Limbach Holdings, Inc.
Q2 2021 Earnings Call Transcript

Published: 13 Aug 2021

[Operator:]

Greetings, and welcome to Limbach Holdings Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jeremy Hellman of The Equity Group. Please go ahead.

[Jeremy Hellman:]

Thank you very much, and good morning, everyone. Yesterday, Limbach Holdings announced its second quarter of 2021 results and filed its Form 10-Q for the fiscal quarter ended June 30, 2021. 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. Beginning with this year's first quarter, Limbach has updated the naming of its reportable segment financial results to more closely align with its evolving business model and relationships with building owners. The two reportable segments are now General Contactor Relationships, which are referred to as GCR; and Owner Direct Relationships, or ODR. These segments aligned to prior construction and service segments, respectively. A complete description of each reportable segment can be found in the Form 10-Q. This renaming of the reportable segments does not create any material differences when applied to prior periods. With that, I'll turn the call over to Charlie Bacon, the President and Chief Executive Officer of Limbach Holdings.

[Charlie Bacon:]

Good morning, everyone, and thanks for joining us. Joining me today is our CFO, Jayme Brooks. We also have our COO, Mike McCann; and our Executive Vice President, Matt Katz, also on hand for the Q&A session, which will follow our prepared remarks. The quarter and year-to-date results continue to demonstrate solid progress in our ODR segment, the growth of which is core to our strategy of transforming the business to be more aligned with direct to building owner revenue and the resulting recurring income streams. We also realized progress on the GCR front, too, with solid sales during the quarter enabling us to have our forecasted 2021 revenue for the segment fully covered at this point, including amounts recorded in backlog and with customer commitments. As a reminder, we are targeting 50% of our revenue to come from building owners through our ODR segment by 2025. The remaining 50% is to come from our GCR segment projects, with the net expected results being significantly improved profitability. Our ODR segment has historically provided higher margins for our company. We are making substantial progress towards our business mix goal. ODR sales increased roughly 28% to $38 million during the second quarter, up from $30 million in the first quarter. The prior period in 2020, our ODR sales grew by approximately 27%. I should note sales at the beginning of the second quarter started off slow but May and June sales showed improvement with our ODR pipeline continuing to grow. We realized strong maintenance based sales in the ODR segment during the quarter, with improvement in our renewal rates and an increase in our ODR project sales. Pull-through revenue from our maintenance base during the period also improved which appears to be driven by pent-up demand for our core maintenance services. We're also exceeding gross margin performance in our ODR segment with year-to-date margin of 29.3%. You may recall from previous statements, our ODR gross margin should be in the 25% to 28% range. Our ODR teams are executing and exceeding expectations. On the ODR front, I want to point out two very important moves we made earlier this year. First, as we discussed in our last call, we made further investments in our largest sector, health care, highlighted by our new office in Nashville, which is the hub of for profit health care in the U.S.A., and we recruited a regional Vice President who has great relationships with our targeted customer base. With this investment, we are also expanding our services within health care to include professional services for building assessments and program management services. By combining our mechanical, electrical, plumbing, engineering, and installation knowledge with program management services, we are creating a unique offering in the marketplace. The health care sector remains well suited for us since MEP systems can be upwards of 50% of the value of many health care projects. These health care clients are very concerned about system, install and operating cost. These new services will help customers make better decisions. We expect this approach will place us in an ideal situation to pick up the installation services. The second important move we made was to focus on indoor environmentally-controlled agriculture, which reflects on our strategy of staying on the top end of emerging trends and growth opportunities. On our