Limbach Holdings (NASDAQ:LMB) Q1 2020 Earnings Conference Call June 16, 2020 9:00 AM ET
Charlie Bacon – President, Chief Executive Officer
Jayme Brooks – Executive Vice President, Chief Financial Officer
Jeremy Hellman – The Equity Group
Conference Call Participants
Brent Thielman – DA Davidson
Jon Old – Long Meadow Investors
Greetings and welcome to the Limbach Holdings first quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. You may press star, one to join the question queue. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad.
It is now my pleasure to introduce your host, Mr. Jeremy Hellman of The Equity Group. Thank you sir, you may begin.
Thank you very much, and good morning everyone. Yesterday afternoon, Limbach Holdings announced its 2020 first quarter results and filed its Form 10-Q for the quarter ended March 31, 2020.
Today, the company will be reviewing those results and providing an update on current market conditions. The company may also refer to a slide presentation accompanying this earnings call. The presentation can be found in the Investors section of the company’s 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’ll turn the call over to Charlie Bacon, CEO of Limbach Holdings, and Jayme Brooks, the company’s Chief Financial Officer.
Welcome everyone and thanks for joining us. Today we’ll be providing an update on the impact of the coronavirus, our first quarter results including an update on liquidity, and an overview of our strategy going forward.
I want to start off by commenting on the recent restructured leadership team. The team is working closely with our business units and we’re realizing substantial improvements in all of our key metrics. We have considerable momentum behind tactical execution while continuing the development and deployment of several broader strategies, all of which I’ll cover later in my remarks.
On to the details, we had a solid start to the year in what is typically a weak quarter for the company seasonally, and Jayme and I will discuss that in further detail shortly. Before we do, though, let me first comment on current market conditions which we’ve summarized graphically on Slide 4.
Since last speaking with you on May 13, we’ve experienced a broad-based restart of construction activity in those markets where the virus had impacted our ability to work. Our most heavily impacted market was New England where a substantial portion of our project work is in Boston proper. The market had been shut down entirely by the mayors of Boston and Cambridge but reopened for construction activity the last week in May.
Outside of New England, we experienced isolated pockets of suspended project activity depending on the preference of individual customers, however only a limited number of those project shutdowns were meaningful to any local branch, and that was largely limited to Orlando where Disney has taken a more cautious approach. None of our projects in backlog have been cancelled, rather the timing of some projects have pushed to the right, which will shift revenue into later periods.
Our Disney pour projects remain suspended at this point. We recently attended a work session with the Disney representatives to discuss restarting those projects and had to deal with virus safety protocols. We expect project activity to resume before too long, so at this time we’re more or less back to pre-COVID state of activity in the construction segment.
In the service segment, activity has also returned to pre-COVID levels in the last week or so, with a few limited exceptions. For example, in Ohio we have a number of small projects and special projects that are ready to restart on July 1. As with construction, we expect these delayed or deferred service projects and maintenance work to be completed, although there may be some owners who push work into the fall and winter.
The other related notable point to report on is the innovation being driven by an increased focus on improving air flow circulation and controlling indoor environments. A number of groups inside the company are engaged in discussions with customers on these and other issues led by our design and engineering group. We’re exploring solutions to these challenges in environments ranging from office to student facilities to elevator cabs and stairwells.
The virus has served to reinforce what many of us had come to take for granted, which is the importance of design and proper functioning of the systems that keep us cool in the summer and warm in the winter and that movement of air throughout facilities in which we spend a great amount of time. Our business is an essential business and we’re leveraging all of our capabilities to continue to innovate for our customers.
As I noted in our May conference call, I’m proud of the Limbach organization and all of our employees that have accomplished so much since mid-March, as well as their continuing efforts to manage under these still very challenging circumstances. They are continuing to execute to stay safe, get cash and get work priorities which we implemented in late March, and we’re making strong progress in many other areas too. We’re grateful that within the Limbach family, incidents of COVID-19 has been minimal, as I stated earlier. Very few of our employees have been sidelined, and none seriously.
With that, let’s move on to review our first quarter performance and other real-time updates.
