself and
made us aware that something came up. He didn't understand where the numbers stood yet, he was just
starting to be briefed on it, but he called us immediately. Following that, we got together and huddled and
put a work plan together because we saw the bleeding earlier in the year, and as it was explained to me,
it was a combination of things. Just further delays outside of our control, but also rework, that we had to
remove some systems -- so look, what happens is, right, you rough-in all the piping and after the piping's
in, you test it, and then you start closing things in. And what we found out was, there were systems that
weren't properly tested. We found out there were systems that were leaking, we found out some systems
were not where they were supposed to be, meaning outside of walls and we had to go back in, remove
the -- what was installed, reinstall it and all of that was done on premium time. So we could keep up with
the demands of the general contractors' schedule, which we're obligated to do. So there was the rework
and then some of these delays, like on the Columbia Marriott, there was just no drywall to trim out. So
we had to wait for the contractor of the subcontractors working for the general contractor to finish their
work so we could install. That hotel was supposed to complete in September, it actually didn't have heads-
on-beds, as they call it, until early November. So the building is now open, but it cost us another 6 weeks
of supervision, labor, all of that. So it's a combination of things that happened, but the work plan that we
put together, that our COO executed, he dug in during the month of October with the project he used to
understand the depth of what we were looking at. I didn't want to -- I did not want to hear about, further
write-downs. If we have information on hand, if we understand there's some rework going on, let's take
a look at the work, get quality control people out there, one particular job we flooded with free QA/QC
people, to just get ahead of it. And that definitely helped. And we just unfortunately had to do a lot of
rework during the month of September, but we found out about it late September. October, we did a full
analysis of 2 elements: one, we took a look at the cost to complete with the Mid-Atlantic major projects
that we're doing, and also there's a lot of change orders outstanding and we had to make sure we felt
comfortable on recovery of the change order. So those change orders, we discounted them to a degree,
so we felt comfortable with them, that we could collect that money and hopefully there's going to be
future upside through good, solid negotiations with our customer base. So [ while ] it all ended up coming
together at the end of October. We presented that to, obviously, all of the stakeholders, the auditors, the
surety, the banking group and made them aware of the scale of the issue. So -- and then we just worked
our way through it, and here we are today, sharing the news with investors. So that -- [ Joseph ], does
that provide the color you're looking for?
Unknown Attendee
Yes. Just -- I mean, to get even more granular, I mean, can you say approximately how much of the $9
million write-down transpired specifically during the month of September? Just ballpark.
Charles A. Bacon
I don't have that broken out that way. I just -- because it's a combination of the hits we took in
September, plus the cost to complete for the remainder of those projects. That's how we categorized it. So
I -- John, I don't think we have that broken out that way.
John T. Jordan
Executive VP & CFO
No, [ Joseph ]. We don't have that analysis on a month by month basis. It was a quarter approach,
comparing the job statuses as of the end of second quarter until the end of the third quarter, and as
Charlie mentioned, there are costs included in those write-downs to complete the projects through project
completion, so there are future costs to be incurred. The projects as we've referenced are wrapping up
in the fourth quarter, a couple will bleed over into the first quarter of 2019. But because some of these
write-downs actually put the projects in a loss position, we -- by GAAP, we are required to take that full
loss when the loss is identified. So the full loss on the project is fully recognized in the third quarter write-
downs.
Charles A. Bacon
And [ Joseph ], where we see opportunities for recovery, which we also study that, we have people on the
ground working through the project documentation, looking at opportunities for recovery, but we don't
-- we can't book that recovery. We don't know what's going to be yet So I mentioned the Santa Monica
[ AET ] Project out west, in Southern California, that was a project that was completed some time ago. We
were delayed on the project, we submitted it to the general contractor, along with other subcontractors,
and I believe even the general contractor submitted something to the owner, and then we had to work
our way through our negotiation. Eventually, it lead to a settlement that took place several weeks ago,