last call, I mentioned we expected to have upwards of eight forms underway. Since our last call, we have secured five of the eight and several others are in the proposal stage. This market is very active, and we're finding the form management teams value our strategic insights and industry expertise. These projects require unique engineering solutions, and there is considerable maintenance requirements, which is ideal for us. So to sum up our ODR progress, we expect to see revenue growth within this segment in excess of 25% year-over-year, while margins are exceeding our previously communicated ranges driven by strong execution. Sales are picking up, and our maintenance base is expanding at a strong rate. We were disappointed with our slower sales than expected earlier in the year, but that appears to be behind us so long as the Delta variant doesn't cause large impacts to the economic expansion the U.S. economy is enjoying. Returning to the GCR segment. Sales have exceeded expectations for the quarter and year-to-date. Health care continues to be our strongest market sector with several new hospital projects being sold, including several in our Florida region. While we have a few larger projects that were brought into backlog, most of our sales in Q2 were smaller projects, which aligns with our risk management strategies. At this point, we have sold, including amounts recorded in backlog and with customer commitments, what we need to reach our segment forecast for 2021. And sales going forward are mainly targeted for building backlog for 2022 and beyond. Overall, execution of our work this quarter continued with project exit margins improving, even though we experienced higher cost of materials and delays in our supply chain for equipment from manufacturers on specific projects. So far this year, we're able to mitigate those impacts of higher cost and shortening the period during which our proposal prices are valid to limit our exposure and increased cost in the supply chain, among other efforts. To be clear, our proposals are now limiting the length that the proposal will be valid, therefore, supporting any sort of increase in prices in future periods. Before I pass this call on to Jayme, I want to discuss our updated guidance, which we are tightening based upon reported results at mid-year and visibility for the remaining six months. When we introduced guidance last quarter, we noted that activity levels look to be picking up, but that we had yet to see that to be a durable trend. While overall activity levels have continued to improve, there remain pockets of softness that could delay achievement of our expected results. Based upon the revenue burn projections and as we mentioned in previous earnings release, we are expecting heavier revenue and profit recognition in Q3 and Q4 of 2021. We are also expecting improvement in our GCR margins based upon the quality of work sold over the past 18 months. As noted in our press release yesterday, our revised guidance is now $480 million to $510 million and adjusted EBITDA guidance between $23 million and $25 million. Both of those ranges are consistent with our previous guidance and reflect a tightening within those prior estimates. Underpinning our updated guidance is the improved confidence that stems from the combination of our reported results to-date and we're currently scheduled for the second half of the year. As noted earlier, we have all of our forecasted GCR work for the year in backlog and with customer commitments. Our ODR segment consisting of booked backlog, customer commitments, contract maintenance base and pull-through work is not far behind. I want to close with a comment on the COVID-19 Delta variant. During our second quarter last year, the pandemic had a significant impact on our business. Generally, economic activity across the country slowed, which impacted our work activity somewhat. However, our business was deemed essential, which allowed us to maintain lower but regular levels of operation. On the other hand, our SG&A expenses were lower than it would have otherwise have been due to operating reductions we implemented in response to the pandemic. We're also awarded emergency response work, which aided our results last year, but that work was short-term and nonrecurring. As we speak with you today, we are monitoring the COVID-19 Delta variant, including both positive and negative short-term impact. However, we are focused on expanding long-term recurring business that will build a stronger company when the economy returns fully to a normal cadence. So with that, let me turn the call over to Jayme.

[Jayme Brooks:]