Let me first comment on the re-casting of our quarterly results for the three months ended March 31, 2019, which are reflected in the current filing. As you may recall, we adopted both ASC Topics 606 and 842 in the fourth quarter of 2019 for the annual and quarterly periods beginning after January 1, 2019 using a modified retrospective transition approach. Since we filed our 2019 quarterly results before we were required to adopt the two new standards, we are obligated to re-cast our 2019 quarterly results to properly reflect these two new standards at each quarter end during 2019.
All the numbers we discuss today for the first quarter of 2019 are as re-cast. For all remaining quarterly filings in 2020, we will be re-casting the comparable 2019 period quarterly results to comply with the two new standards. While certain categorizations and line items may change in each quarter, there is no impact on full year results or cash flows previously reported for fiscal 2019.
With that, I will now comment on our first quarter results.
We had a solid first quarter that reflected continuing progress in improving field execution, cash flow generation, and balance sheet management. The first quarter has historically been our weakest quarter from a seasonality perspective, so achieving net income breakeven is a positive development. Also, certain year-over-year comparisons appear unfavorable due in part to the recognition in last year’s first quarter of a final right-up of $1.2 million on the Little Caesar’s Arena project in Michigan. Absent that right-up, core performance was more comparable year-over-year.
In the first quarter, consolidated revenue increased 3.8% year-over-year. The construction segment accounted for all of the growth, which is broad-based outside of mid-Atlantic and Western Pennsylvania operations. As we discussed previously, we continue to successfully execute a turnaround plan in the mid-Atlantic region and are not anticipating any material revenue growth in that market for another several quarters, however that branch is profitable at this time. In Western Pennsylvania, we managed the business unit to focus exclusively on service and owner-direct opportunities and will not be executing traditional construction projects there as we have in the past.
As we discuss the service segment, please keep in mind that in our business, sales and revenue are different concepts. We will sell a project opportunity to a customer and book it into backlog, and then we generate revenue as the project is executed.
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Folks, we’re going to rewind a bit. We’re going to go back to where Jayme started explaining the details of the quarter, so with that, Jayme, I’ll turn it back to you.
Thank you Charlie. I won’t go through the ASC Topic 606 and 842, but I’ll start with our first quarter results.
We had a solid first quarter that reflected continued progress improving field execution, cash flow generation, and balance sheet management. The quarter has historically been our weak quarter from a seasonality perspective, so achieving net income breakeven is a positive development. Also, certain year-over-year comparisons appear unfavorable due I part to the recognition in last year’s first quarter of a final right-up of $1.2 million on the Little Caesar’s Arena project in Michigan. Absent that right-up, core performance was more comparable year-over-year.
In the first quarter, consolidated revenue increased $3.8 million year-over-year. The construction segment accounted for all of the growth, which is broad-based outside of mid-Atlantic and Western Pennsylvania operations. As we’ve discussed previously, we continue to successfully execute a turnaround plan in the mid-Atlantic region and are not anticipating any material revenue growth in that market for several quarters, however that branch is profitable at this time. In Western Pennsylvania, we have managed the business unit to focus exclusively on service and owner-direct opportunities and will not be executing traditional construction projects there as we have in the past.
As we discuss the service segment, please keep in mind that in our business, sales and revenue are different concepts. We will sell a project opportunity to a customer and book it into backlog and then we generate revenue as that project is executed. Revenue in the service segment was flat in the first quarter. The weather across our geography was more mild than usual in the first quarter and there was some impact in the second half of March from COVID-19, all of which impacted T&M work and some project activity.
We also experienced a decline in small and special project sales late in the fourth quarter of 2019. Given the short sales cycle in the service segment for this type of work, the revenue impact of that sales shortfall was felt in this year’s first quarter, however we did see sales rebound in most markets in the first quarter, which is an encouraging sign.
As you can see on Slide 7, service sales this year increased more than 53% year-over-year. The impact of COVID-19 is likely more pronounced in the second quarter, however we’re still several weeks away from being able to fully evaluate and quantify the impact of our service revenue.
