Limbach Holdings Inc (LMB) 2020 Q2 法說會逐字稿

Greetings and welcome to the Limbach Holdings Second Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jeremy Hellman of the Equity Group. Thank you. You may begin.

Thank you very much, and good morning, everyone. Yesterday afternoon, Limbach Holdings announced its 2020 second quarter results and filed its Form 10-Q for the quarter ended June 30, 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 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 that presentation.

With that, I'll turn the call over to Charlie Bacon, the President and Chief Executive Officer of Limbach Holdings; and Jayme Brooks, the company's Chief Financial Officer. Please go ahead, Charlie.

Welcome, everyone, and thanks for joining us. In the midst of a difficult and constantly evolving economic environment and public health response to COVID during the second quarter, Limbach generated solid financial and operating results and made substantial progress on a number of key objectives including dramatically improved cash flow. In fact, by certain measures, the second quarter reflected one of the company's best quarterly performances in several years despite the disruption caused by the widespread outbreak of COVID-19. Our office staff, service technicians, craft employees performed exceptionally well under extraordinary difficult circumstances this quarter, all while doing so with a heightened focus on remaining safe. It was a terrific effort, and I'm damn proud of all the members of the Limbach team.

With virus cases currently increasing in many markets and knowing that the fall/winter could be challenging from a public health perspective, we take some comfort in having been challenged during the second quarter and having seen the business respond as it did.

We were quickly deemed as a essential service provider in nearly all of our geographic markets and appropriately so, given the heightened focus on maintaining the air quality of indoor environments.

We don't see that essential designation changing in the future, although we would not be surprised to experience some push and pull of project activity in any given month or quarter, depending upon what's happening around us.

During this period, we also benefited from the diversity of the business model, which allowed us to shift resources to geographic regions and end markets with the greatest opportunities. So while there continues to be an element of uncertainty as we look forward, we believe the dynamic is manageable based upon what we experienced and achieved in the second quarter.

As we'll discuss shortly, business is largely back on track and really has been for some time now. We understand that a limited number of customers have reevaluated capital spending plans for the next several quarters or years. But in a fluid environment like this one, what's certain is that those plans will change again.

Our core end markets of health care, education, data centers, R&D, namely with life sciences, remain active, and we believe there are opportunities to support customers with enhanced mechanical systems and innovative solutions to address their new and evolving concerns.

Although COVID-19 impact on field activity largely abated in the quarter, the company was impacted by the deferral of some revenue that we anticipate will be made up later this calendar year.

So with that, let's move on to review the second quarter performance.

As a reminder, we adopted those ASC topic 606 and 842 and 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 2 new standards, we were obligated to recast our 2019 quarterly results to properly reflect these 2 new standards at each quarter end during 2019. Though, all the numbers we discuss today for the second quarter of 2019 are as recast. For all remaining quarterly filings in 2020, we will be recasting the comparable 2019 quarterly period results to comply with these 2 new standards. Although 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 second quarter results. Please follow along in the company's presentation, starting on Slide 4.

Total revenue increased by 1.9% year-over-year despite the impact of the delay of revenue in certain geographic markets due to the impact of the virus. Construction revenue increased just over 1%, while Service revenue increased 5%. On a sequential basis, Construction revenue fell by just more than 3%, while Service revenue was flat, neither of which was unexpected under the circumstances. This decline represents revenue that was pushed out of the quarter due to the virus and its impact on field operations, and we believe this revenue will likely be earned in the future periods.

Notwithstanding the modest revenue gains year-over-year, gross profit increased 14.9%, while gross margin expanded 170 basis points. This was due to a better overall margin profile on work executed during the quarter in both operating segments, a slightly richer mix of service work related to construction work and continuing improvement in Service segment gross profit margins. That has been a big focus in recent quarters, and we are pleased to see that segment margins have continued to increase.

During the quarter, margins also benefited from the successful execution of a quick hitting high-margin emergency project in the Michigan market. In that instance, our Michigan team converted a convention center into 250-bed hospital in just 11 days, which is a terrific accomplishment.

At the same time, we responded aggressively to the deteriorating economic climate by reducing our operating costs wherever possible. This included everything from temporary and permanent headcount reductions to salary deferrals and other fixed and variable SG&A cost reductions.

In the aggregate, during the quarter, SG&A expense declined by $3.3 million year-over-year. As a percentage of our revenue, SG&A expense was 10.2% in the quarter as it compared to 12.9% in the prior year period. However, a portion of the second quarter reduction in SG&A expense is likely to be temporary.