Thanks, Charlie. Total second quarter revenue of $121 million was down 10.5% as compared to the prior year and up 6.8% from the first quarter of this year. For the six-month period, total revenue was $234.4 million, a decline of 14.5% compared to the same period last year, which is consistent with our plan and guidance for the full year. By segment, GCR revenue of $87.6 million was down 17.4% from last year's second quarter, and up 3.2% versus the first quarter of this year. For the six-month period, GCR revenue declined 20% to $172.4 million compared to last year's second quarter. Again, this is consistent with our guidance and internal plan. ODR segment revenue of $33.5 million in the second quarter grew 14.4% compared with the same period last year, and 17.3% compared with the first quarter this year. ODR segment revenue accounted for 27.7% of the total consolidated revenue during the quarter. For the six months, ODR revenue was $62 million, up from $58.5 million for the same period last year. Gross margin was 15.4% in the second quarter, up from 15% last year. ODR segment margin continued to be a bright spot, outpacing our expectations at 29.3%. GCR segment margins slipped to 10.1% compared with 11.5% a year ago. The decline this quarter compared to last year was primarily due to projects burning at lower margins. From a project execution perspective, net write-downs improved from $2 million last year to $1.1 million in Q2 this year. SG&A was $17.2 million in the quarter, up from $13.8 million last year, when our operations were significantly impacted by pandemic-driven cost-cutting. Second quarter SG&A expense was the level – was in level with our first quarter and consistent with the full year expectations we discussed on our last earnings call. Interest expense during the second quarter was $450,000 compared with $2.1 million a year ago. This marks the first full quarter since we entered into our current credit facility in February. So this quarter's financing expense represents the first full quarter for purposes of modeling the run rate of our finance expense. For the second quarter of 2021, adjusted EBITDA was $3.6 million compared to $8.1 million for the same quarter last year and $2.1 million in the first quarter of 2021. The second quarter of 2020 benefited significantly from certain SG&A expense categories, such as payroll costs and travel and entertainment being unusually low due to the reductions taken as a result of the pandemic. Adjusted EBITDA for the first six months of 2021 was $5.6 million compared with $11.8 million in the year-ago period. Net income for the quarter was $732,000 or $0.07 per diluted share versus net income of $2.9 million or $0.37 per diluted share for Q2 2020. Total backlog on June 30 was $439.5 million compared to $446.5 million as of March 31 and $444.4 million as of December 31, 2020. On June 30, GCR and ODR segment backlog accounted for $378.9 million and $60.6 million of the consolidated total, respectively. Shifting to the balance sheet and cash flow. Our current ratio on June 30 was 1.45, which compares with 1.46 as of March 31 and 1.33 as of December 31, 2020. We had cash and cash equivalents of $27.7 million and $33.5 million of total debt as of June 30, 2021. $8.5 million of that total debt was classified as current and $24.7 million net of issuance costs and was classified as long-term. Shifting to working capital. We had cash used from operations this quarter of $7.2 million, bringing our year-to-date cash usage from operations to $24.6 million. The primary drivers of this year-to-date usage was an increase in our accounts receivable due to the timing of billings and collections, a decrease in our accrued expenses and other current liabilities due to timing of payments, and a decrease in our overbuild position due to the reduction in GCR revenue in 2021 and the timing of contract billings and the recognition of contract revenue. These decreases were offset primarily by an increase in our accounts payable, including retainage as compared to the prior year period. I’ll turn the call back to Charlie Now.

[Charlie Bacon:]