Consolidated gross profit and gross margin were lower year over year due in part to the right-up of the Little Caesar’s Arena project last year as well as the impact on operations from COVID-19 in the last two weeks of March this year. Activity levels declined late in the quarter this year and that impacted both revenue recognition and our ability to generate gross profit. Importantly, however, we expect to make up in the next several quarters much of the delayed revenue and gross profit from any in-process work that was suspended earlier.
That revenue won’t disappear. It will get pushed out several months or quarters and may end up having to accelerate in certain cases. Nevertheless, Limbach generated a consolidated gross margin of 13.1% that represents a modest improvement of 10 basis points over consolidated gross margin for fiscal 2019. Despite lingering write-downs in the Southern California market as our challenging projects approach substantial completion, we believe we’re making incremental progress in improving execution.
Adjusted EBITDA declined from $5.2 million last year to $3.7 million in the current year period as a result of the previously mentioned prior year right-up and the impact of the virus this year. While we took aggressive action to reduce costs and headcount in response to the impact of the virus on operations, those actions occurred late in the quarter and those savings were not fully reflected in the financial statements by March 31. We’ll see the benefit of those reduction initiatives as well as the broader cost savings projects as the year progresses.
As a whole, SG&A expense was 12.1% of total revenues, which is relatively the same as the prior year quarter. Expense increased approximately $754,000 year-over-year due to increased salary and payroll costs, offset by reductions in rent, travel and entertainment and professional services. Higher salary and payroll costs included $1.1 million primarily due to additional headcount added to the service segment and $0.6 million related to severance expense incurred in conjunction with headcount reductions that took place the end of March. At May 31, our total salaried headcount was 484, a decrease of 18.4% from the year end 2019.
Finally, our on-site labor force continues to contract on the LAX Midfield project and it is minimally staffed. By the third quarter, we expect to be wrapped up with systems started and commissioning, both of which are low risk activities.
Also on Slide 7, we provided a handful of key performance indicators. Total backlog at March 31 was $534.9 million, of which $472 million was attributable to our construction segment. While current backlog is below the levels of December 31 and March 31 of last year, in most markets our capacity is sold out for fiscal 2020 or close to it, and we’re carrying reasonable backlog for 2021. We view the current level of backlog as healthy and no cause for concern.
The decline in backlog year-over-year was planned as largely a function of three items. First, our New England operation booked two larger projects into backlog in the first quarter of 2019. New England is sold out for major construction project revenue in 2020. Second, as I mentioned, we’re confident that we’ve matched capacity with opportunity over the next 12 to 18 months and we are taking a more conservative approach to sales generally. Third, in certain markets we’ve made an intentional pivot away from larger construction projects which have a less favorable risk profile. As we’ll discuss in further detail shortly, we expect this trend to continue while at the same time we should continue to see an increase in service backlog which will include smaller construction projects performed directly for owners.
Beyond the impact of the large project sales in New England in the first quarter of last year, we orchestrated a managed reduction of new sales activity in Southern California and Tampa. Our actions in Southern California were intended to reduce risk while we transition management and stabilize the operation, similar to the plan we executed successfully in the mid-Atlantic operation. Our Tampa business unit entered the year largely sold out and was not aggressively pursuing new work in the first quarter. When compared to planned sales across the company, we’re actually more than 5% ahead of internal expectations.
Sales in the service segment were strong through the first quarter, increasing nearly 53% year over year. As in the construction segment, sales are also substantially ahead of internal expectations through March 31.
With respect to sales in both construction and service, we are experiencing some COVID-induced impact. We’re not through the second quarter yet so it remains to be seen whether we’re witnessing a trend of temporary deferrals or a more substantial pattern of indefinite delays in new project solicitations and more caution overall around capital investment. I should note we are continuing to perform pre-construction engineering work on a number of significant construction projects in several proven branch operations. These projects appear to be moving forward, which should result in future additions to backlog once contracts are executed.
We have and will continue to adjust manpower and overhead resources accordingly based on our pipeline of activity. We are also redirecting resources to owner-direct and service opportunities and reducing our construction sales resources in several branches where we have made a strategic decision to rapidly expand our owner-direct services.