As we've noted on prior calls, we reduced headcount through terminations, furloughs and reduced hours. Given the pace with which activity resumed during the end of the second quarter and into the third quarter, most of those furloughed employees and those employees working reduced hours have returned to work on a full-time basis. That is ultimately a positive development, which we view as a indication of the health of the business and the markets in which we operate.

In other cases, expense reductions are likely to be more sustainable. One example is travel expense, which was almost entirely eliminated during the second quarter. Travel will return to a new or normalized level at some point in the future. Nonetheless, we remain committed to a disciplined approach to SG&A with a focus on making investments required to support the company's long-term strategic plan. At the same time, based on the year-to-date profitability and our expectations of continued profitability through remainder of the year, we also expect to be funding all or a substantial portion of the company's performance-based incentive compensation programs, which are included in the SG&A line item. Because these programs are performance-based, they align interest to a significant degree.

When the company performs to expectations, our employees are rewarded when the performance falls short, employees incentive compensation is impacted. Because of the company's underlying performance challenges in 2018 and 2019, the incentive program was largely unfunded. While the lack of performance incentives in those years was disappointing to many of our employees, given their personal and local branches, significant contribution.

The company as a whole is required to meet certain levels of consolidated profitability before incentive compensation programs are funded. In those years, the triggering conditions were not met, and as a result, no performance incentive was paid. We expect to meet those performance conditions this year. Another challenge is that the virus has done little to relieve the pressure on the industry's labor situation. Given that we've experienced firsthand from both the recruiting and retention perspective, we need to monitor closely and be able to address compensation concerns.

Fundamentally, our business is built on a human capital model and retaining and recruiting talent is critical to our success.

Shifting to Slide 5. Let me highlight a few items, which will summarize the company's year-to-date performance as compared to the prior year period. Revenue increased 2.9%, while gross profit increased 3.3%, driven by a 223 basis points increase in Service segment gross margins. As a result of the growth in gross profit in CAGR management of SG&A, adjusted EBITDA increased 54.9% to $11.8 million. Based on these year-to-date results, we now have greater confidence that if the credit markets remain open, we may be able to accelerate a refinancing of our senior credit facility. Of course, the environment can be quickly changed. However, reducing the company's cost of debt, capital remains a key priority for the leadership team.

Turning now to Slide 6. Backlog of $471 million represented a decrease sequentially as well as compared to December 31. This was by design. As we've communicated previously, our enhanced project selection process applies a more stringent filter to new project opportunities. That dynamic, together with reallocation of certain sales resources to the Service segment has impacted year-to-date construction sales as well as construction backlog. We did experience some slowdown in large project proposal activity during the second quarter as potential customers took a wait-to-see approach to capital spending.

But by design, we're also not pursuing as many of those opportunities so that we can instead focus on the owner-direct market. As of this call, we have not experienced any cancellations in backlog due to the virus. What's not reflected in the June 30 backlog number is approximately $130 million in contract opportunities that we have characterized as promised.

In the case of promised projects, as we've communicated before, we are performing preconstruction activity under a pre-construction contract in advance of negotiating or executing the principal contract or we are negotiating definitive project documentation, which is not yet complete. The value of the unexecuted contracts has not been included in the backlog at this time, which is consistent with the company's policy on backlog recognition. However, we expect most of those opportunities to enter into backlog by year-end. As has been our historical experience.

With some color on our construction sales activities, we are experiencing a steady pipeline of project opportunities in health care, life sciences, data centers, essential utility plants and indoor farming. We have realized contractions with opportunities in entertainment, education, hospitality and the office sector. The only meaningful sector that we counted on is entertainment, but we have discussions ongoing with those customers for smaller service and maintenance project work, which will mean expansion for our Service revenue.

The story is somewhat different in the Service segment, where on a year-to-date basis, service sales has increased more than 50% versus 2019. We obviously like this trend and are focused on both generating new ownership relationships as well as expanding those owner relationships we already maintained. Service sales did decelerate in Q2 relative to Q1 due to the virus, but we still grew nearly 50% for the quarter on a year-over-year basis. Service also posted profit growth year-over-year as well as sequentially. Also as a reminder, sales refers to new work and projects that have been sold, which, in most cases, are reflected in backlog, except for work both sold and performed in the same period. This is a distinction from revenue, which is work actually performed to build in the period. Whether it be from service project backlog, maintenance contracts or T&M opportunities.