Thanks, Jayme. I want to close with some thoughts about the general macro conditions, our strategic direction, and our overriding vision for Limbach. Concerning the market outlook, the American Institute of Architects’ inquiry, design contracts and billing indexes all remain in very positive territory with the inquiry index recently hitting 72, a strong indicator of continued industry expansion. The Construction Industry Roundtables third quarter sentiment index is at an all-time high of 79.7, with a design index at 86.8. A year ago, these indexes stood at 52.1 and 49.3. This points to a continued robust period for the industry over the next 9 to 12 months, allowing us to build strong selective backlog for 2022 and beyond. Now turning to our strategic direction. First, our emphasis on growing our ODR business is well underway and having the intended impacts on our margins. We previously stated in 2021, this was going to be our year of transition for the company as we focused aggressively on growing our ODR segment while overhauling how we approach GCR, and we are executing that strategy. While recent COVID developments represent a headwind, we fully expect to end 2021 with ODR making up the largest portion of our revenue it ever has and contributing greater than 50% of our consolidated gross profit. Where that ultimate lands will be a function of our final business mix, but based upon current projections, we expect to exit this year with gross margin improving approximately 150 basis points versus 2020. That is a level of improvement we’ve been talking about for some time. Second, we are rightsizing our GCR business and are confident the changes we have made to our corporate culture in that segment, particularly in terms of our sales and project evaluation approach have changed for the better. During the second quarter, we saw GCR sales pick up quite a bit, leaving us confident that we’ll be able to resume growing that segment and be able to do so with much improved bottom line performance. We will remain firmly committed to operating the GCR segment with a bottom-up profitability mindset and expect it will yield solid results going forward. Third, we’ll continue to focus on market diversity. As we’ve seen over the last 1.5 years, our end markets have each reached uniquely – or reacted uniquely to the pandemic, with some negatively impacted in the near term, such as higher ed, while others such as health care, have seen the demand and thus facilities need increase. This also includes our entertainment and R&D sectors. We’re also keenly focused on the emerging sectors where we think Limbach offers a compelling value proposition for building owners. Indoor agriculture is such an example. Lastly, I want to reiterate the progress we are making against our key deliverables. Driving growth in our ODR segment is a top priority you heard us discuss at every turn. As Jayme highlighted, ODR segment revenue grew 14.4% in the second quarter compared to the same period last year and 17.3% compared to the first quarter this year. ODR revenues accounted for 27.7% of our consolidated total in the second quarter, so we’re making solid progress driving our mix shift towards the 50-50 goal. We’ve also stabilized our GCR operations. Our net write up, write-down performance has improved, and we’re just about done burning old business that was booked before we instituted our new project gating criteria. Coupled with the sales and backlog commentary we already noted, we are firm in our belief that 2021 will be the low point for the segment. Turning to our expenses. Our SG&A expenses for Q2 was virtually unchanged from Q1 and tracking to the full year estimates we discussed last quarter. So we think we have our operating expenses well in hand, thanks to Jayme and her team. While the Delta variant is certainly occupying its share of the headlines, we are encouraged to see an infrastructure bill advancing in Congress. As this becomes a reality, we expect several submarkets within the non-residential section of construction will benefit as significant funds are made available for capital projects. To our Limbach and Harper teams, thank you for your hard and smart work this past year. Change in transformation isn’t easy, especially working remotely. We are achieving what we said we would. Again, thank you. With that, we’re available to take your questions.

[Operator:]

Our first question today is from Rob Brown of Lake Street Capital Markets. Please proceed with your question.

[Rob Brown:]

Good morning and nice job in the quarter. I just wanted to kind of follow-up on your comments about the GC business. I think margins in the quarter, did you say that this was sort of going to be the low point in terms of margins? And I guess, how do you see the gross margins in that business trending over the next few quarters?

[Charlie Bacon:]

Yes. I’ll have Mike respond to that, our Chief Operating Officer.

[Mike McCann:]

Thanks, Rob. I think from a margin perspective, I think we talked about this a little bit, but the – as we – the work that we’ve sold before are more rigorous risk management procedures and processes, that work is really starting to burn off as the work that we have sold in 2020 and 2021is based upon, obviously, very close watch from a management perspective, should produce higher margin, and we anticipate that as we go forward. So we’re very careful from a size of projects. We’re looking for controlled outcomes as much as we can. The other thing, too, that we really look forward to. It’s not just narrowing the criteria. We look at things like new vertical market sectors that we’re in, for example, the indoor agriculture that we mentioned before. Whether it’s size or specific new vertical market sectors, we are looking to make sure that we are looking at that from a risk management perspective. So long story short, I think as that newer, more rigorous risk management work starts to come into play, the margins will pick up as we go through the back half.

[Charles Bacon:]

Rob, it’s been interesting. We’ve installed this whole gating procedure on Newark and every Friday morning, we have this review call where the business units have to present their opportunities, and there’s criteria that they have to abide by. And we see the calls actually increasing. We’re seeing more and more projects go through that, which is an indication the pipeline is improving, but also the quality of the opportunities are improving, too, because they know they’re not going to get the projects approved if we don’t like the numbers. The other thing I’ll just point out, we have this new indoor agriculture sector that we’ve ramped up over the past year. And actually, every one of those projects are going through that review process. We just approved and we secured a small farm, $500,000. It’s a quick-heating equipment installed in an existing building. And that’s kind of the rigor we’re putting into it. Anything that we’re looking at that we’re either – it’s kind of new to the company, maybe or just has some aspect that it’s new to what we’re used to doing, has to go through that rigor. So the outcome of all of that, we are seeing continued improvement in upside. And the proof of that really is just when you look at the work booked over the past 18 to 24 months, we’re seeing a consistent pattern of upside coming into the business. We still have some legacy stuff we’re working off, but that backlog that we sold years ago just about through the books. But it’s very encouraging to see a leading indicator of the newer work produce upside.