Irrespective of what’s happening in the market, we will not pursue revenue for the sake of revenue. Each opportunity we identify and pursue must meet enhanced risk management parameters and generate acceptable risk-adjusted returns.
We experienced another quarter of strong gross margins in the service segment, where margins increased 182 basis points year-over-year. Going forward, we expect owner-direct business mix we are targeting to support segment margins in the low to mid 20% range. On a quarter-to-quarter basis, that figure will likely bounce around a bit, but on an ongoing basis we expect it to stay relatively level here rather than continue to expand. However, we do expect to see increasing growth in gross profit dollars going forward as the segment revenues grow.
At this time, I don’t have any material update to provide with respect to claims collections. We continue to engage with counterparts and to explore and pursue various options for resolution. In each case, we’re focusing on maximizing our results. As we have communicated before, these processes may take time and while we believe it’s possible there will be a resolution on certain claims this calendar year, other projects will more than likely be resolved in 2021.
A focus on maximizing liquidity and improving working capital management is quickly becoming a part of our daily discipline, as evidenced by our first quarter’s positive operating cash flow of $3.5 million. Given the evolving environment, we are again providing a post reporting period snapshot of our liquidity position, although we are not reporting financial results for any period subsequent to March 31.
As you can see on Slide 8, our cash balance and overall liquidity position continues to improve. At the end of May, we had $16.7 million in cash on the balance sheet and total liquidity of $27.2 million. By and large, this success with cash and liquidity results from a greater focus on ordinary course activities such as invoicing, billing and collections, and does not reflect any substantial collection of claims proceeds through May 31, as Charlie just noted. It remains a great team effort. As before, we have not seen any slowdown in collections, have not identified any new credit risks among our customer base, and do not have any material exposure to the retail, energy or multi-family markets.
Allow me to address a few final points before we pivot to an update on our overall strategy. While we’re experiencing greater levels of normalcy in every market as compared to even just a few weeks ago, it’s clear that the impact to the economy from the national shutdown has been substantial. We’ll leave predictions about the pace and trajectory of the economic recovery to others, but we are anticipating and planning for choppy waters, which we believe is the right approach. For Limbach, that means continued focus on liquidity and working capital management, extreme discipline with respect to project sales and new project selection, and continued focus on making fundamental changes to the company’s cost structure.
The current backlog is stronger and provides solid revenue visibility over the next 12 to 18 months. We like the margin profile, including a handful of large projects that will executed in our strongest locations with the best resumes in large project construction. In those cases, we’re working in the right branches for the right customers. Without the need to sell multiple large construction projects elsewhere, we can remain focused on execution discipline and growing our owner-direct business without impacting margins in the near term or losing operating leverage.
In the past, I’ve stressed the importance of geographic and market diversity, especially when facing a market downturn. Limbach maintains a diverse resume, allowing us to ship resources to more active and attractive market sectors. In the current environment, we see healthcare, R&D labs for biotech and pharmaceutical companies, as well as data centers remaining very active. Over the next several quarters and years, we also see select compelling opportunities in education, entertainment and government, and we think there is an interesting upside and optionality in the industrial and manufacturing sectors with all the discussions with on-shoring of manufacturing. The expected period of prolonged interest rates should also support additional investment in all of these areas.
Irrespective of the trajectory of the recovery, we anticipate that we’ll continue to benefit from our breadth and diversity in geographies, services, customers, and projects. That has served us well in the past, and we see no reason why it wouldn’t in the future. Additionally, the last several months appear to have validated the essential nature of the work we perform. There are limited exceptions and there are ongoing uncertainties, but on the whole we interpret the evidence to suggest that the future widespread wholesale cessation of construction activity on a prolonged basis is an unlikely event.
Certainly with our service segment, existing buildings must be maintained. Certain maintenance projects can be deferred for a period of time, but eventually equipment fails and must be replaced. That’s the beauty of our service segment.
With that, we want to now turn to strategy and will offer an update on how we’re thinking about the evolution of the business model.
We’re heavily influenced by our own experiences over the last several years, as well as by opportunities we are seeing in the construction and building services markets broadly. Slides 11 through 15 capture the substance of what I’ll be discussing.
