Limbach Holdings, Inc. (LMB) Q2 2022 Earnings Report, Transcript and Summary

Greetings. And welcome to Limbach Holdings’ Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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. Thank you, sir. You may begin.

Thank you very much and good morning, everyone. Yesterday, Limbach Holdings announced its second quarter 2022 results and filed its Form 10-Q for the quarter ended June 30, 2022. 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. With that, I will turn the call over to Charlie Bacon, the President and Chief Executive Officer of Limbach Holdings. Please go ahead Charlie.

Good morning to everyone and thanks for joining us. With me today is our Chief Financial Officer, Jayme Brooks; our Chief Operating Officer, Michael McCann; and our Executive Vice President of Acquisitions & Capital Markets, Matt Katz. I want to start by thanking our many employees for all of their outstanding work and commitment to the transformational change and evolution we undertook several years ago. We set a goal of achieving a 50-50 revenue split between our two operating segments by 2025, and I'm pleased to report that we expect to reach that goal ahead of schedule. Let me circle back to that shortly. First, though, we had a solid quarter of progress on our ODR transformation and maximizing our GCR outcomes, and I want to share some highlights with you. Year-to-date, the ODR segment contributed 40.1% of Limbach's total revenue as compared to 26.5% for the same period last year. We currently expect to exit 2022 with the ODR segment revenue percentage moving even higher. It's become a leader that the majority of our building owners view their building systems as critical to their business outcomes, which is fueling our growth. We've resolved the second claim in 2022, this one resulting in a $1.3 million gross profit write-up for the quarter. The resolution of this claim will generate approximately $6 million of cash prior to year-end. This brings the total for both claims resolved this year to over $8 million of additional cash this year. Cash flows from operations for the quarter was $15.6 million, with the business generating free cash flow of $5.1 million, excluding changes in working capital. Term debt declined by $7.3 million in the quarter and we are scheduled to reduce our term debt to $22 million by the end of the year. We remain on track to deliver financial performance that meets the full year guidance that we provided on our last call. Much like last year's pattern, we're expecting an acceleration in both our top and bottom-line results over the second half of the year and as a result, continue to expect full year revenue to be in the range of $510 million to $540 million with adjusted EBITDA of $25 million to $29 million. The growth that I mentioned in the ODR business is the result of several factors. As you will hear throughout our prepared remarks today, we've seen demand in the ODR segment for larger project work on down to T&M work. Many of our customers have reacted to the ongoing inflation of supply chain issues by prioritizing the repair and maintenance of existing equipment, which is right in our wheelhouse. Fundamentally, air conditioning, heat, power and water are mission-critical to our customers' business models, whether they operate in health care, data centers, pharmaceutical laboratories or manufacturing. The services we provide to them are essential. Within the GCR segment, we continue to improve execution, generating solid gross profit contributions. We are leveraging our talent, which remains at high demand and being very selective on the construction projects we bring into backlog. We expect the impact of our continuing effort to maximize profits within the GCR segment to result in annual low single-digit percentage contraction in the GCR segment revenue. We are turning down opportunities that don't deliver the level of risk-adjusted profitability that appropriately rewards the talent we have. Although our focus is to deploy resources on the higher profit ODR segment, GCR opportunities remain valuable to us for a significant reason. They provide access to developing relationships with new facility owners which in turn leads to higher-margin annuity income streams. While the ODR track is tracking toward an exceptional high growth rate this year. On a go-forward basis, we expect a more normalized organic growth rate in the low teens, as we exit this year with our segment split approaching 50-50, we currently expect the combination of the revenue from both segments to net out to positive annual growth in our consolidated revenue and continued improving our free cash flow results. Before we dig into the quarterly numbers, let me provide a quick comment on our expansion into the industrial market, which is one of the strategic reasons we acquired Jake Marshall last December. As we anticipated, the industrial market seems to be accelerating given a variety of factors, including on-shoring and better domestic access to raw materials, including comparatively cheaper and abundant natural gas and electricity. We think that's particularly relevant in the Tennessee Valley where Jake Marshall operates. The frequent announcements of plant relocations and new plant expansions is encouraging. Within the last several weeks, one of Jake Marshall's most prominent customers announced a multi-year $200 million plant expansion to produce specialty silicon products at the facility in Chattanooga. These products produce their support the automotive, solar, electronics and medical technology industries. The Southeast is an attractive geography for industrial activity, but there's also a lot of announced and anticipated investment in the Midwest, which could match up well with our footprint there. Matt will be commenting further on our acquisition activity, but we are finding the industrial marketplace is very promising for Limbach's future growth. With that, I'll hand it off to Jayme to provide details on the quarter.