[Rob Brown:]

Okay, great. And then on the owner-direct business, you talked a lot about some pent-up demand coming through on the maintenance side and really good growth in general in this business. What’s sort of the visibility about continued growth there, and I think you said 25% plus growth. Do you see that kind of continuing here for the rest of the year and into next year?

[Charles Bacon:]

No, it was interesting, last year, we – during 2020 like Limbach, I guess, everybody else, we all pulled back on expenses to minimize because we weren’t certain of our future, right? So everybody pulled back. And we also saw the building owners pulled back last year a bit that they weren’t spending typically what they had spent in the past. But the reality is you can’t neglect that for too long. Sooner or later, you have to repair things. It just things break or they reach their life expectancy. So where they held back last year, that’s why I’m suggesting the pent-up demand is fueling our growth on top of, quite frankly, we’ve invested heavily in more sales resources, more management to expand the ODR segment. So our growth projections, we still believe there’s so much more in front of us. And that’s why we’re continuing our investment, and we expect our investment to continue to ramp up.

[Rob Brown:]

Okay. And then just wanted to touch on the supply chain and cost issues that you talked about. How much are you seeing those? Are they getting kind of better or worse at this point? And I guess, what’s sort of the risk that as costs move? How much risk are you exposed to as costs move? How much risk are you exposed to as costs move?

[Mike McCann:]

Rob, I’ll take that one. I think it’s been kind of interesting from a period of time in Q3, Q4 2020, we started to see that acceleration from a cost perspective, whether that’s in our business is copper, steel, chips was another big piece of it as well. One of the things that really helped us is we were strategic and selective in Q4 and Q1. So lots of – the work that could have been affected wasn’t necessarily affected as much during that period of the time. The one thing that we’ve done internally is very important is from an awareness and training perspective to make sure that people understand that our proposals that used to be good for 60 to 40 days, maybe only be good for five days. So that’s one of the most important things we have to qualify our proposals. The other thing from a customer perspective, too, with the volatility is they have to order equipment and materials immediately. Where in the past, things would go through a bit of a process, so we’ve been using that, not only from a risk management perspective, but from a leverage perspective in order to make sure that we can get sales going. So there’s a lot internally that we’re thinking about, whether that’s qualifying proposals, whether that’s using that to break out packages to get sales run early, whether that’s equipment or materials after we have to procure early. So the initial shock of that period of time between when those materials start accelerated, now I think we’ve got our staff really laser-focused on making sure that we mitigate that risk and leverage this opportunity as well.

[Operator:]

The next question is from Yaron Naymark of One Main Capital. Please proceed with your question.

[Yaron Naymark:]

Good morning, guys. Given – it sounds like working capital has eaten up a decent amount of the cash this year. Do you guys think you can get some of that back between now and year-end? Do you think – I mean, do you think the year is a positive free cash flow year? Or is it going to end up being a negative free cash flow year?

[Jayme Brooks:]

Yaron, this is Jayme. Yes, with the – the guidance that we’re providing for the back half of the year, obviously, that’s our strong half of the quarter. So from an EBIT perspective and EBITDA perspective, you’re going to see generation of income. The piece that’s going to fluctuate is going to be the working capital. So we need to – depending on the timing of when those sales are actually recognizing we can build that revenue, that’s the piece that will just have to fluctuate. As well, if you recall, we did over last year, we were able to accrue our – some payroll taxes because of the CARES Act. And so we do have a payment of $3 million to due at the end of next year – due in December on that as well, if that doesn’t change from a regulation perspective. So we’re going to see what – from a cash flow, we’ve got income coming in.