To begin, we’ve worked with the board over the last six months to restructure the executive leadership team. The goals were to bring together a small group of individuals with a diversity of skills and experiences. We wanted to create a structure where business and capital decisions could be made efficiently and o the basis of input from individuals having multiple and often different perspectives. This group interfaces most often with the executive committee of the board. This new structure is working well and has led to more rigorous debate and a broader consensus throughout the larger management team.
These discussions have yielded three key initiatives that I want to introduce briefly. The first core initiative is to redefine the risk management paradigm. With specialty contracting, money is made or lost in the field. For too long, Limbach’s performance at the project level has been uneven. In the last several years in particular, operational excellence across many branches has been overshadowed by the impact of write-downs on a discrete number of projects. In hindsight, these projects should have warranted a further and more critical review during the sales cycle, based upon a number of factors from the lack of strong customer relationships to the availability of local labor.
To counter that risk, we have substantially modified our get-work processes to emphasize local market capacity and project characteristics, like size and duration. A more stringent sales filter that’s administered with greater central authority and less local autonomy will drive better front end decisions. That together with more rigorous internal review and project audit process leads to improved back end outcomes with less variability. We’re redirecting internal resources to support these project reviews and audit initiatives.
Additionally, we need to increase utilization of our design and engineering capabilities, both during the sales and planning phases. Reducing cost and scope and controlling the budget and schedule all mitigate project risks. Importantly, leveraging these resources also impresses our customers and facility owners, and that leads to stronger and more profitable long term relationships.
Our second core initiative is to maximize profitability and cash flow. Simply put, the company needs to generate better returns and stronger cash flow. We must execute more consistently in the field, as Charlie just noted. While we made significant strides in the last several months in improving working capital management through greater accountability, we need to institutionalize the effort and make it sustainable. We also need to monetize the project claims and continue to analyze our operating costs, including the way in which we do business internally with an eye towards improving business processes.
As we think forward, we need to apply the same degree of rigor to investment decisions, including how we hire to support growth initiatives. Executing well in these areas drives more consistent and substantially greater cash flow generation. We’ll experience reduced borrowing and capital costs which will allow the organization to become more flexible and responsive overall. This is critical to our ability to regain the offensive and to leverage the company’s design and engineering-driven advantages to move the business forward into a new era.
Our third core initiative is to expand owner-direct offerings. For almost 120 years, Limbach has made money in large construction projects. We have some unbelievable talent and experience throughout the organization, and in many markets large institutional facilities imply don’t get built unless Limbach is building them. In those markets with a history of success in executing large projects, we’ll continue to pursue those jobs but will do so subject to a gating process we’ve noted. As the industry has evolved, however, the traditional large project contracting structure has shifted to one with a risk-reward profile that can be unbalanced and inequitable. Without proper controls and discipline, we could find ourselves too far from the facility owner and source of capital and less able to control our destiny.
Even with our broad diversity the market can be cyclical, and while Limbach has always found work in challenging markets, has too often found work with unattractive risk-adjusted returns, so as we think about allocating capital across the business over the next several years, our focus will shift to owner-direct work where we can engage directly with the facility owner to demonstrate Limbach’s value propositions and capture and leverage the ongoing relationship.
Today this model is broadly represented by our service segment, which includes everything from revenue we generate from maintenance contracts to small pull-through projects and other work performed directly for building owners. This project work can be larger, and often is, but irrespective of size Limbach’s position in the value chain is more substantial and controllable.
Across the various products and services we provide today, our focus for new investment will shift towards small and midsized projects with an occasional large scale project where we have the proven resources and solid customer relationships. As a general rule, these shorter duration projects we believe can lead to long term building maintenance relationships with the building owners. Based on historic experience, we anticipate greater consistency of project outcomes and higher overall margins. This approach has been long a feature of our model, although more so in certain locations than in others. From this point forward, however, it will become central to how we operate across the organization.
Importantly, we’re also building and leveraging relationships with facility owners to capture not only traditional maintenance services but also a new generation of digital technology-enhanced products. This new offering will better leverage blue collar labor and white collar design and engineering capabilities to generate stable high margin revenue streams. To be clear, large construction will remain a core competency and a critical offering in the foreseeable future.