Thanks, Charlie. Our earnings press release and our Form 10-Q contain a detailed review of our financials. So I'll focus my discussion on some key areas. Total revenue for the quarter was $116.1 million, down $4.9 million over the prior year quarter. GCR revenue for the second quarter was $66.3 million, down from $87.6 million in the year ago period. The main driver of the change is our continued intentional rationalization of the GCR business to reduce risk and maximize profits. ODR revenue continues to accelerate and was up 48.7% to $49.8 million compared to the prior year. Growth in this segment was driven primarily by the increase in large owner-direct project work. Large project works, which we define as projects in excess of $50,000 grew the fastest in the quarter, up 85% from a year ago and 20% from the first quarter. We also experienced solid growth in maintenance revenues as well as T&M work. T&M work grew 17% sequentially and 35% on a year-over-year basis. For the second quarter, GCR gross margin was 13.1% and ODR gross margin was 25.4% for consolidated gross margin of 18.4%. This compared to 15.4% in Q2 of last year and 16% in Q1 of 2022. The GCR margin in the second quarter increased to 13.1% and from 10.1% in the second quarter of last year. This reflects our continued focus on project selection in addition to winding down of our operations in Southern California branch and our Eastern Pennsylvania GCR segment. The gross margin increased in the second quarter of 2022 also included a gross profit write-up of $1.3 million related to the settlement of a prior claim. The ODR gross margin for the quarter of 25.4% sequentially ticked back up to our expected range of 25% to 28% due to the business mix in the quarter and project pricing. As we said previously, over time, a substantial portion of the growth in ODR revenue will be driven by larger project work as opposed to smaller dollar, higher margin maintenance and T&M work. Although, we're experiencing solid growth in all lines of our OTR business, the dollars are weighted heavily towards large project work. We believe that over time, our profitability in this segment will increase as we mature our relationships with owners and achieve the optimal mix between our different business lines. Our SG&A expense for the quarter was $18.7 million, which is relatively flat compared to the first quarter and an increase from $17.2 million in the prior year quarter. Second quarter SG&A included SG&A costs for the newly acquired Jake Marshall entities, which was not in last year's SG&A numbers and non-recurring expenses related to branch closures and our ongoing efforts to reduce SG&A. Concerning the progress of winding down our business operations in Southern California and the GCR segment in Eastern Pennsylvania, we expect both to be substantially complete by the end of this year. The expense associated with winding down these operations and other non-recurring expenses associated with cost reduction initiatives have unfavorably impacted our Q2 2022 quarter-to-date and year-to-date income before income taxes by $1.5 million and $2.9 million, respectively. This compared to 2021, the Southern California operations in the Eastern Pennsylvania GCR segment unfavorably impacted the Q2 results quarter-to-date and year-to-date income before the income taxes by $1.9 million and $3.2 million, respectively. Regarding our expense reduction initiatives, we continue to make good progress. Like many employers, we have responded to the pandemic by implementing a more flexible work structure for our office-based employees. And that is allowing us to reduce our need for office space. Based on the square footage reductions we have been able to complete so far this year, we expect annualized savings going into 2023 of approximately $900,000 from this reduction of wealth. Turning to cash and the balance sheet. During the second quarter, we saw a sharp improvement in our cash from operating activities as reported on the statement of cash flows. Cash from operating activities year-to-date was $12.6 million, which included the improvement of cash provided by operating activities of $15.6 million during the second quarter. The second quarter improvement was due to a combination of factors as we continued our focus on working capital management. The operations of the business generated cash, and we experienced continued improvement in our cash collections and net underbilling positions. For the quarter, free cash flow generated from operating the business before working capital changes was $5.1 million. This is comprised of net income of $866,000 plus non-cash operating activities of $4.5 million, which consists primarily of depreciation and amortization, non-cash operating lease expense and stock-based compensation less $304,000 of CapEx. As we have suggested a reasonable way to view cash generated from operating the business is to start with net income, add back non-cash operating activities to subtract capital expenditures. Also keep in mind, we have the opportunity for cash coming from the claims recovery, which would be additive. Cash flow during the quarter included receipt of $2.1 million of proceeds from a previously recorded resolve claims. That was included in AR and the change in our net billing position generated $6 million of cash in the quarter. There were no specific or notable reasons for the underbilling improvement other than project life cycles and timing considerations. This strong performance enabled us to continue to reduce the principal amount of our term debt. We repaid $1.9 million through scheduled monthly amortization payments, $3.3 million as a result of the required 2021 excess cash flow sweep and $2.1 million upon the receipt of cash proceeds from a previously reported claim resolution. In total, we reduced the term loan balance by $7.3 million during the quarter. We ended the second quarter with cash of $19.6 million, which included $3.5 million borrowed on the revolver and a total debt position of $34.9 million, inclusive of the short-term portion. As a result, our net leverage ratio is below one times based on our trailing 12-month adjusted EBITDA of $27.7 million. Subsequent to the quarter, in July, we paid back $3.5 million on the revolver and we are required to make monthly amortization payments of $619,000 in the term debt, which would bring down term loan balance to $22 million by the end of the year before any other required claim resolution payment. By the end of the year, this would represent a $14 million reduction in our outstanding term loan balance in less than two years. As mentioned earlier, during the quarter, we settled one of our smaller claims, resulting in $1.3 million gross profit write-up. With this claim settlement, we expect to receive a cash inflow of approximately $6 million before year-end. We've noted for some time that outstanding claims represent potential significant cash coming into the business. So we're certainly happy to report some success on this front. We have resolved two claims during 2022. Beyond this claims, we still have over $40 million of gross claims value outstanding on several projects, which represents potentially additional cash coming into the company. Each of these claims are very active right now and in terms of going back and forth in negotiation. But we cannot provide a time frame on when they will resolve or when the cash will actually be received. To conclude, with the pay down of our debt, the claims settlement this quarter and our continued improvement in performance, we feel good about our balance sheet and our ability to fund potential acquisitions this year using the cash and additional debt. I'll now pass the call to Mike to discuss key operational highlights.