At the end of the quarter, Service sales picked up, including a number of opportunities generated from the virus. This includes air cleaning and filtration methods, such as ultraviolet and bipolar ionization of various building types, such as office buildings, K-12, colleges and universities. Between the existing backlog, promised work, other active construction opportunities and a large service business, we believe we have good visibility on revenue for 2021.

This is consistent with the company's experience during the Great Recession, where activity remained robust through 2010, driven by strong backlog entering the cycle and the nature of our diversified market sector experience. I also want to note, we did not have the current scale of our Service business back in 2008.

I'd also like to draw to your attention to the cash flow statement, including -- included in our 10-Q filing, specifically to the net cash provided by operating activities line item.

On a year-to-date basis, Limbach has generated cash flow from operations of $22.5 million, of which $18.9 million was generated in the second quarter. Greater net income was partially responsible for the strong cash flow generation, but we also made tremendous progress in working -- improving working capital management.

Let me now pivot quickly to project claims. Across all the claim situations, which total in excess of $40 million, we are working diligently with various counterparties to find acceptable outcomes. We continue to execute against our strategies in each case, but anticipate the resolution of several claims will push from late this year into 2021. That does not suggest that the underlying merits for our strategies have changed only that in some cases, discussions slowed during the second quarter due to the virus.

We ended the quarter with $28.8 million of cash on hand and have provided an update on our liquidity position on Slide 7. That cash balance increased to $30.3 million as of July 31. And at both June 30 and July 31, we had $10.5 million of undrawn availability under our revolver. I'm happy to report we have not had to draw on the revolver since March 23 and don't expect to do so for the balance of the year, assuming the continuation of current market conditions.

As you have seen from prior reports over the last several months, the company has generated increasing cash balances and liquidity over the year. Given the uncertainty of economic environment, it's important that we continue along this positive trajectory. We believe the changes we've implemented to working capital management are sustainable, and we look forward to reporting improved cash balances and liquidity as we move forward. The second quarter will undoubtedly be remembered as one of the more extraordinary periods for Limbach's corporate existence.

Never before has the company encountered a comparable market dislocation nor rebounded in such a brief period with such strength. While we faced some difficult moments, the ability of our employees to respond was inspiring. From our heroes in the field and in areas like treasury and working capital management, these actions will benefit the company for a long time to come.

While much of the on-the-ground evidence suggests that the most challenging period is in the rear view mirror, we have to anticipate the possibility of additional market dislocation over the next 12 to 24 months, given the number of macroeconomic, political and public health headwinds.

So we remain laser-focused on maintaining an adequate liquidity cushion on aggressively exploring opportunities to reduce our cost of debt capital and securing profitable Construction and Service work that meets our criteria with respect to risk profile, profitability and cash flow. All the while, we remain an essential service and expect to enjoy the benefits of our geographic and end market diversification.

Before we move on to Q&A, I'd like to address 2 final issues. First, as noted in our August 4, 8-K and press release, on July 31, we received an unsolicited proposal from our largest stockholder, Mr. Brian Pratt, together with Blue Wolf Capital to purchase common stock from the company. As it relates to anything in connection with the proposal for Mr. Pratt & Blue Wolf Capital, we don't plan to speak to those matters or anything related there to, at this time including as part of the Q&A portion of this call.

To the extent anyone has any questions, we refer you to our Form 8-K. Just to reiterate and be clear as to where our focus is, and as we have said before, the company's Board of Directors and management team are focused on maximizing value for all of our stockholders.

Finally, let me also clarify that Mr. Pratt has no known relationship to the Chairman of our Board of Directors, Gordon G. Pratt. Second, let me address the guidance that was included in yesterday's press release. For calendar year 2020, we are guiding toward revenue of $560 million to $600 million and adjusted EBITDA of $22 million to $24 million. Underlying these ranges is the assumption that any impact of the company in the back half of the year from the resurgence of COVID-19 is no more extensive or impactful than what we experienced in the second quarter. We've also considered risks and opportunities in the backlog and believe we have taken into account any further margin deterioration on those projects that have been challenging.

Additionally, the guidance we've offered does not assume any resolution of the more significant claims opportunities discussed earlier.

With that, we're available to take your questions.

(Operator Instructions) Our first question comes from the line of Gerry Sweeney with ROTH Capital Partners.