Subject to the risk management structures I have just described, we are confident that this is a profitable line of business that we can earn acceptable returns in those markets with experience and capacity to handle the work. We have some great general contractor, construction manager and owner relationships, and we intend to remain a critical partner for those groups going forward.
Ultimately, however, we are striving to accelerate the construction to service transition that we’ve been commenting on for several years. In 2016, the year in which Limbach became a public company, the service segment accounted for just over 18% of consolidated revenue and just over 30% of gross profits. On an annual basis through the first quarter, service accounted for almost 21% of consolidated revenue and, given our focus on margins, a greater share of gross profit at approximately 41%.
We have previously spoken about transitioning to a revenue split of 70/30 by 2025, but we are now striving to reach a 50/50 balance by then. We believe we can achieve this by limiting construction revenue to only the best opportunities in the marketplace and by redirecting resources to expand our owner-direct pipeline. From there, we see exciting opportunities to bundle technical services built on a robust digital platform. Many of these opportunities are under development, with some more advanced than others.
We have more work to do in that respect, but we see a future where Limbach is perceived as a dominant technical services firm that can provide end-to-end solutions for critical facilities systems. Collectively these initiatives should lead to greater and more stable cash flows, a more defensible market position, and better leverage of the company’s diverse competencies.
With that, we’ll take your questions.
Our first question comes from the line of Brent Thielman with DA Davidson. Please proceed with your questions.
Great, thanks. Good morning.
Good morning Brent.
Charlie, maybe off your strategic comments, I guess I’d be curious what the new parameters or cap on size of large projects you’re willing to go after here going forward.
Sure Brent. We’re still looking at some very large scale projects. In certain market geographies like Ohio and Michigan, we’ve executed some of the largest projects in the history of the company very successfully, very profitably, and with positive cash flow. In those particular geographies, we’ll continue to look at projects that are very large scale – you know, 30, 40, 50, up to $100 million, so we’re not ruling that out. When you look at other geographies where we’re kind of making that shift to more owner-direct, those will probably be on the smaller side but with select relationships with certain general contractors and construction managers, I could see doing 5, 10, 15, $20 million projects.
What we’re doing at this point, Brent, and we put this in place, it’s either 15 or 18 months ago, we have a standing call every Friday morning that any branch can present a project that’s valued over $7.5 million to our risk management committee, so we take a look at them. I think we’ve seen some really good discussion. It’d led to saying no to certain projects and it’s led to, I think, some dramatic enhancement of the proposal in terms of margin as well as what we need to see in our contracts.
We’re not ruling out large scale projects, it’s just that I think we’re going to have much better risk management processes in place and we need to see that the competency is there within the branch to handle the project they’re taking on and that they have the resources to execute.
Okay, thanks for that, Charlie. Then beyond the disruptions that you’re experiencing in certain regions here, just be curious the levels of bidding and quoting activity you’re seeing, what the pipeline for new work opportunities looks like out there in this environment.
Let’s break it down to construction and service, so I’ll comment on both segments. On the construction segment, there’s still quite a bit of opportunity out there, but clearly we’ve seen over the past couple of months people not making the decisions that we were used to seeing. It’s dragging out a bit, people holding off, and I’ve spoken to a number of CEOs of general contracting firms over the past month and a half – I’ve actually been having a standing call with a group of other CEOs to deal with the virus and how do we protect our workers in the field, but we can’t help ourselves but to talk about how the business climate is.
What I’m hearing from everybody is the major projects that they’ve been looking at have not stopped. They’re still in discussion, but just like I said, decisions have cooled off a bit. I think everybody is just doing a wait and see, but the good news for Limbach at this point, when we look at where we stand with backlog, we’re sold out in a number of our branches. We’re looking for some smaller work, quick hitting stuff which generally falls into what we call SPD – special projects, as well as our service projects. But for the most part, our backlog is sold, so we’re looking pretty good for this year.