[Yaron Naymark:]

Got it. But if you hit your guidance, it sounds like we could still be negative free cash flow for the year just based on not positive working capital unwinding?

[Jayme Brooks:]

So, if you look at – I mean, we have – if you take the results that we need to get to that EBITDA of the $23 million to $25 million, that will go to the bottom line from a cash flow perspective, depending on the – you have the working capital adjustments.

[Yaron Naymark:]

Got it. Okay. And then I think you guys said on the call, you expect about 150 basis points basis points of gross margin improvement this year. Was that for the overall company or for construction, or sorry, GCR, not construction.

[Jayme Brooks:]

Yes, that’s most likely for the GCR piece of it because to exit to hit our total number, you’re going to see an improvement in our overall gross margin.

[Yaron Naymark:]

Got it. Okay. And then on the ODR side, so for the last three years, I think you guys have grown that at around 10% a year. In the first half, you guys grew at around 6% year-over-year, and you guys highlighted some – a lot of uncertainties in the back half with the Delta variant? I mean what's the thought process for guiding the 25% year-over-year growth for this segment? I mean it doesn't sound like you have a lot of visibility into it. So why guide that aggressively for this segment?

[Charlie Bacon:]

Yaron, actually, from a sales perspective, while the GCR portion, which we stated is pretty much sold for the year, we're there. And anything we add to GCR sales, if we choose to do that, would be accretive. When you look at the ODR component, we're just about there, too, here sitting in July. I mean, sales continue to improve. And when you take a look at what we've sold, the trend of sales and the pipeline, tied to our maintenance base and the traditional pull-through we get, the pull-through actually has increased nicely here. We're able to project out the year and see the nice growth trends coming through. So the growth is there based on the sales that we have in project backlog for owner-direct, plus the maintenance base has continued to grow in terms of sales. The sales have actually been very good. And also, you got the pull-through that's just coming through with that pent-up demand. So it's actually – we're pretty pumped up about where the ODR is going and the growth factors are there. We also added a lot more people here to – our staff here over the past year, right? So we really pulled back last year. But this year, we did put on more management and sales staff in ODR earlier in the year. And again, we're going to continue to invest right into 2022 to not stop the growth. But we just see so much opportunity.

[Yaron Naymark:]

Right. Yes. I mean, it just seems like given the history with the company of not being very consistent in achieving its guidance, it just seems a little aggressive to guide for 25% growth given the first half of the year. But hopefully, you guys hit it. And then the last question I have is – I know you talked about this being a transition year. It seems like there have been a lot of transition years since you guys came public in 2016. And I think there's a little bit of just a challenged relationship between the company in general and public market investors. And I guess this is a question to you, Charlie. I mean, I'm trying to understand the hesitancy of engaging with your investors about your – the potential new Board addition. It would just be such an easy way to restore credibility with investors in public markets. So just really trying to understand the hesitancy of engaging with your existing investors as you guys are making that decision about Board numbers? Thanks.

[Charlie Bacon:]

Sure, Yaron. One of the things that I'm really pleased with, actually, is our Nominating and Governance Committee that's running our search for our new member. There's been some good conversation between management and the committee. The committee is running the search. And one of the things that we highlighted was the issue of our strategic plan and the importance of finding credible candidates that can help us drive all the things we've laid out from a growth perspective, including organic as well as acquisition. And they've done, I think, a great job at producing some real stellar candidates. They're working it aggressively. I think our Chairman has done a really smart job at thinking through all the constituents out there. And he's got a heck of a nice pipeline of candidates. So they're still working through the process, but that's probably as far as I go with the update right now.