I had a question on the Service side, in particular. Lots of news out there about companies needing or building owners to work on HVAC systems because of COVID, improved ventilation, check ventilation, et cetera. Is this an opportunity for your Service side of the business?

Gerry, absolutely. What we actually instituted back, I think it was in April, we've been having weekly calls, Tuesday evenings, well, actually late afternoon, with all of our sales representatives throughout the company, both Service and Construction. And we're working on topics each week where we're kind of learning our way through COVID or where the opportunities are. What we saw starting really in early June through late June was tremendous activity with building owners, trying to figure out how to get their buildings open back up.

Right now, obviously, there's a big focus on educational facilities. So we've worked that very aggressively, and we're out talking to our customer base across the entire owner-direct as well as working with general contractors to let them know, look, we can help you with this, that and the other thing to get these buildings retrofitted. The other thing that's kind of interesting, Gerry, is that in the of most of March, we really saw kind of a backing off of, you can't come into our building, and that continued really into May.

Now because that maintenance really didn't happen during that period, we're seeing a real uptick happening really in June as kind of a new normal was starting to settle in. People realizing we've got to get back to business.

So yes, I mean, it's a tremendous opportunity for us, Gerry, and we're working it very aggressively.

And this is just more out of curiosity, I guess. But is there an opportunity for almost a recurring type business that going into buildings, I don't know if it's disinfecting, changing more filters, et cetera, just to a more consistent revenue type of contract from that perspective as well?

Look, I think so, filtration has been, quite frankly, an easy one to push with our customer base. So that's -- we've seen a big uptick there. But when you really look at what's happening right now, this is a terrific opportunity for our company because a lot of building owners are confused as to what to do. So again, we have our existing base of customers that I think we're going to be able to expand our relationships with, meaning more work.

And we're also out knocking on a lot of doors of buildings we haven't been servicing, and we've got customers that are saying absolutely come in and help. And we've given our sales force kind of a -- it's really an order card, listing out all the different things we can do so they can listen to the customers' concerns and then go back with a solution.

So we think it's an opportunity to expand revenue with our existing customer base, which is well over 1,000 customers we deal with on the Service side. And also, it gives us the opportunity to open up doors to customers that previously weren't -- we haven't been servicing. So it's kind of a -- it's a very interesting period, and we're pretty pumped up about it.

Right. Switching gears to the construction side, some very good margin results, but maybe a couple of points. One, was there -- how much of an impact did the Michigan emergency work with the transformation to a hospital that building has just on that segment? Was it a large impact, moderate, et cetera, any type of just sort of anything you can give on that? And then just...

First of all -- yes. It was moderate, Gerry. And I have to say, I'm so proud of the Michigan operation. I mean, what they did in a matter of hours in converting that facility, working around the clock. Our Michigan business, they're top performers for the company consistently, and their customer base locally realized they were the right group to bring in to get this done. And they got it done. We made a moderate profit off of it, and it was just great to see. I guess the real point was it was revenue we didn't expect, right? That hit so quickly. And we saw a bunch of, quite frankly, a lot of other emergency work creep in there, too, that helped offset some of the pullback we saw in Boston, a bit in Michigan because we did see some pull back in Michigan and also down with our Disney customer.

And then I don't want to monopolize the call, but just sticking on the margin front on the Construction side. I think in the press release, you mentioned the backlog had maybe richer margins, I think it's the term you used. Can you just talk to us a little bit about going out, getting new work. Is there an absolute line drawn in the sand, we won't take a project less than this x like gross margin type? And should we sort of anticipate margins staying up at the current level, onetime things aside, of course.

So when we dealt with what we dealt with over the past couple of years were some challenges with selling too much work in a couple of markets, and we couldn't find the labor pool to execute all of it and that burnt us. We clearly learned from all of that. And over the past -- it's almost 24 months now, we've inserted certain risk management processes. And one of the key processes is any project over a certain size has to go through our risk review committee, which is scheduled every Friday morning. Any of our branch leaders can request time to come in and present that project. I will tell you, we look at the project under a microscope, the risk profile, the profit margin profile and the cash flow profile. We've rejected a number of projects, but in many cases, the conversation led to go back, improve the margin by 400 basis points or we want this kind of cash arrangement. Or we want to see this risk matter addressed in sufficient detail that we're comfortable with it. Otherwise, we're killing the deal. I'm so proud of our team. They've all rallied around that. Nobody wants to go back to where we were. So as a result, we're seeing better margins. Quite frankly, we're cherry picking the projects we want on the Construction side of the house. So when we use that word, richer, I think we've done a very smart job at risk management, looking at the profitability of the projects and making sure we're going to see solid cash flow.