Now on the service segment, what we’ve seen happen is our time and materials spot work, emergency type work is still continuing. We were disrupted a little bit with some riots, we were told that we had to leave the city areas a bit earlier in the afternoon, but for the most part we are still doing that work and that’s remained fairly robust. In terms of preventative maintenance sales, we’ve seen a pull back on that, and that’s mainly because people don’t want us in the buildings right now. I think that’s unfortunate – we already have a good maintenance base, but sales were a bit soft with that.
But the rest of service, we’re still seeing a pretty robust pipeline, and if something is breaking, that’s the beauty of service, it’s got to be fixed, so that’s what we’re seeing.
Jayme, do you have any other comments you’d like to share around that?
No thoughts [indiscernible].
Okay. Brent, does that give you enough color? Is there any specific markets you’d like to talk about, or ask on?
No, that’s helpful, Charlie. I guess my last one, I understand you guys aren’t providing guidance, but any near term directional parameters you can provide, just so we can handicap all the delays that you’ve experienced quarter to date with some of these COVID disruptions? Should we think about something a little lower in the second quarter and then hopefully we pick back up in the second half? Just looking for some qualitative commentary there.
Yes, so when you look at the dynamics of the business, the majority of the business kept going on the construction side. We did face the shutdown in Boston and Cambridge, we had a couple of major projects there that were sidelined, but we continued with prefabrication, we didn’t stop. We had a similar situation up in Michigan on a few projects, but actually it was good because the prefab–you know, we had a backlog of a bunch of stuff we needed to fabricate, so we kept going and the clients kept paying, so while we couldn’t work on site, our fabrication shop facilities actually continued.
We also had some emergency work come in. Now, it wasn’t substantial but we saw–we did convert a convention center into an acute care facility. That happened overnight in 10 days, that was unexpected revenue. We’ve had a few things like that happen, so I’m not sure how the numbers are going to shake out yet for the quarter. But I think we had some pull back but we also had some other revenue to offset some of that pull back, so that’s probably the best I could share right now.
Okay, fair enough. I’ll pass it on, thank you.
Thank you. Once again as a reminder, if you would like to ask a question, please press star, one on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Our next question comes from the line of Jon Old with Long Meadow Investors. Please proceed with your questions.
Thanks Charlie and everyone for holding the call. Just quickly, in the release you talked about gross margins improving in coming quarters, and then in your prepared remarks you discussed the cost, the SG&A initiatives and how those are just sort of getting started. Where do you expect–where do you hope those to sort of end up? What are the goals for–I mean, SG&A was 12%. Do you have a specific goal, maybe 11 or less, and then gross margin improvement, maybe can you be more specific as to what you–where you expect that to land.
Yes Jon, thanks for the question and thanks for joining us this morning. First off on the gross margins, our service margins in my remarks, I think we’re starting to hit a good stride there – you know, 20 to mid-20s, and I think that’s where we’re going to continue to see those numbers land. We’re going to keep pushing hard to see more, but I think that’s a reasonable expectation.
On the construction side as we continue to work through the challenges of past backlog, especially out in Southern California with that work wrapping up, we do expect to see construction margins pick up, so we’re pushing hard for that and I think we’ll see that happen in the future.
Jayme, could you comment on the SG&A, please?
Yes, so the SG&A, we have–we are working through our cost reduction initiatives, and I would say that as we look at it holistically over the full year, we probably anticipate to be a few percentage points over last year, 2019, without taking into consideration any incentive comp. Last year, we didn’t have any incentive comp in our numbers for 2019, so that would just be the additional add on top of those numbers for the full year. Timing of when our cost reductions come in is fluid right now, as we’re still working through that, and as well as we’re looking at different–you know, we did do furloughs and layoffs and how we’re anticipating that headcount to return and the timing on that.
And so you expect it to be higher than last year? I’m confused there.
On a core basis, because we grew from–if you look at Q1 as we grew throughout the year, headcount was added throughout the year, so we exited the year at a higher level, so total year-over-year is basically what I’m commenting on.
On the margin or just absolute dollars?
Oh, absolute dollars? Okay. But you expect the margin to be lower?
On absolute dollars, yes.
But you expect the margin to be lower, correct?
No, SG&A margin.