and that capital will be coming into the company, and it's 7 figures, it's coming into the company during
Q4 and we'll have a modest profit write-up in our Southern California business. So it's -- we're still in that
process of identifying opportunity for recovery, which would happen in a future period, but because of
GAAP, we had to take the pain through the books in Q3 since we identified the cost.
Unknown Attendee
And then my follow-up question was, as we just look into 2019, so I guess these specific 5 projects that
accounted for the current write-down, there will still be -- 2 of those will still be going on in the beginning
of 2019. So I guess a 2 part question: One, is it fair to assume that there may be some write-down
associated with those 2 projects, that will still sort of flow through in '19? And then the second part of
the question is, are there any additional projects beyond those 2, or beyond the 5, for the current write-
down, that maybe didn't happen in Q3 but have started or are ramping up just where -- at least there's
a possibility that there may have sort of that same issue around the labor occurring but, so sort of above
and beyond the current 5 projects that you guys highlighted, but they just maybe haven't kind of ramped
up yet or even begun yet, but will between now and 2019 -- beginning the first half of 2019?
Charles A. Bacon
Sure. Let me take the second question. And I'll ask John to come back on the first part of that question.
So as far as the work going forward, what we did was we stopped sales on major projects in Mid-Atlantic
region for any work that would commence between now and June 30. We have adequate backlog in the
business to maintain our craft levels that we feel comfortable with that 175 to 225 craft, that's maybe
plumbers and pipefitters. We're very comfortable with that level. So we're going to get the business
back to its normal operating, acceptable levels, where they make good money and, again, you got
to remember, there's a 10 year track record of this business doing extremely well. They've got great
customer relationships. Great relationships with the craft and we have terrific people working in the
branch. We're just going to get the business back to those levels where we can enjoy profitability again.
So we stopped sales, and the work we have, and I just want to be clear, when you step back and look at
all of these projects, we didn't have estimating problems. Maybe we missed something here or something
there, but there's usually something else we pick up, some good news, it all washes out. It's just the
way estimating works on these big jobs. But we don't have estimating problems here. The real culprit
really was the issue of this massive ramp up of labor, and we just didn't have the supervision to properly
administer it, some of it in our control, some of it out of our control. So going forward, we're going to get
the business back to its normalized levels. We feel comfortable with the work we have in backlog. Every
job has its challenges, it is a construction process, but we have great talent in the business, and we're
going to focus on that talent and keep it at that level. We'll get back to growth in 2020, right now in 2019,
we just want to stabilize. John, can you answer the other part of the question?
John T. Jordan
Executive VP & CFO
[ Joseph ], as I mentioned a few minutes ago, the 2 projects that are continuing into 2019 are actually at
a loss position already. So as I said, we've taken that full loss through the books, through the end of the
third quarter. So as of right now we do not anticipate any further write-downs on those projects, as they
get completed in the first quarter of 2019.
Charles A. Bacon
I just want to be clear with everybody though, folks, what we did was we took the schedules we have
today and we looked at what we were going to have to work around and we budgeted for all of that to
complete these jobs. Some of these are government-related projects. This project, the turbine project,
should have completed months ago, but there's just ongoing delays. They won't let us start up the
system. Stuff outside our control, change order work, just design issues, all sorts of things. If we see
that on some of these other projects that we're completing, such as rail to Dulles, we're working hard at
getting that project complete, and we budgeted for everything we know today. If they decide to delay
that project by 3 or 4 months, 2 things are going to happen: one, there's going to be increased cost;
two, they're going to get to a claim. So -- sure hope it doesn't happen, but as of right now all the cost
that we've taken through the pain, reflect what we know today. They should be able to complete on the
schedules that we've been told, there's no reason they shouldn't, but I just know on these government
jobs they tend to get pushed out due to things outside of our control. And then we'll pursue our money.
Operator
Our next question comes from the line of Justyn Putnam with Talanta Investment Group.
Justyn R. Putnam
I was wondering if we could get a little more detail around your financing situation, specifically, your