Okay. One more, I lied. Just a follow-up. When you're looking at your risk management, when you're looking at projects, can you align that pipeline or potential pipeline or time line of that project going through with potential labor available in the market? Do you have that visibility? Because that was one of the issues that -- yes.

Gerry, again, I think it was 18 months ago, we started it, but every month during the monthly branch reviews, each branch leader has to present their labor curves. And you can see on the labor curves, and that's 12 months out. Where they need to sell business, and they have available craft talent and project management talent to execute that work. So that's been in place for a while.

When they present these projects on Friday mornings -- and again, these are the larger projects. The general rule is anything over $7.5 million has to come to the risk review committee or any other project that we see that my COO, myself or even a branch manager wants to put through the risk management review.

So at this point, we don't allow a project to go forward unless the labor curve all works out that they can prove to us, they have a gap, they need that sale. But we're no longer doing this thing. We're Limbach, very proud of our organization, the ability to hire people and take care of people, we're famous for it. But we're no longer relying upon that. We're relying upon the proven talent we have in our business, and we've got some of the best to make sure we can execute that work and make a damn good profit and collect our cash.

Our next question comes from Brent Thielman with D.A. Davidson.

Just a clarification on the work in Michigan. When you say moderate, is that $1 million or less?

Jayme?

Yes, we're not commenting on this.

Brent, we're -- yes, we don't normally get into the details of the projects, but it was a good project from a revenue and profitability perspective. I think our client was very, very satisfied with what we did. And we worked around the clock to make that happen. And I wish we would have done a couple of more of them, but we're very proud of what we did up there in Michigan.

Okay. And where are you with some of the ongoing problem projects from a completion perspective? And I guess, where is LAX? And when do you expect to wrap that up? And then as a second question to that, the write-downs outside of Southern California, the other half of it, what were those attributable to?

So yes, look, in Washington, D.C., we have several claim type situations going on. And there's strong progress on all of them. And -- but there's no problem jobs in D.C., I mean, right? That's old, that's long past. Long, long past. Go out of Southern California, our big project that we're completing is the Lax Midfield terminal project. And it got pushed out a couple of months due to COVID. There was -- it was shut down for a little bit, then it started back up, then there were some setbacks, but anyway, we're working our way through that.

And it looks like a November completion. The vast majority of the work on that project, both the construction work is actually complete. What we're doing today is any sort of punch list, engineering things that have to be scored away. So the majority of the pain is through. And actually, if you look at Q1 and Q2, you can see the pain was dramatically reduced because the projects are wrapping up.

In Southern California, we are following a similar path that we took in Mid-Atlantic. We looked at major construction sales. We stopped, we caught our breath. And today, that business is really focused on more owner-direct and smaller projects with general contractors. So we're repeating what we did in Mid-Atlantic. The leadership out there, we did make a change. And actually, the existing leader that was out there, really good guy.

Unfortunately, oversold the capacity to deliver everything out there. But we have moved him over to work on the LAX matter and get that resolved. And we are making steady progress with our customer. Conversations are continuing. We're seeing some good steady progress there. It's going to take a while, though. So Jayme, any further comment on that?

No. I mean, we've definitely seen a decline in the second quarter. So out in South Cal, that's come down substantially in Q2, and we'll continue to expect that to (inaudible) trail down.

Okay. And then the windfall from working capital on cash flow this quarter, does that reverse in the second half as you're, I guess, fully reengaging on projects?

As far as where we're at with working capital, it's been really a great period of just looking at collecting retention, converting change orders so we could build them and really making sure we're staying cash positive on our projects, which when you look back in the past, we were not where we should have been. So our new leadership team. It's great that Jayme joined us back in October; our new Chief Operating Officer, Mike McCann and the complete branch leadership team. They've really done a great job at focusing in -- on getting cash. Brent, when we enter this COVID period, and I might have mentioned this on the last call, I think it was late March where we were having daily management goals to deal with all the moving parts that we were seeing happen in front of us like what do we do with this? What do we do with that? I came up with this 3 tactical actions, stay safe, I was dealing with all the COVID risks, get cash and get work. So when we get cash bit, we started having daily phone calls and then it moved to 2 days. We're still doing it 2 days a week, where the guys are just on top of our game. I mean, we have good data. We know where to push and now we're actioning all those items. So we believe it's sustainable. And actually, we think there's some more room for improvement. Plus we have for the resolution of our claims once we see that cash come out the door, that will improve the picture even more.