Oh, SG&A percentage? Depending on how we exit the year from a revenue perspective. I don’t necessarily know yet what that percentage is at this point.
Yes Jon, we’re taking a really, I think, a very strategic focus on headcount reduction. I think we executed well during Q1 to reduce headcount based on what we saw happening, and I think a lot of that is going to remain permanent. The other part is we’re looking at other processes in the company, bulk purchasing as an example we see as a strong opportunity to reduce costs, so we’re looking at all aspects of that. We’ve got a very, very focused effort that’s actually being led by Matt Katz, one of our Executive Vice Presidents. I don’t know the exact outcome of that yet, but I think you’re going to continue to see continued improvement. He’s identified some terrific opportunities.
Okay. You guys have done a great job on the cash side, so if we now look at your net debt position, it’s way down, that great cash position. As you look towards the fall, I believe you can refinance the debt facility, sort of mid, late fall without any penalty. Have you started working on that, and how are you thinking about that? Then also, if you could just add–and if that $16 million, which is terrific, it doesn’t even include much of the charge-back collection, what is the total that’s still available there? Anyway, just sort of a broad question on refinancing debt and the future size of the potential cash collection.
I can assure you, Jon, refinancing is high on our list, and we’ve got to continue to execute, so we’re very focused on executing our business strategy and also performance focused on bottom line. We’ll be entering the market this year, looking to see what we can do with that refinancing, it’s just a question of timing, but management is extremely laser focused on seeing what we can do to make that move as quickly as possible.
On the cash, where we stand today, I think the company is performing much better than we have in the past, and we’re going to continue that stride. It was very interesting – when we saw the virus hit, I just went in to the management team and I said, guys, I have an idea, these three things are the most important things: stay safe, get cash, get work. On the get cash side, it’s been remarkable how we just really hit that hard, and I want to credit our customers. Our customers listened to us and they helped us, and we–I think we’re in a much better position, and now I think everybody’s seen the opportunity and we’re going to continue to push very hard on that. On top of all that, we still have these claims to get resolved, which will be future cash coming into the company. It’s just always a question on timing with those. We’re not going to just walk away from opportunity to get a couple of bucks in the door. We want to maximize our position, so we’re going to continue to work that very strategically.
I hope that answers your question.
Yes. What’s the size of the receivables currently?
The receivables in terms of the claims?
I can’t divulge that number, Jon.
Okay, no problem.
I mean, I’m sure I have customers listening in on this call. I don’t want–
Okay, no problem. But is it fair to say that in the $16 million balance, the incredible improvement we’ve shown, very little of that has come from that collection opportunity, so that still–most of it lies ahead of us?
That’s true, yes.
Okay, great. Thank you for your time.
Thank you Jon.
Thank you. Once again as a final reminder, if you would like to ask a question, please press star, one on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for more questions.
There are no further questions at this time. I’d like to turn the call back over to management for any closing remarks.
Thank you Operator. In 2008, we hit the start of the Great Recession, and back then like today, our diversity in sectors, customers and services, along with being essential, with solid project backlog led to 2009 and 2010 as strong performance years for the company. While today’s economic environment is different, the basic strengths of Limbach remain in place and our strategic plan will only improve our opportunity to deliver better economic results.
To recap today’s call, first, our leadership team is dynamic and interfacing regularly with the board’s executive committee. We are making decisions and moving forward with market opportunities. Two, our focus is on economic results, applying our risk management processes with strict oversight on SG&A. Three, the balance sheet, our focus on strengthening our balance sheet to support our growth ambitions is a core focus of management, and I think we talk about that just about every day. Four, our strategic focus on rapidly growing our building owner relationships supported by a suite of technology offerings will separate us further from the competition, and five, the Limbach team has some of the most dedicated and talented experts in the industry. How we’ve dealt with the virus crisis was exceptional. Our focus of staying safe – very few people became sick with the virus, get cash – we just talked about liquidity and our results, and get work – the innovation that was created just so impressed me and so many people within our business and outside our business, just outstanding results by our people.
Thank you for attending today’s call, and we’ll look forward to presenting our Q2 results in the future. Thank you.
Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.