Limbach Holdings, Inc. (LMB) Q3 2019 Earnings Report, Transcript and Summary

Greetings! And welcome to the Limbach Holdings Third Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jeremy Hellman of The Equity Group. Please go ahead, sir.

Thank you very much and good morning everyone. Yesterday, Limbach Holdings issued the announcement of its 2019 third quarter results and filed its Form 10-Q. The company will also be using a slide presentation to accompany this 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 two of the presentation. With that, I'd like to turn the call over to Charlie Bacon, CEO of Limbach Holdings. Please go ahead, Charlie.

Thank you, Jeremy. Welcome everyone and thanks for joining us. Joining me today is our Chief Financial Officer, Jayme Brooks. As Jeremy mentioned, we'll be using a presentation deck. We’ll note the page we're referencing in our commentary. We’ll begin with Slide 3. Consolidated revenue was up 9.4% from last year’s third quarter as both construction and service segments reported topline growth exceeding our internal plan expectations. Once again the service segment is performing ahead of plan and grew 15.7% compared with last year’s third quarter and we’re excited for this continued level of growth. Across all key operational measures, our service segments performed better than expected and the results reinforced our core strategy of continuing to wrap up the growth of segment. We’ll be talking more about how we are looking to maintain that momentum in a bit. Overall, our construction segment was also strong from a revenue perspective. However, we were faced with more challenges and in a number of cases impacts caused by others on certain projects which resulted in a net profit write-down of $3.1 million for the quarter. We were very disappointed to see these write-downs come through on these projects while most of our construction project operations returned strong results. As we’ve noted in the past, when we’re impacted by others outside of our control, we pursue claims and change orders to financially recover the added cost we incur, and we have a positive track record of recovery. An example would be the recent experience in our Mid-Atlantic region. Several of our challenging projects we discussed last year were favorably resolved in 2019 leading to write-ups. We also realized write-ups during third quarter of this year, which is typical as both large and small projects were near or at completion. We expect the claims and disputed change orders we're pursuing for recovery to be settled in the first half of 2020. So let everybody be familiar with these matters, when we are impacted on a project costing us time and money, and determine we have entitlement for recovery we estimate the probable recovery amount and book debt value during the period, which is in accordance with GAAP. This unfortunately can lead to a write-down during a particular period, but with the possibility of being reversed later if we recover more than we will carry on the books from a GAAP perspective. This is what happened earlier this year with the Mid-Atlantic region. For the entire company at September 30, 2019, we had over $40 million in outstanding claims and disputed change orders. We cannot reveal the estimates we are carrying on the books or the range of our successes due to the sensitive nature of the customer negotiation process. We're not satisfied with the way this impacts our construction segment results and shareholders and thus we are responding in several ways. First, more rigor in our project selection in these booming industry times. There's no indication of a market slowdown in our sectors, and we have the ability to be much more selective seeking the best regional market opportunities. As mentioned on earlier calls, last year, we started projecting extended labor curves 12 months out, allowing us to tie our sales cycle to upcoming available craft and project management resources. Human Capital is in such tight demand and we are laser focused on leveraging great talent that work for Limbach and increasing our margins. We have what building owners and general contractors want, not only labor itself, but experienced Limbach craftsmen, some of the best in the industry. We're also digging deeper into our customer’s assigned resources. They too are faced with substantial talent shortages, which is affecting our ability to execute efficiently. We know, we need to know their teams of project managers and construction superintendents who absolutely impact the flow of a projects execution and our ability to redeem our estimates. Finally, we are conducting more intense internal reviews tied to what we noted above. As an example, recently here in the third quarter, we had a project win which is an engineering science building for a major university in Boston. The new process confirmed that we knew the general contractors assigned team and had enjoyed financial success on previous projects. The contract terms were reasonable as compared to industry standards. The schedule and timing was attractive based upon the business units backlog. We saw the opportunity to build a long standing relationship with the University for future service and owner direct capital projects. Finally, a risk review committee directed the local business units to increase our quoted margin by 200 basis points, due to the strong regional market activity. We secured the project which is in excess of $23 million. The project has all the right elements to be very profitable and positive cash flow. We are currently in the engineering and planning stage with this project. Our Chief Operating Officer along with our business unit managers are driving these processes. Second, based upon the labor shortage in the industry, we are refocusing resources to move over to our service segment, which is not as labor intense. This may result in slow growth within our construction segment. However, we expect to realize continuation of our rapid growth with our service segment and increasing strong contributions on the service operating results. We firmly believe we have substantial service growth opportunities in our major MSAs with substantially higher margins. Case in point, we have realized over 200 basis point improvement this year in our service segment margins. Our solution sales approach which is all about listening and coming up with value add solutions for our building operations is being well received. A third aspect to highlight is our focus on owner direct capital projects sales. We expect that by continuing to align ourselves with building owners, we’ll be able to command a greater share of wallet for projects including our MEP Prime offering, which is a general contractor service on turnkey projects that are heavy mechanical HVAC, plumbing and electrical systems and related equipment, and post construction service and maintenance work. Importantly, by aligning ourselves with building owners, we expect to occupy more powerful bargaining position overall. And particularly with respect to issues like budget, scope and schedule, which is where we experienced the most friction with general contractors. With greater control over the input into these areas, we can better leverage our design and engineering capabilities and create better opportunities to exceed our estimated profitability. Owner direct projects also tend to be cash flowing better. We're targeting securing contracts with many Fortune 100 companies like Disney, HCA, Bedrock Development to name a few. We now move on to slide four with our consolidated financials. At the macro level, non-residential construction demand and our target verticals such as healthcare, higher education, research and development, entertainment venues, and our recently entered sector mission critical data centers remains very healthy. We also secured during the quarter another indoor form of possible emerging sector that requires design engineering, construction and intense ongoing maintenance. We are recently contacted by two other developers to engage our services. We're going to walk before we run, but this could be an exciting new sector for Limbach. According to many research journals, indoor farming will revolutionize farming of the future, using 5% of water with far superior yields due to constant growth compared to seasonal open fields. The mechanical electrical requirements of these farms is very intense, which is perfect for Limbach and our offering. In the recent past, we actually designed to build one of the most notable indoor farms in the USA. AeroFarms located in Newark, New Jersey. Recapping our Q3 revenue, which was up 4.9% from last year, our healthcare remains a stand up vertical for Limbach and continues to validate our emphasis on our owner direct strategy. Hospital Corporation of America or HCA has been a top customer for ours for several years enabling Limbach to be well positioned as HCA adds to its hospital network, especially in Florida. Higher Education with prestigious universities, Entertainment with Disney and Universal Studios, which are theme park rides and supportive venues also continued to see solid demand and project awards. Notably, our service segment accounts for 40.4% of our gross profit in the quarter, which was roughly double the proportion of consolidated revenue attributed to the segment. This really supports our strategic efforts to grow that segment of our business. Switching gears, I want to share the news that we've made a management change, with Mike McCann becoming our standalone COO as of today. Mike joined us in 2010, heading up our Tampa Bay region operation. Within one year, he turned a very strong profit. In 2013, he was promoted to President of our Florida business. He remained in that position through last year delivering strong profit and cash flow results. Last year, we readied him to move up to Co-COO taking on our challenged Mid-Atlantic region along with the Eastern Pa and New Jersey regions. He's done an outstanding job delivering consistent strong profit and cash flow. He's been leading the development of stronger risk management processes in the business as well as back data collection to better manage our risk. I'm quite excited about Mike taking on this role. He’s a big part of our future and continued operational improvement. At this point, I’m going to hand it off to Jayme Brooks for review our segments in more detail along with our overall financials.