Thanks, Jayme. Fundamentally, our customer base is particularly focused on proactive maintenance repair, given the critical nature of their facilities and zero tolerance for system downtime. With our rapid ODR growth, it's become clear to us that building systems are critical infrastructure to the vast majority of our building owner customers. We're very focused on maximizing the lifetime value of our best building owner clients. Those tend to be customers operate in critical facilities across multiple building sites, where we can deliver both ODR and GCR solutions. We seek out building owners that appreciate the value we bring and are committed to forging long-term relationships. As we look to deploy resources in the future, we believe we can expand our wallet share with those accounts. Moving on to supply chains, this continues to be an issue, although a modest economic slowdown may help bring a resolution to those issues. Demand is driving the supply chain problems, as much as availability of equipment is. However, we can also benefit as building owners tend to defer capital investment and replacement equipment and point spending to the maintenance of existing equipment, which has much less demand elasticity. Turning to the conditions in the field, we have seen commodity prices start to fall from their highs earlier in the year, and that does appear to be supporting a calming of the market generally. Labor dynamic has remained tight so far. We continue to add technicians and own our direct field personnel to support the strategy, while on GCR work we are focused on limiting risk. As Charlie and Jamie both noted, ODR activity remains robust and has even accelerated in certain cases. Second quarter ODR sales of $57.3 million were up 50.3% from last year's second quarter. Sales of ODR projects in T&M were again particularly strong. As of June 30, ODR segment backlog was $119.3 million, up from $60.6 million a year ago, a 96.9% increase year-over-year, and an 11.6% increase sequentially. So given the year-to-date performance and the sales activity, we expect to deliver solid year-on-year growth in ODR revenue in 2022. We ended the quarter with GCR backlog of $308.8 million. That provides us with solid segment revenue coverage through the end of the year and into 2023. It's around this time of the year, when we really start to focus on building revenue for 2023. We have a good pipeline to be selective around – and it's interesting to see the AIA building index remaining above 50, which means the architects are still in expansion both. That building index generally leads to opportunities for us six months to nine months later. So far, we feel good about the outlook. Now I'll pass it over to Matt.