Okay. And then, Charlie, beyond the temporary delays because of COVID, is there any work included in backlog that's subject to more prolonged delays or deferral by your customers just because of end decision on projects? Have you had to debook anything because of that?

No, there's been no cancellations, no debooking. Everything is underway. So I think the pipeline, we've identified some very nice opportunities. I mentioned the promised work, in my comments, about $130 million yet have to be booked. And those projects are really moving along nicely. They appear to be firmly committed to happen. And then when we look at our pipeline, it was a little soft early in the quarter. But then as June and right into July, we're seeing some very nice opportunities being presented. So I -- but it's in certain sectors. So I mentioned health care, it kind of shut down there for a little bit because they lost their income streams off of -- what's the word I'm thinking about, elective surgery. But now that's open back up, and we're now seeing conversations continuing on certain projects, be it new builds or renovations starting to come back. So health care seems to be pretty good. Research and development, namely our life sciences, seems to be very strong. Education, I think there's going to be a nice retrofit type set of opportunities there with, and I commented earlier about that to get the buildings back open, so schools can function. And the other part that I really didn't -- are the grow markets, that's kind of interesting. We're also in these indoor farms for marijuana are popping up all over the place. And because of our reputation of building one of the first indoor farms up in New Jersey AeroFarms, a lot of people are coming to us asking us to budget those and help with design. And then finally, and I didn't comment on this earlier. I'm interested to see where manufacturing goes. The anti-China bit that's going on and the potential onshoring, we have some light manufacturing experience, but we see that as an opportunity for further expansion if we see an uptick, and we'll certainly shift to that if we see the opportunity.

Okay. I appreciate that, Charlie. Maybe on the -- just on the guidance, if I assume the Service business continues to run sort of at the pace that it has, which has been solid growth, that sort of implies that Construction business could see a drop in profitability in the second half. Can you just walk me through the bridge to the outlook into the second half?

Jayme, can you take that, please?

Yes. We're just giving -- we're not really doing it by segment at this point because we're seeing services coming on again here at the end of the quarter into the beginning of the third quarter. So we didn't break that from a Service and Construction perspective. Just the top line in total.

Yes. Brett, I think from our perspective right now in our strategic plan, we're going to continue working construction opportunities. But as I commented, we're seeing a tremendous opportunity to expand our owner-direct offering. That segment, we see tremendous growth opportunity. And I think the sales kind of indicated that year-on-year growth. So we're going to really cherry-pick our construction opportunities going forward. For all the right reasons, the risk management things, I talked about, profitability and cash flow.

But we, quite frankly, just see much better outcomes, much better margin with the Service owner-direct segment. So we're going to continue to focus our resources on expansion in that area.

Okay. I'm going to try in another way to ask around the term sheet, Charlie, and it's more just a question if there's any expectation for further communication via the board regarding that?

Brent, I'm sorry, I was thinking of the guidance. Could you just ask that question again?

No. I -- Look, I just wanted to ask, I mean, with respect...

With term sheet, oh.

Company -- yes. If there's -- is there any expectation for further communication from the board just regarding that?

Yes, we're not going to comment at this time.

Our next question comes from Yaron Naymark with 1 Main Capital.

Congrats on setting up a great quarter. I guess the first question I have is, so you guys have a history of putting up these great quarters and this encouraging guidance. And then all of a sudden, there is some problem projects that have and so I guess the question is, do you feel like you've baked enough conservatism in here to account for any unexpected hiccups that might turn up in the back half?

Yes. We did it extensive. We reached out to our branches. We look at all the projects. We have monthly project reviews and everybody puts input into those numbers. So we feel, based on where we sit today, and the visibility that those are solid numbers.

We instituted something last year. We were forecasting quarterly for the year. We'd always do a new forecast. We've actually increased that now on a monthly basis. All of our systems are in place, we can do that. So as we see the sales come in each month, they can -- each of the business units can project out their numbers. So we can see on a monthly basis what's happening and where we have to make changes or where we have to shift resources. So it's been a really improving situation on visibility. And again, I just want to reinforce what Jayme just said about our monthly project reviews. Every project is reviewed monthly, and then that just feeds back into our database. And it's given us a clearer picture. And I think the risk management processes that we've put in place over the past 18 to 24 months after what we went through are really starting to pay off.