Thanks, Charlie. And now on slide five, which summarizes our construction segments. For the third quarter, construction revenue was $118.1 billion, which is up $7.9 billion from last year. Year-to-date, our construction revenue is up $7.8 million or 2.4%. Both the quarter and year-to-date figures are consistent with the plan that was laid out at the beginning of the year, which included immaterial reduction in the level of business in our Mid-Atlantic branch. Our plan was to offset that reduction with growth across the rest of the business, and we continue to execute to that plan. On the prior slide, Charlie noted that our healthcare and entertainment verticals have been strong. And with HCA and disease activity level of Florida, the Florida region has led our growth this year. I also want to note that with respect to our 2019 plan for the Mid-Atlantic region, the bottom line performance of the branch continues to be ahead of plan and we're certainly pleased with the turnaround of that branch. As you can see from the chart on the right, our backlog remains solid, with our construction segment backlog at 516.8 million at the end of the third quarter. Lastly, we had a goodwill impairment charge of approximately 4.4 million related to our construction segment, which was the result of evaluation effects of management decreasing our forecasted cash flows within the construction segment. The decreased forecast cash flows are due to our continued focus on expanding our service segments, as well as the planned reduction and elimination of certain large scale projects that typically require large amount of working capital, have an increased risk of claims, and have low historical margins. Our service segment goodwill of 6.1 million did not change. The full discussion on the goodwill impairment is included in our 10-Q filing. On slide six, our service segment remains a bright spot is an area we continue to expect will drive improve profitability. Third quarter service segment revenue was up 15.7% and up 15.4% year-to-date. At the chart on the bottom right shows our service segment gross margin remains strong, with our rolling four quarter average moving at 440 basis points to 23.1%. This is helping pull our overall consolidated gross margin up while building a recurring service revenue streams that helps reduce the volatility inherent in the construction side of the business. Turning to slide seven, I'd like to reiterate a data point that Charlie noted regarding gross profit split between construction service. The fact is that our service segments has a significant positive impact on our gross profits and gross margin. As you can see, year-to-date service accounted for 21% of total revenue that contributed 38% of the consolidated gross profit. And for the third quarter, service revenue accounted for 20% of the total revenue, and contributed 40% of the gross profit. We think this is a powerful statistic and reaffirms our belief that writing growth in our service segments should be a top priority. For the quarter, and year-to-date our service -- our revenue mix was approximately an 80:20 split between construction and service. As we have discussed, our midterm business mixed goal is 30% service and 70% construction by 2021. And we're working hard towards that goal by investing additional resources in our service business. Moving to slide eight, we summarize keys items year-to-date on the income statement and balance sheets. In the table on the bottom left, you see our year-to-date performance compared with last year. From an adjusted EBITDA perspective, we went from 2.1 million year-to-date for 2018 to 11 million for 2019. This is a substantial improvement. As well as from a net loss perspective, you see a $2.4 million improvement. A reconciliation of adjusted EBITDA is located on slide 12. And also keep in mind that we had a non-cash goodwill impairment charge of 4.4 million during the quarter, which I discussed earlier, and that is included in the Q3 net loss. On the right side, our balance sheet is stable with a current ratio of 1.26 and working capital of just over 40 million. I think, it's important here to point out that this quarter we experienced the shift from being in a net over billing situation to a net under billing situation. This is being driven primarily by growing claims related to large projects. And this means that we can convert those under buildings into cash to continue to build our balance sheet. As Charlie mentioned, we have material outstanding claims and speed of change orders, with the majority expected to be resolved and collected in the first half of 2020. I want to mention that cash flow is one of the key areas of focus for me. The construction industry has some relatively unique aspects in terms of cash flow, which I think creates some confusion depending on how people define cash from operations. When I think about operating cash flow, I look at it as cash from operations as reported as cash flows on the cash flow statement, less cash use for CapEx. Additionally, you then need to look at the balance sheet to see what the future cash impact will be with regards to underbillings and overbillings and the timing of those cash flows. For Q3, we saw a reduction in cash used in operations of approximately 9.6 million and an increase in CapEx requirements for approximately 300,000 when compare to Q2 assets. As such, operating cash or free cash flow for the quarter improved 9.3 million in Q3 compared to Q2. We also saw a shift from being in an overbilled situation to an under billed situation, which I mentioned was driven primarily by the large projects. This gives us a near term opportunity to reverse those net under billings to cash. Lastly, as I mentioned in our press release, we were not in compliance with our total leverage ratio as of August 31. However, our lenders waived the event of default arising from this non-compliance, and yesterday we entered into an amendment to these agreements with our lenders. I'll now hand the call back to Charlie.