Thanks, Mike. Speaking now of the acquisition effort at times over the last few months, our challenge has actually been to navigate through the volume of interesting opportunities given our conservative approach to underwriting, and the vagaries of the business cycle, we see businesses that are only just now starting to get their feet under them following the pandemic or want to explore transactions, but just aren't ready to at this point, aren't yet organized from an information and leadership team perspective. Often, it's not until we really engage that the scope of the process becomes apparent to the owners of those businesses – and it takes them a while to get up the curve. So effectively, we're constantly evaluating parameters like financial performance, strategic value and certainty of close and deciding where we focus and spend our time. But in general, it's a good environment. We've got a good underwriting and diligence team, and we're persistent. The summer months are generally a little quieter from a prospecting perspective. During these months, business owners tend to spend more time away from where the action is. And to some extent, this year is really no different. That being said, this dynamic of business is just trying or rather just harder and more difficult for smaller companies hasn't really gone away. And I don't see that changing anytime soon. Small business owners everywhere are navigating many of the same market dynamics that we are, but often are doing it with fewer resources at their disposal, and it's just very frustrating for them. So our value proposition of providing administrative and operational support in a culture that has a partnership like field and that feels very familiar to them continues to resonate well in these local markets. We've been juggling and reshuffling opportunities over the quarter, and that's fine. We're happy to carry a pipeline of great businesses with great leaders, who might one day join the platform. And if that means next quarter, that's fine with us. If it means two quarters from now, that's fine, too. We'll continue to reshuffle. We're discriminating buyers, and if and when we deploy capital, we want to do it thoughtfully and with the maximum impact. Charlie?

As I stated earlier, we are reiterating our guidance for the year. We currently expect revenues to be in the range of $510 million to $540 million and adjusted EBITDA to be in the range of $25 million to $29 million. While not part of our formal guidance, I also want to share a little more detail on the revenue composition, given our comments around the pace of the ODR transition. We're currently expecting GCR revenue to be in the range of $275 million to $310 million in the ODR range in the range of $220 million to $245 million. As a reminder, last year, we delivered $140 million of ODR revenue. Turning to capital allocation. We are committed to executing our transformational growth strategy and delivering on our financial growth targets, and we continue to have discussions with the Board on capital allocation strategies appropriate to achieving those objectives. These discussions include acquisitions, organic growth initiatives and general application of SG&A dollars. We also have evaluated share repurchase program. A repurchase program needs to consider the available trading float and liquidity of our shares and the actual mechanical feasibility of repurchasing shares given that liquidity. We believe the best use of our capital is to support the continued execution of the growth strategy. With all that stated, we will continue to actively evaluate a share repurchase program. I want to note that members of the executive team and Board members have been purchasing shares in the market during our open periods. The shares are certainly undervalued. Before wrapping up to take your comments, I'd like to touch on what Mike mentioned earlier in regards to the macroeconomic and market environment. With a recession now on us, at least technically, Limbach is prepared and well equipped for any economic slowdown, both operationally and financially. Over the past few years, we've undertaken a transformational change in our business, and we continue to successfully execute that plan. We deliberately rationalized our GCR business, leading to much better execution, profitability and cash generation. We have invested in growing our OTR segment and those investments are paying off in the form of accelerated growth, not to mention being well positioned for the current economic environment. The improvement in our operating cash flow that Jayme noted, has allowed us to continue to reduce our debt, resulting in relatively underlevered balance sheet, which we think serves us well in this current environment. Diverse, evolving and essential, diversity in our market sectors, geography and our customers, evolving with our transformational strategy to the higher-margin OTR segment, essential in that our building owner customers view their building systems as critical to their businesses. Please keep these words in mind as you think about Limbach. With that, we'll take your questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Rob Brown with Lake Street Capital. Please proceed with your question.