relationship with your lenders. I mean, my specific question is, the [ nearest ] I'm hearing on this call, and
quite frankly I heard on the last call was that, there's your onetime issues you're working through in the
Mid-Atlantic; otherwise, the business is doing well. But yet the reaction to your lenders seems to be not
proportional to that narrative. So I was wondering you could give us a little more detail around that.
Charles A. Bacon
John, please take that?
John T. Jordan
Executive VP & CFO
Sure. Justyn, thank you for the question. As far as the relationship with the lenders, I can't tell you what
their thought process was, to come to the conclusion that they would like to remove themselves from
the credit. We've had a strong relationship with them for the last 8 years, and we continue to have very
productive conversations with them as we work through this transition process. As far as the refi process,
it's well underway with one of the lenders that's in the existing bank group. There are 4 banks in our
existing bank group, one of those lenders has elected to step up and take the lead, and be the lead bank
in a potential new lending structure. We're working very closely with them on a daily basis. We have an
agreement in place to have them be part of a syndicate to provide the $30 million revolver, as well as they
will arrange for a $50 million term loan. Now both those amounts are total capacity. As I mentioned, our
draws will be significantly less than the total capacity. So from a business perspective, we feel that we're
in a good -- we're in good shape with the refi process, with the, with the potential new lender group. We're
kicking off due diligence here very soon to work through and we have very specific milestones that we will
be hitting over the next few months, to work through the transition process to pay off existing lenders and
have a new credit facility in place.
Justyn R. Putnam
Okay, so your current lenders are not articulating any issues with your business that concerns them, other
than what we've seen out of the Mid-Atlantic?
John T. Jordan
Executive VP & CFO
Correct. They have not expressed any concern about the rest of the business. They have -- they see all
of our financials. We meet with them, we talk with them on a regular basis. We provide them all the data
that we see internally as well as what we file externally. We've not heard any concerns from them about
the other branches. It has all been focused on the Mid-Atlantic operation.
Operator
And this concludes our question-and-answer session. I'd like to turn the floor back to Mr. Bacon for any
final comments.
Charles A. Bacon
Well, look folks, it was a tough quarter, but again, I want you to all please take a look at the business
without Mid-Atlantic. We're going to continue to work extremely hard at correcting Mid-Atlantic, but the
rest of the business is doing extremely well and I've shared this with investors in the past. When you
start thinking about a construction company, you got to think about diversity. We have a huge, diverse
footprint. We've got diversity in market sectors and we have 2 segments, Construction and Service, a
very nice growing Service business, which balances out the business. It was a very tough quarter. I think
[ Joseph's ] question, that he asked about the write-downs and the hits and we explained what happened
during the quarter, it's a great question. And it just was a very painful event. We had to get through it.
I look forward to working our way through some future recovery. That can't be promised or committed,
that's why it's not on the books, but we hope to see someday in the future, recovery like the Santa Monica
[ AET ] project. So -- but the overall diversity of the business allows us to deal with issues like this.
I want to thank you for all your support and if any of you have any further questions, or would like to
follow-up with us, we welcome phone calls. Please reach out to The Equity Group, and they will reach out
to us, and we'll get something set up. Thank you very much for your time, and Happy Thanksgiving.
Operator
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you
for your participation.
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Limbach Holdings, Inc., Q3 2018 Earnings Call, Nov 20, 2018

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Limbach Holdings, Inc., Q3 2018 Earnings Call, Nov 20, 2018

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Limbach Holdings, Inc.

CONSENSUS ACTUAL SURPRISE CONSENSUS CONSENSUS CONSENSUS

EPS (GAAP) 0.46 (0.46) NM 0.47 0.47 1.54

Revenue (mm) 140.92 135.06 (4.16 %) 140.25 542.70 576.00

CONSENSUS ACTUAL SURPRISE

FQ4 2017 0.36 0.12 (67.57 %)

FQ1 2018 0.06 (0.60) NM

FQ2 2018 0.29 0.09 (68.97 %)

FQ3 2018 0.46 (0.46) NM

Call Participants .................................................................................. 3

Brent Edward Thielman

Year-on-year comparison of sales bookings as of September 30 has construction of 50 basis points.

Question and Answer

Brent Edward Thielman

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