Thank you, Jayme. And it's great having you on board. Turn to slide nine and some final thoughts. First, we're updating our guidance for the year, which is for revenue in the range of $550 million to $570 million. That basically brackets our prior revenue guidance of $560 million. We are reducing our adjusted EBITDA guidance to a range of $14 million to $18 million compared to our prior estimate of $22.5 million. The primary reasons for the reduced adjusted EBITDA guidance or the right downs we just took in the third quarter, along with making sure we were being appropriately conservative with respect to any additional unanticipated delays that could occur on those underlying projects. Those project delays and right dams are obviously painful, but our overall business remains strong. As Jayme and I have noted throughout, macro conditions in key -- in our key verticals and geographic areas remained favorable and are allowing us to tactically moderate our construction segment growth, while booking higher margin business into backlog. Our service segment is firing on all cylinders, and we're working aggressively to maximize the opportunities you see there. We're looking forward to closing 2019 strong. Concerning 2020, we're just completing our planning work. We expect to present strong growth in our service segment on all measures. With a construction segment, our focus is on bottom line return from our trusted Limback talent. We expect modest top line construction growth but strong bottom line contribution. Management is also reviewing our cost structures to identify opportunities for reductions in an effort to offset the expense related increase in financing cost. Finally, I'm not happy with our results due to a handful of projects not performing well out of hundreds that are being worked on every day. Let me reinforce I am very aligned with the shareholders of my own sizable stake in the company. With that, we’re available to take your questions.