Yes. That's helpful. And I guess another way to ask is, do you feel like you've baked the level of conservatism into here though? Or do you -- just looking at your Q2 margin -- EBITDA margin of 6% and you guys are guiding to 3.5% margin in the back half. And I understand there's some more G&A rolling on board. I'm just wondering if part of that margin compression between Q2 to the back half is just you guys putting out a number that you feel very confident you're going to hit? Or is it more of a realistic number?

Yes. We obviously built some conservative -- conservatism into the numbers, and we want to be solid on our numbers.

Okay. Helpful. How much of the margin compression from Q2 to the back half, which is pretty meaningful, again, from 6% down to 3.5%. How much of that is more G&A rolling back on?

Well, that's part of it. So for the SG&A, we wanted to -- clearly, in our prepared remarks, pointed out that Q2 obviously was not a fixed run rate. We had the furloughs, we had reduced hours, employees were working and so too with the travel. And there's -- so there's some of those temporary items that are coming back online, and they started through the end of the quarter being the end of Q2. And starting in Q3 as business is picking up so that run rate, obviously, is not going to be the same as well, as we commented before. We are executing this year, and incentive comp is in being accrued into those numbers. And so as we continue to perform, you're going to see that in the SG&A line item.

Okay. Helpful. And then, Charlie, you commented on visibility into 2021. For the 2021 year. I guess, could you elaborate on that a little more? I mean is that visibility into what a typical year would look like? Are we talking about 80% of what a year would typically look like? Like how much visibility do you have into that here?

Yes. So when you take into account backlog, where we stand today, I mentioned the promised sales plus we have other sales that we're laser-focused in on, but they haven't reached that level of negotiation yet. So we have a pretty clear picture of '21 as far as what we think could happen. And I guess the other thing that we're all -- I think everybody is concerned about what will COVID do to us in the fall. But I think based on what we did in March and how quickly this management team took action, I think we impressed the hell lot of many, many people, many stakeholders.

We took immediate action. And I think the way we executed thinking through the COVID crisis, we'll do it again if we have to, if we're faced with that challenge. So all that will lead to, I think, a strengthening position on '21. And the other comment, Brent actually asked the question about the Service or maybe it was Gerry, we're going to keep pushing like old hack on the owner-direct. We just think that's a tremendous opportunity. Again, we're going to continue with our construction opportunities where we have excellent execution, where we have great customer relationships, but we do see this period right now as a heck of an opportunity to expand that owner relationship. People need us and (inaudible) air quality. It's paramount right now.

Yes. But again, so the visibility is into flat revenue, growing revenue or some level of revenue as a percentage of what you guys did this year?

I can't comment on revenue right now. I will tell you, we are laser-focused on bottom line.

Right. Okay. I mean -- okay. Maybe we'll take it offline. And then it was great to hear you guys talking about being confident in positive cash flow going forward, and you have the potential to settle some of these claims heading into next year. I mean, at what point do you just take out the debt with cash? I mean you guys are going to get to the point, it seems like in the next 12 months or you could just be a net cash balance sheet instead of having or actually refi the debt? Or are you guys just comfortable with this level of debt and you're comfortable that you're going to be able to refi with acceptable terms?

Yes. We are aggressively working our options for refi. So we're definitely -- that is manager's focus. And from the cash perspective, we're holding onto the cash to maximize our liquidity right now, just to be prepared for any uncertainty. And so as each month and each quarter gets us more visibility and our action plan.

Our next question comes from Jon Old with Long Meadow Investors.

And Charlie and Jayme and everybody, thanks for a great quarter and congrats. I appreciate it as a shareholder. I just wanted to follow-up on the SG&A conversation a little bit. So what do you think a normalized number looks like or a targeted margin? On an annual basis, just trying to get a feeling for -- if the current quarter was not a sustainable going forward number. What should be -- what kind of margin are you targeting?

John, I appreciate you wanted to get more clarity into that. We're -- that's why we put out guidance with regards to our bottom line. We're really focused on the bottom line. And right now, there's just -- it's fluid with regards to our SG&A. So right now, the target is that bottom line number that we gave guidance on.