Hi, good morning.

Good morning, Rob.

A little further color on the shift to maintenance. I think you talked about that in the ODR business. How has that grown? And how do you see that at this point for the -- or the trend line in that on the maintenance side?

The maintenance base continues to grow and there's really two components of that Rob, that you have to consider. One is the actual sales and bringing on new customers that we're trending similar to last year, which is good. And the other part is maintaining the existing base, and we continue to focus on the customers we have with the maintenance contracts. And we're going to hear that in two ways, obviously, to maintain the contract, but also to expand what I refer to as wallet share. So we have over 1,200 owner direct customers and we're looking at those customers just from an account planning perspective to say, where else can we go with them. And it really also gets down to kind of return on people, how can we maximize the return of our people with those customers within that portfolio. So actually, it's gone really well, and we're pleased with the base where it stands. We'd like to see more growth in it, but we continue to invest appropriately to see that growth materialize.

Okay. Great. And then just for kind of the demand environment, I think you talked pretty positively about how things are coming in overall. Do you see that sort of continuing now for the past the quarter end? And do you see any sort of softness on the horizon or is the demand indications fairly strong?

Rob, in our primary market sectors, we're not seeing any let off, healthcare, data centers, research and development, laboratories and our entree in a broader way, we commercial and industrial that's pretty hot. And we don't see that letting up. If you think about all the plant expansion activity that's out there being announced, it's pretty exciting to see what that market is bringing to us. And my comment around -- I think that's a fairly future for us. We're looking for further expansion into the industrial sector. And the Midwest, there's quite a few plants being planned. So I'm very optimistic about those particular sectors. On our -- what I'll call our non-primary or secondary sectors, what's interesting, maybe CapEx isn't going to be a strong with them, which we're not so dependent upon. But from a maintenance perspective, those particular sectors, all those buildings and including commercial buildings, office buildings have to be maintained -- so -- and we saw that with our T&M expansion. And smaller project work within those buildings. It's all expanding. So right now, again, I'm pretty optimistic on our primary sectors and the secondary sectors continue to give us nice revenue flow.

Okay. Thank you. I'll turn it over.

Thanks, Rob.

[Operator Instructions] Our next question comes from the line of Chip Moore with EF Hutton. Please proceed with your question.

Good morning. Thanks for taking the questions.

Good morning, Chip

Hi, Charlie. Great to see that acceleration in your ODR-- obviously, you talked about higher percentage exiting the year and you gave us some -- some guidance there. Clearly, you're going to get that 50-50 goal sooner than 2025, these trends hold up. You also talked about sort of to think about some normalization as we look out a bit. Just maybe help us think about some of those dynamics as we think about that 50-50 split and how that evolves.

Rob, I'm sorry, Chip, so this is the one point of your question, I couldn't quite hear it.

Yes, just really about that going or growth really accelerating and just hitting that 50-50 split, it looks like you're going to hit it-- right sooner than 2025. And then also just sort of balancing your comments about some normalization there, maybe next year on growth.