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions]. Our first question today is coming from Brent Thielman from D. A. Davidson. Your line is now live.

Thanks, good morning.

Good morning, Brent.

I'd love to start with just making Jayme's kind of initial punch with the items they want, or feel they need to address from the company as they assume their new roles.

Mike's not on the call with us today. He's listening in, and he's not here with us at this in Tampa. So for myself, really, I've had a good transition period I'm looking to, you know, obviously focus on cash flow for us, as well as looking at efficiencies throughout the business and diving into all the different branch units and those working with those financial professionals, [indiscernible] as well as the [indiscernible] managers.

Concerning Mike McCann’s move to full COO. He's been in this position as a CO-COO for the past just about a year. And his focus has been not only building up relationships with all the key managers in the business, but also looking at process and automating processes is referred to as Limbach elements. And he's been laser focused on that. I think he's done a terrific job at building that out and introducing both the systems processes along with supporting training and development. So Mike's going to continue to be very focused on process improvement, and continued risk oversight.

Okay, and then wasn't quite clear, clear to me, but the latest write-downs, can you talk about what specifically those are related to, are these legacy projects are these new jobs that have come up? Where are you in terms of completion and then Charlie, I guess as we think about about this 517 million in construction backlog, can you tell us what portion of that's underperforming and as you're pivoting the business that are focused on projects how do investors get comfortable with what you've booked to date?

Sure. So the projects that we work through every month, we have a process called the MPR process, monthly project review. And every project team comes in and presents their project and we record if there is upside, or if there's a hit, it's recorded in the period that it occurs. So it's, it's got rigor to it. And these projects that you know, recently, we took some hits on there were either some delays or impacts that we did not cause, that were identified during the month and recorded properly. And as I mentioned, we have claims and change order requests that go out when we view there's entitlement for recovery and we act upon those. In terms of backlog, we constantly looking at all the projects, again, all active projects every month go through that MPR process. So I think it's got a lot of rigor to it, Brent, as we identify issues, it's recorded. Jayme, I don't know if you have any other comments about that.

Yes, just for the quarter the process that Charlie referred to, we do that on a month end basis and that's each get addressed and recorded. And those conversations are done with the branch level and with management.

Okay. And I guess, in terms of this, sort of selection process going forward, I guess, I'm curious sort of what's changed? Is it the size of jobs? Is it what you're actually doing on these jobs that you're…

Brent, when I step back and I look at some of the issues that we've uncovered and I made a comment to this. When you look at the general contractors' project teams, it's very interesting. This dynamic of this booming economy, that talent shortage is across the board. And the general contractors are, I think, struggling, like we've struggled in the past, we've come to the conclusion that we're going to stick with our resources that we have our proven resources and continue to look at our business execution around the resources we have. But we're also now looking more in depth upstream, not that it's just one of our typical major contractors that we work for, but who's being assigned to the project. We need to understand their project manager, their superintendent. What's happened in the industry is you have this massive expansion. And everybody's growing dramatically. And everybody's kind of stealing a person from here or you're recruiting another new person, and they aren't coherent execution teams. So, we've decided, we need to not only look at our own resources and make sure we're comfortable with our forward projections that we're taking on the right work according to the labor availability, but also when you look at the customer staffing, who are they putting on the project, and do we know those team members? And have we had success with them before? So that's become a new gating valve for us. Does that make sense, Brent?