[Yaron Naymark:]

Yes. I would just say what you guys think is important and what your shareholders think is important. There might be some overlap, but there might be not be some overlap. And I think engaging with shareholders is a healthy dialogue to have especially given the history you guys have over the last five years, what you guys think might be the right candidate might not necessarily be what public market investors think and they're your partners at the end of the day. So I think it's just a very easy way to help restore credibility with your investors. And it blows my mind that the committee is choosing not to take that action. But hopefully, they change path on that. Thanks for the time.

[Operator:]

Our next question is from Mike Hughes of SGF Capital. Please proceed with your question.

[Mike Hughes:]

Yes. Actually I wanted to follow-up on the last caller's question. On the 25% growth for the ODR segment, I believe that segment was recast from – you previously referred to as Services. So that line item did about $127 million in revenue last year. And if it grew 25% this year, you'd get to a little less than $160 million. Year-to-date, you've done $62 million. So that implies a run rate in the back half of $48.5 million a quarter, which would be up from $33.5 million you just did. So have you ever had that magnitude of a step-up going from $33.5 million quarterly run rate to $48.5 million?

[Charlie Bacon:]

Yes, it's obviously quite a bit of growth, Mike, and thanks for the question. Well, when you look at our SG&A numbers, too, you'll see that we've invested in the ODR segment, and that includes both management oversight as well as additional resources out in the field. So we're prepared for it. We've been working it hard. This has been our core growth strategy. Last year, we backed off a bit because of what was going on around us. But this year, once we saw things were opening up, we went and maybe further investment to expand it. So the sales are coming in. We had a nice jump in sales in Q2, and there's visibility on that continuing. The nice thing is – the beauty of that sector – or segment rather, you got your maintenance base. And that's the part that you're in with the customer. They have needs. They call us up, and this pent-up demand where they held off last year, is just emerging. They need to change our cooling towers, chillers, air handlers, all of that equipment eventually expires or has to be rebuilt. And that's where we come into play. So our contract base keeps growing. That's the preventive maintenance space. And then you have what's the traditional pull-through that comes through those relationships. And that's fueling the growth, along with working with different customers. I mentioned last call and this call, what we did in Nashville. What we're working there is selling to our customer base, the health care customers, our direct services. So how we can help them with their maintenance, larger capital programs, we can actually do the work direct. They don't need to hire a general contractor. We can actually do that work for them. And then I also mentioned in today's prepared remarks, we've introduced new services to those customers called program management services. And that's where customers typically hire an architect or an engineer to come in, do some analysis work for their needs. But the reality is they don't really understand mechanical electrical plumbing the way we do. And we went to our customers last year, we started asking questions, would that be a value to you if we were able to combine all of our knowledge of MEP installation with that front-end engineering program management to help you make better informed decisions. And there was a resounding, yes, we would love to have that. So we went into the market. We found the Vice President that we retained. He's sitting in Nashville, and it's – we've already secured some nice program management-related work through his endeavors. So we're very excited about that. And all of that's quick-hitting. It's not like you got months to go before you start a big project, you actually get the award, you do it. So all of that is fueling the pent-up demand, the new services, the focus on health care expansion and even indoor agriculture. A lot of that work is going on to direct. So it's pretty exciting what's in front of us. I think we're hitting all the right levers.

[Mike Hughes:]

Okay. I appreciate everything you just said. So in that segment, the revenue was $20.5 million in the first quarter. You just did $33.5 million. But to ramp to $48.5 million a quarter, which is exactly what the guidance implies – actually, you say, in excess of 25%. So mathematically, it might even be north of that. Maybe to give us more comfort, what was the revenue run rate in that business in the month of July? Were you out of $15 million or $16 million revenue run rate in July?

[Charlie Bacon:]

We're not going to come comment on the July numbers just yet. But from the standpoint of increase, we have the visibility based on the backlog. So the ramp-up is there. Again, it's work that we have. And then the work we're selling today, we'll earn in Q4. So it's the work we've already sold. You saw the sales ramp-up in Q2. That work is now being burned in Q3, plus you have the maintenance space and all the other things you already have in backlog. So you can see how that's all ramping up. Again, we sold $38 million in Q2 which you can see how you add in the other existing things we already have in the business at maintenance space. You can see how you get north of 40 and approaching 50.