Yes. It's very interesting right now. My comments were really tied to kind of the low teens in terms of future growth of ODR. And I think that's appropriate to state. What we're excited about though is this growth this year actually accelerated more than we thought, which was exciting to see. We're doing better account management with our customers and I mentioned this is the words we use here at the company called expansion of wallet share. We're really focused on seeing where else can we go with the owners that we have under contract today. And of course, we're adding new ones. But it's a dynamic that that I use the words critical infrastructure in my prepared remarks today, it's become clear to us that these customers absolutely need us to operate their businesses. We kind of always knew that. But what's happened now is we're just seeing they're really liking what we're doing with our customer care and they're expanding their capital program with us. They're giving us more and more work, that's the cost of the acceleration. So it's going to be interesting to see is it the low teens or is it even better? But right now, we're trying to give some guidance for modeling that the low teens would be appropriate to look at going into 2023 to 2024.

Got it. And back to that 50-50 split, I guess, more so in terms of M&A, if we think about that pipeline, I assume it skews more owner direct. Is that something that could potentially get us there sooner as well.

Matt, do you want to comment on that? A – Matt Katz: Sure. Chip, the profile of the target universe actually doesn't skew overwhelmingly ODR, it tends to skew reasonably consistent with where Limbach is today or might have been last quarter sort of somewhere typically between 70-30 and 60-40. I think the big difference is that in those businesses, GCR revenue tends to look very different than what we might perform in some of our more sophisticated GCR locations. And so instead of finding a business that's got a book of $25 million and $30 million large university health care projects. We see target companies with GCR work that's $500,000, $1 million, $1.5 million, and they've been doing work in those facilities for a long time. There just happens to be a GC in the middle and the relationship works for everybody. And so, they've rolled with that structure and they make good money off of it. They've never really thought about their business the way that we do. And so, when we have that conversation about why they're working for a GC in that healthcare facility, it's sort of the first time anyone's really asked. So, there's an opportunity there, I think, to shift that contractual relationship – but in general, the profile of the businesses does tend to be somewhere between 30% and 40% ODR, sometimes a little higher, sometimes a little lower, but with a path to accelerating that over the course of the next 18 to 24 months post closing.

Perfect. That's helpful, Matt. And maybe just on that one for me. I don't think you want to get into debating what defines the recession, but your commentary – it sounds like you feel pretty good about the portfolio and the trends you're seeing. I guess I'm thinking broader legislative, right, Inflation Reduction Act, CHIPS Act, we have the infrastructure active well back. Have you seen some potential tailwinds from some of that or do you foresee that?

When I look at the current situation, let me back up a little bit. Mike and I actually toured all of our business units over the past two months with the exception of one that's happening later this month. And we specifically went and said hello to customers. We're actually out reinforcing our strategic plan with all of our employees having samples face-to-face, which we haven't done it in a while because of the pandemic. But we also stopped by at each location and met with customers. And what I found very interesting about all of those meetings, every one of them, we have such a type relationship with them and they view us as mission-critical and our customer care is off the charts. They're very, very pleased and they point to our technicians. The reason I keep bringing you back and the reason I keep giving you more is because of Jordan and they named the individuals that they really like more key work. And through this, what might be an economic downturn, it's become clear to me. There's not going to be any letup, they absolutely have to maintain their facilities. So I'm not going to get into all the details of what we saw, but there were some great meetings that we had. And I think there's a lot more to be had there yet. So again, when I talk about account management and really figuring out where else can we go with these multisite customers there's a lot more growth there for us. Now that's on the ODR front. On the GCR side, which we're still focused on and we expect to continue to see revenues coming through our GCR relationships, the AIA [ph] Index, when I looked at the last set of numbers, along with some other industry data that we look at, there's still expansion going on. right? So could that cool in the future? Maybe. But as of right now, what they're producing in terms of opportunities will flow to us six to nine months out and there's still an expansion mode Add on to that the industrial sector, which I think is with all the onshoring and the geopolitical matters around the globe, there's going to be a lot of opportunity for us, namely in the Southeast and we're studying the Midwest. We think there's going to be a pretty robust growth opportunity for the company going forward. So Chip, I hope that answers the question? We're feeling good about where we stand.

No, that's great color. I appreciate it. Thank you very much.

Thanks, Chip.

Our next question comes from the line of Jon Old with Long Meadow Investors. Please proceed with your question.

Good morning, everyone. Thanks and congrats on a great quarter.