Yes. And that's helpful, Charlie. I guess my last one real quick. I guess what's the new profile or interest run rate on your debt after the waiver and amended facility? And then just secondarily, do you have an expectation for free cash flow for the fourth quarter?

Yes. With regards to our new facilities that new rates is LIBOR Plus 11%, so its about 13% on that piece. And then for -- there was no change in our revolver. And with regards to cash flow for this fourth quarter, as I mentioned, it's really going to be driven by the timing of collecting on those underbillings and that's just something we're have to see as it comes in since that is out of our control.

Okay. Thank you. I'll pass it on.

Next one.

Thank you. Our next question today is coming from Gerry Sweeney from ROTH Capital. Your line is now live.

Hi. Good morning, Charlie. And Jayme, thanks for taking my call.

Good morning, Gerry.

Charlie, let's talk about maybe the overall market. It just feels like listening to your comments, there's trouble with finding skilled labor versus the total amount of projects out there. Are other competitors seeing or are they having trouble executing on projects as well?

Yes. It's -- I think certain contractors are facing certain challenges generally in the market with the booming economy. And I think what we're seeing in the industry right now, at Limbach, we took some pain last year in Mid Atlantic. We've had some issues this quarter. I think a lot of contractors right now we're stepping back saying, we've got to leverage the resources that we have and keep things in check in regard to growth. So I can't comment for other contractors, but I do think there's -- that talent shortage isn't letting up. But here at Limbach, we were really looking very hard at future availability of our labor and when we can place them on projects. And that's become our governing valve for our pursuit of new work. So I can't comment about other contractors.

Yes.

Gerry, I can't comment about the other contractors out there. I mean, there's here say about what's going on and I don't want to comment any further about how others are doing or not doing.

Okay. No. That's fine. I mean, it's safe to say maybe on a go forward basis we should start looking maybe less is more, maybe even I apologize for jumping back and forth between the call. But less maybe even steady to even down backlog, you have less work, higher margin, more confidence in your pool of labor that you can put into that work. So maybe on a go forward basis [indiscernible] less is more, is that a best way of looking at it?

Yes. I think, when I look at the talent we have in our company, we recently just completed a complete business plan toward the whole business. And we just have some amazing talent here, just amazing, and the vast majority of the business is performing extremely well in terms of operating contributions. And when I look at the construction market, the opportunities that are out there, the pipeline is amazing. This is the time for us to raise margin and leverage that talent that we have. So when you look at the construction going forward, you're going to see and I made a comment about -- I think there's going to be modest growth. We're going to be shifting our resources over to service, the returns are just so much better. And it's also not as labor intensive. So we're looking at kind of our business plan going forward is to focus heavily on service and be very smart about leveraging the resources that we have on our construction or within our construction segment and maximizing the bottom line. So that's our direction going forward.

Okay. And again, I apologize. Did you say there was some commentary about I think price increases. Did you say you instituted a 200 basis point increase? Or was that a one particular project? I apologize, I want to….

Yes. No. Gerry, that was one particular example that I gave about a major university project up in the Boston metropolitan area. Boston is booming and we saw the opportunity to make the move and test the market. We did it. And we secured the deal. And we're very pleased because that particular project has all the right attributes for long-term success not only on the project, but also with the building owner. So, it all depends upon the market conditions and what we're seeing. But I have to say, what we haven't instituted, that's 200 basis points across the board. Each opportunity in each region is being looked at through our risk review committees. And identifying, what can we push, how can we push it, and in certain cases, we are pushing the envelope and we might lose some work. And that's okay, because there’s work there’s more just up the road for us to focus in on. So we're being smart about it, testing the market, and we'll continue to see what we can do to leverage the number or raise the numbers on the margin side with each opportunity. So it's more an individual opportunity within a particular MSA. We just have to be smart about what the market is telling us.

Okay. Then final, 2020, some of this work was booked previously. Has the risk profile versus what that work was booked at changed in any way just due to increasing industry demands kind of bottleneck around skilled labor?