[Mike Hughes:]

okay. And then just a follow-up on the prior question about just the sustainability. So how much of this is just work that was pushed out? So the business will generate $45 million to $50 million in quarterly revenue for the September, December quarter, and then it bleeds off and we're back to the $30 million to $35 million level by the middle of next year. How do you see that playing out? Could that happen?

[Charlie Bacon:]

Look, I do think the pent-up demand, right, there's a catch-up of hearing auto dealers are saying their lots are going to be full again in the fall of 2022. So kind of the same thing. Things choked a little bit because of the pandemic. We're catching up with that. But the other thing we're doing, again, is we're investing in additional sales resources to get new customers. One of our big customers is Disney. And we're having active conversations with them. I was actually at FCOT two weeks ago for a management meeting. We actually had our meeting right at Disney, we're doing quite a bit of work there. And there's just – the park was packed, and I just saw the earnings today, it just released that I read earlier this morning, Disney's results. And while they haven't committed that their CapEx is going to be increasing clearly, we know what they want to do with the parks, which we're pretty intimate to the Disney thinking in terms of future project work, not too close, but close enough. They'll just stay in the trends. We think the spend is going to increase as their parks continue to do well. So it's – I think we're going to see the pent-up demand probably catch up. But I also think everything else we're doing with investments will allow that growth to continue. It's our big focus, Mike. It's the ODR revenue, the margins it's generating, it's clearly the right answer for our company.

[Mike Hughes:]

Okay. And then I appreciate that you're kind of tightening up the proposal process where the only on – or a proposal for, I think you said as short as a five day time frame. I guess my concern on that front would be we've probably had more inflation than anyone expected six months ago. And just the nature of your business, what you booked in the backlog six months ago, maybe starts to flow through into revenue in the back half of this year. And the cost component probably is higher than you envisioned at that point. So give us some comfort on why that would not be the case?

[Charlie Bacon:]

Yes, a couple of things. One, as we we're looking at our business plan last year, we actually had our GCR segment pretty much sold. We sold some things in Q4 into Q1, but we did need a lot of sales during that period because we had the year really progressing nicely. So the nice thing is, we didn't have to sell stuff and they get bit going into the new year where maybe commodity prices would have hurt us. So there's a little bit of that, that happened. But I think we were fortunate that we didn't have to sell a lot. So as a result, the new sales we're getting right now, we did have a very good booking in Q2. We were well aware of what we were looking at in terms of the steel, the coil, steel pricing, copper pricing. And obviously, the equipment, we look to lock in the equipment with our proposals. So I think we're in decent shape, but there could be – here and there, we could see some element of that hurting us. But as we said, so far, we've been able to mitigate those increases in the first half of the year. Mike, do you have anything else to share with that?

[Mike McCann:]

Sure. I think if you look at work, I think your question related to the last six months of sales. So one of the things that we have limited the time line in our proposals. We've also had the strategic conversation with our customers that you have to procure immediately. And whether that's stewards of that material, whether that's decisions that need to be made, we've been keyed in on that early conversation where, I think in the past, when we worked through these periods of times, that the procurement would take months after that. So it's immediate procurement. And I think the limiting of the days on the number proposal has been received positively from our customers because that also heightens them to understand that there's important decisions have to be made. So pushing the decision-making process, both internally and really most important x internally from our customers, is really what we've done, especially in the last six months to make sure that everybody is aware of the fluctuation or potential fluctuation.

[Mike Hughes:]

Okay. Thank you for your time.

[Charlie Bacon:]

Thanks, Mike.

[Operator:]

This concludes our question-and-answer session. I would like to turn the call back to CEO, Charlie Bacon, for closing remarks.

[Charlie Bacon:]

Well, thank you, everyone, for joining us today. We look forward to speaking with you again when we report the third quarter results in November. Thanks again for your interest in Limbach. All the best.

[Operator:]

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