Good morning. Thank you.

Yeah, Jayme, I wonder if you could just highlight a little more when all the dust settles with the L.A. branch and other branches and other cost-saving initiatives, the lease terminations, real estate decline in real estate spending. Where should SG&A, sort of, settle in? Obviously, it's elevated because of some of those things. But once we get through that -- through this year, where should that number settle in roughly?

Yes. So over the long-term, we're really anticipating that the SG&A will run between 13% to 13.5% of revenue. So once we get through this kind of transition, we expect to settle there in the long term.

Okay. Great. Thanks. And on the claims, just out of curiosity, what -- that we're going to receive about $8 million, what is that as a percentage of total face amount of curiosity?

So we did receive two and then the additional is scheduled to be received by the end of this year.

Right. But of the…

Then our total claims exceed over $40 million, so we don't get into actually what percentage the detail of that just because of the negotiations that we're going through.

Okay. Got you. Okay. Thanks. Okay. That was it from me. Thanks very much.

Thank you.

Thank you.

Our next question comes from George Melas with MKH Management. Please proceed with your question.

Thank you. Good morning, everybody. Just a few, sort of, housekeeping questions. The restructuring charges, are they all related to GCR?

Yes.

Okay. And…

And we have property just be clear. So we're reducing our footprint so you'll see those charges to the adjusted EBITDA as well, but does office space.

Okay. I'm not sure I understood what you meant Jayme there. It is -- as you reduce that, but it should it be mid-GCR, or should it be more, sort of, in some kind of corporate bucket that they are less allocated to both?

Yes. So it's going to be part of both because we allocate our overheads to both GCR and ODR. So as we bring down our footprint, we're bringing it down because the -- because of our focus of moving people out of the office and being we're able to work remote part of the time to that square footage is coming down. So you'll see it separate from that perspective.

Okay. Is there a rate then to parse the 2.9% year-to-date in restructuring? And how much of that is Southern California, Eastern Pennsylvania on the one hand? And how much is other things?

Yes. So for the year, do you actually look at the adjusted EBITDA table that's in our earnings release. You'll see the adjustments there, and you can -- we don't carve out outside of -- like we don't carve out -- just at SoCal or just EPA. It's a total bucket. So for the three months, it was $1.5 million for restructuring charges. So that includes SoCal and then also the Eastern Pennsylvania GCR business as well as other restructuring and cost-saving initiatives, and then that was $2.9 million for the six months.

Okay. Okay. Great. And then sort of a general question about the over billing and under billing, it seems like you are in a fairly neutral zone right now. But I think you have a net under billing of just 5 million. Is that something that should remain relatively flat, or do you expect -- because it has had huge fluctuation in the last couple of years. How should one think of that as it impacts basically cash flow?

George, I can take that one real quick. As we look at the transformation of our business, the GCR depending on the cycle that we’re in tends to be -- tends to go up and down. What we're looking forward to from an ODR perspective is the billing to be more stable as we look forward. So I think this is really going to trend as we continue towards our shift over time.

Okay. And just to understand, like on an ODR basis, are you pretty much on a neutral zone in, because if the projects are $10,000, $20,000, are you pretty much always pretty flat from over billing, under billing in ODR?

We expect a lot less fluctuations with the owner-direct. From an owner-direct perspective, one thing that's really beneficial to us is in a GCR type arrangement, our money flows from the owner to the GCR to us, in an owner-direct relationship that money flows directly to us. So inherently, that's built in some inefficiencies what's nice about is the owner-direct we expect, less fluctuations, and there's no way necessarily between us to collect their money quicker.

Okay. Fantastic. Great. Thank you very much.

Thanks, George.

We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Well, thank you everybody for joining us today. We're very pleased with the quarter our overall progress this year. We're very excited about the accelerated growth of ODR and how we expect to achieve our 50:50 mix sooner than expected, which is great. We look forward to talking to you next quarter. If you have any other questions, please follow-up with our Investor Relations group or directly with Matt Katz. Thank you. Bye-bye.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.