Yes. That's been our push. When we look at margins, what we've been -- when we analyze the project opportunity, we look at the labor risk in the deal. And whether it self-performed or we decide to subcontract that more than impacts our margins, how we look at the project. But from the standpoint of across the board, labor risks have increased because of the situation. And again, we've done two things. One, yes, we have raised margins to cover that risk, but also, we're saying, we're going to dial back the growth aspect of construction and keep it steady, leveraging the resources that we have. So that's -- it's Limbach labor that we trust and know they can deliver for us. We're sticking with the people that we know. We'll introduce new people to the company. But it's going to be at a very, very measured pace.

Got it. I appreciate it. Thanks a lot, Charlie.

Thanks, Gerry.

Thank you. Our next question is coming from Dave Cohen from Midwood. Capital. Your line is now live.

Hi. So, help me understand with respect to the write-down in the quarter in Southern California, what type of projects were those related to? Sorry, if I missed that, in your earlier commentary.

There were several projects, David that were written down and one of them is one of our major projects, which continues to get delayed. And so, as we go through our monthly review process, we are always identifying what's happening on all of the projects and we determine if there's upside or there's risk in the project. And if we feel like we need to take a downside hit because of what's going on in the projection on the job, we taken in that given month that its identified.

I know the process. So were those – any of those plumbing projects in Southern California?

It was a mixed David. It was a combination of different things particular…

Were plumbing projects? Charlie, you said they were basically ring-fenced on the last call. The plumbing situation was ring-fenced on the last call. You did point out the problem at LAX but with the delays on that project when you specifically talked about that plumbing project stays within ring-fenced? Were there plumbing charges in this quarter?

There may have been some, but we didn't identify anything material.

All right. My next question, how do you justify a full reversal of your incentive compensation when this company has to made shareholders money for three years and you consistently put out guidance that you fail to make -- fail to meet and you fall far short of. How do you justify that? Why don't shareholders participate in value creation? Were there's no value creation for shareholders there?

Sorry, [Indiscernible].

You took a bath last year and you're reversing all of that this – that's in your SG&A. SG&A is three plus million dollars higher. I don't understand that. Explain that to me?

So the reversal has taken last year, in Q3 of last year 2018. And so this year reflects what our program, it's based on a percentage of the minimum EBITDA levels. And so as we progress through the year that accrual gets booked as it goes through each quarter and where we think we're going to end up with the end of the year.

What's your -- so what would be the level of incentive compensation, if you come in at the low end of your annual guidance?

You have to refer to the proxy and the detail for the executive team, but we don't disclose that for company-wide.

Okay. And lastly, you can tell I'm apoplectic about these results. I mean, this talk is getting, so once again, it's extraordinary that with a seasonal benefit to the second half in particular, because this is a first half, you know, always less than second half business, you can deliver such poor results in your second half where in total you might be $6 million of EBITDA in the second half. So I don't understand that. So my last question is, our deals on the table or off the table? Would you consider doing M&A given the state of the company today?

We regularly look at opportunities that come available, and we evaluate those, but at this time there's no pending acquisitions.

Thanks.

[Operator Instructions] Our next question is coming from Jordan Kox [ph] from AECS [ph]. Your line is now live.

Good morning, guys, I guess, I'm not -- I'm probably just as disturbed as the prior caller. I guess, my concern is if you guys are moderating your growth projections for next year, and you still have this balloon in your SG&A line. And there wasn't really a lot of discussion about how you rationalize that and how do we bring more money to the table. So let's focus on that aspect for next year. And then, Charlie, I guess my question to you is, you've been running this company for a while and what happened over the last two years since you became a public company to have such, I guess, continuous right off?

When I look at -- so I've been running the company just over 15 years. And through the course of those 15 years, I've seen upsides. I've seen downsides to the course of execution. And when I look at the past two years, you've heard a theme of what I've shared in the past in terms of just the market growth and the human capital shortage. This is a very unique situation that I had not seen before in the industry. This is the strongest construction market I've seen in the history of my career. So, I think we've worked our way through, what we dealt with last year with Mid Atlantic. And I think you can hear me talking about the issue of the rigor of risk management, looking at human capital resources, and making sure we're going to leverage the talent we have, we're certainly doing well on the service side of the equation. And on the construction side where we have taken the hits, what we've done now between moves that we're making from a management perspective, to the rigors of the processes of looking at upcoming opportunity tied to the availability of human capital. That's what we're doing different to deal with this phenomenon that's happened over the past several years with the labor shortage. So that's, that's my response to the question. So I hope that provides some better color on what we've been dealing with, and also the actions we've taken.