John, I also -- when you look at what we did in March, I mean, that was a very painful day when we let go about 18% of the salaried staff. Some of that staff is needed to come back because of revenue taking off, which is great to see. But the reality is some of that staff will not be coming back. We realized we didn't need it. We are working more efficiently. I'm actually blown away about how well we're working from home. About all of our offices are up and running. We have incredible protocols to enter offices and all this COVID standards that we all know about today. But a lot of our people continue to work at home, and we're actually seeing productivity take off.

We just are in the midst of a second employee survey about how they're doing working from home. So a lot of -- we're thinking through a lot of things right now about leveraging our people. People aren't working 9-to-5. They're working when they need to work, and the productivity seems to be improving. And then the big question is, what are we going to do with all of our real estate. So we're thinking that through. I mean, we have leases, but where could we go? Do we really need all the real estate we have today? So that's a future opportunity.

Everything is fluid right now...

Everything is fluid.

It's very fluid right now. So that's what we're just really focused on the bottom line number.

We're still -- Jon, we're still also working our way through other opportunities for cost reduction. I think it fueled our interest in seeing what we could do, and we see some opportunity for purchasing and some other opportunities, which would help. I don't think it's going to be tremendously meaningful to the bottom line. But I think there's other opportunities that we have initiatives well underway to continue to sharpen our SG&A expense.

Okay. And does your guidance contemplate more write-downs in the second half? Or I mean, do you think we're largely through that or there's still, it's going to be a -- just a sort of steady, slow decline to that -- in that number? Or when do we sort of get that to breakeven or are even hopefully positive?

We expect to see the decline happening as it has really this last quarter as well. So that is factored in there as projects are wrapping up, and we expect to see that declining.

Jon, we -- you're always going to have write-ups and write-downs in the business. We propose on a project, it gets executed. You estimate it the way you estimate, you're expecting certain things to happen in a certain way. And is variable. Sometimes we have pickup because it went way better than expected. And other times, we do face the challenge where the project didn't go as expected. There's no claim involved. There's no pursuit. It's just maybe we missed something in an estimate or there was just some field condition that we just had to deal with. I think we're laser-focused on our risk management process at this point to try to weed out those things. Yesterday, because we're doing the call today, we actually did our risk review call yesterday morning. And a project was presented around a large chiller replacement project. And one of the things we identified was just the logistics, and we asked that team to get back to us, how are you going to move the old chiller out and the new chiller in? We want to see a logistics plan. And they have to come back to us and prove to us. They really have figured that out.

So we're trying to improve our estimates, make sure we're adequately covered. We have certain contingency levels in those estimates, so that we can see better outcomes, which means upside. One other thing I'll share is that late last year, we introduced a project profit share program, which is where we estimate a project the team has got to deliver that margin. But if they see opportunity, they now will share a portion of that upside directly with that project team, and it's a very structured, very structured process. We didn't have that in the past. So we believe the ownership of the numbers on the project, that contract risk and opportunity is now going to be really incentivized by those project teams to execute and execute well. That was one of the things we identified, having come through the past couple of years as a risk management processes -- process we needed to insert, our compensation committee approved it, and we move forward with it. So that should also help net-net, we see net write-ups as opposed to writedowns. So work in process, you're always going to have some variables, but I think we're doing the right things to make sure we get to the point where it's positive.

I Understand. But is it -- would it be correct to say that the current -- all the sort of write-downs recently, those are all on projects started or agreed to before -- way before you put all these risk controls in place and that...

I kind of refer to them as legacy. The legacy stuff we have to deal with. And the answer is the majority of that, yes.

Thank you. We have reached the end of our question-and-answer session. So I'd like to pass the floor back to management for any additional, closing comments.

Look, I'm damn proud of our organization and our people. The crisis hit us. We acted fast. And I know this sounds simple, but it worked, stay safe, get cash, get work. They're very tactical statements, but it got everybody aligned here, and we worked it and we worked it hard. And that's across the entire company. I think with where we're going right now with all the things we've done, our business units are performing well. I believe we have a bright future despite everything that's going on around us. We're clearly essential. The diversity of our business, which I've reinforced many, many times through different conversations with many investors or on these calls. We were prepared for a downturn because of the diversity. We can shift resources we're not in one market sector. We're not in one geography. And obviously, we have construction, we have service. And the other thing I'm very proud of is the discipline that the management team has inserted into the business. We learned some tough lessons over the past couple of years, but we've come through it, and we've come through it strong.

Thank you for your interest, and we look forward to talking to you in Q3.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.