And then if you guys can comment a little bit on how you can rationalize the SG&A because there's no way your company is going to make a lot of money at 12% operating or SG&A exposure?

That's a big difference that you're noticing between this year, the comparison of Q3 over Q4, or Q3 of this year versus Q3 of last year, is really that reversal that took place in the quarter because of the performance that was happening last year. So that's really the delta that you're seeing a difference of.

We had a delta in the second quarter as well. So we've had a couple quarters where our delta is extraordinary. So I guess my comment is, where does SG&A margins go? Or do we go back to 9%, 9.5% after this quarter? And is that the objective for company for next year?

We are taking a step back right now. It's great that Jayme has joined us. She is looking at where we can go with efficiencies between the center and what we have in our business units. So that's a process. It's one of the things that she has on our list to tackle. And I might add, it was great that Jayme joined us when she did. Because she had an opportunity to go around with me and tour each of the business units from the get go and learn each piece of the business, drinking from a firehose I might add, but learn each piece of the business so that we can step back now and look at where are the opportunities with her thoughts on how to create efficiencies in the business. So the management team is taking a challenge on and we've not completed our business planning process. We're still in the midst of it. But it's something that is on the front burner to make sure we look at the efficiencies and how can we do much better with the SG&A in the business.

Okay. If I look at the gross margin line other than the write-offs, you guys have -- you're making some progress there. So hopefully Mr. McCann can come in and solidify that. But one of the things that got me involved with this company was expanding margin potential. And wherever you guys expand on the gross margin side, you've been getting slammed in the SG&A side, so there's the net-net no gain to the bottom line. So, again, is the model changing, and therefore, we have to look at this company not getting to 5% operating margins, or is this something that you think that you can address fairly quickly, Jayme?

Yes. When you look at, Jordan, when you look at the operating business, and you do pull out the impacts that we had, the vast majority of all of our projects are performing extremely well delivering those higher margins that I've been talking about over the past several years. And then when you couple that with the success of the service expansion, which I'm thrilled to see the progress of service. And I still think it's the tip of the iceberg. The opportunity is tremendous in front of us. But going forward, as far as you're looking at the overall bottom line, yes, look, I believe life is going to make a difference. He's proven to me over the years that he's very effective at operating businesses. He's proven it time and time again. So I'm very pleased with this decision that myself on the board came to elevate Mike into that role. So, we need to give it some time to work our way through it. But pleased with the moves we've made. And I just want to reinforce to everybody. I said this at the close of my comments, I am a significant shareholder in the business. I am disappointed with what happened here. And I am taking aggressive actions to make sure we get this on track, coupled with the good news that we have in the business, but where we have had some issues we're attacking and attacking it aggressively.

Is there any thoughts of the management team and the board that the stock is sub three to get more aggressive to put more money of your own money to align yourself with shareholders? I think that would be an awesome sign that you believe in your business. There has been not a lot of purchasing by insiders over the last year that I can recall. And matter of fact, obviously, the divestiture of your original partner was not taken kindly by a lot of people on the street. So, what's your thoughts on management and directors buying stock?

Jordan, I can't speak for the rest of the management team or others are on the board. I can't comment. But if you look at my track record in the past, I have bought. I'm not going to comment on what I'm going to be doing going forward. But in the past I have bought, so I'm going to have to leave it at that.

Okay. Thank you, guys.

Thank you.

Thank you. I'd like to hand the call back to management at this time.

Look, I am disappointed in what happens here. And I just want to share with everybody. Through my career, I've always looked at challenges. And I've worked even harder and smarter. I make moves, I take action. I'm excited about the moves that I recently announced. I think they're the right moves for our company. And we need some time to work our way through those changes in terms of the impact that's going to have, but we're going to continue to stay focused on our core strategies that we've laid out. And you've heard my commentary about the market conditions and how we're going to take advantage of the market conditions smartly. That's our path forward. I want to thank you for joining us this morning. And I look forward to our fourth quarter earnings call in early 2020.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today