Star Equity - Q1 2024

Transcript

Operator (participant)

Greetings, ladies and gentlemen, and welcome to Star Equity Holdings Q1 2024 Results Conference Call. Please be advised that the discussions on today's call may include forward-looking statements. Such forward-looking statements involve certain risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. Please refer to Star Equity's most recent 10-K, 10-Q, and other filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligation to update forward-looking statements as a result of new information, future events, or otherwise. Please also note that on this call, management will reference non-GAAP financial measures, including EBITDA, adjusted EBITDA, adjusted net income, and adjusted earnings per share, which are all financial measures not recognized under US GAAP.

As required by SEC rules and regulations, these non-GAAP financial measures are reconciled to their most comparable GAAP measures in our earnings release issued this morning. If you did not receive a copy of the earnings release and would like one after the call, please contact Star Equity at 203-489-9500, or its investor relations representative, Lena Cati, of The Equity Group, at 212-836-9611. Also, this call is being broadcast live over the Internet and may be accessed at Star Equity's website via www.starequity.com. Please note, this call is being recorded. Shortly after the call, a replay will also be available on the company's website. It is now my pleasure to introduce Rick Coleman, Chief Executive Officer of Star Equity.

Rick Coleman (CEO)

Thank you, operator. Good morning, everyone. Thanks for joining us for our Q1 2024 results conference call. On the call with me today are our Executive Chairman, Jeff Eberwein, and our Chief Financial Officer, Dave Noble. We'll begin today's call with an update on our Q1 2024 results, and then we'll discuss the acquisition of Timber Technologies, which we announced earlier this morning. Additional acquisition details can be found on the 8-K we filed with the Securities and Exchange Commission and on the updated investor presentation on our website at www.starequity.com. Our Q1 2024 results were weaker than expected, due primarily to the continued impact of economic headwinds facing our Building Solutions division. Specifically, four large commercial projects, which we expected to be completed in the Q1, could not be completed due to customer financing delays.

Three of these projects slipped into the second quarter and have now been completed, while the remaining project is now financed and is scheduled to be completed this fall. As a result, our Q1 2024 revenue decreased 26.1% to $9.1 million, compared to $12.3 million in the Q1 of 2023. Our gross margin was 17.3% versus 34.6% in the same period last year, and our gross profit decreased by 63.1% year-over-year. These quarter-to-quarter fluctuations aren't unusual and are a key reason for our focus on expanding and diversifying our revenue base. Despite the challenging environment sector-wide, our sales pipeline and signed backlog remain roughly equivalent to historical averages.

We believe the impact we're seeing is temporary and that there is strong demand for new construction in the markets we serve. Our reputation as a reliable and high-quality partner is strong, and we continue to focus on all elements of our growth strategy, including business solutions, division expansion, acquisitions that would mark our entry into new industries, and exploring new opportunities at our Investments division. This focus is exemplified by our acquisition of Timber Technologies, which I'll discuss later. Now I'll turn the call over to Dave Noble, our CFO, to provide additional Q1 consolidated financial highlights. Dave, please go ahead.

Dave? All right.

Dave Noble is having connection difficulty, so we're gonna have our Senior Vice President of Finance and-

David Noble (CFO)

Okay, go ahead, guys. I'm sorry, I was on mute.

All right. Let's now turn to Star Equity's consolidated financial results. Due to the sale of our healthcare business on May fourth, 2023, all results and historical comparisons relate only to continuing operations, which include our building solutions and investments divisions. Of note, Digirad Health, which we sold last year, is now reported as part of our discontinued operations. In Q1 2024, SG&A increased by 11.1% versus Q1 2023. This is mainly due to increases in legal and outside services expenses related to acquisition activities. At the bottom line for Star Equity, we reported a net loss from continuing operations of $2.2 million in Q1, compared to a net break-even result in Q1 2023.

Non-GAAP adjusted net loss from continuing operations in Q1 was $1.4 million, compared to an adjusted net income of $0.5 million in Q1 of 2023. Non-GAAP adjusted EBITDA from continuing operations was a loss of $1.1 million in Q1, versus a positive $0.8 million in Q1 of 2023. On a standalone basis, before public company costs, our Building Solutions division generated a non-GAAP adjusted EBITDA loss of $0.3 million in Q1, which was down from positive $2.2 million in Q1 of 2023. Consolidated cash flow from continuing operations for Q1 was an outflow of $2.4 million, versus an inflow of $5.1 million in Q1 of 2023.

This cash flow decrease was driven primarily by lower revenues for our Building Solutions division and higher net working capital expenditures. As of March 31, 2024, our consolidated balance sheet and liquidity remained strong. At the end of the Q1, we had just $1.9 million interest-bearing debt, and our consolidated unrestricted cash balance stood at $14.7 million at the end of Q1, as compared to $5.0 million a year ago. Turning to our investments division, our equity securities at the end of the quarter amounted to $5.6 million, while our rollover equity and note receivable investments resulting from the sale of our healthcare business to TTG are valued at $6.0 million and $7.6 million, respectively.

Now I'd like to turn the call back over to Rick to provide some additional information on our TimberTech acquisition.

Rick Coleman (CEO)

Thank you. As I mentioned, this morning, we announced the acquisition of Timber Technologies, a Wisconsin-based engineered wood products manufacturer, which, since its founding in 2003, has established itself as a leader in the manufacturing of glue laminated wood products. Timber Tech will operate within our Building Solutions division, and its team will continue to run the day-to-day manufacturing operations at its existing 69,000 sq ft facility. As part of the acquisition, we will also acquire the manufacturing facility and associated real estate in a separate transaction expected to close in June of 2024. As you probably noted, we've renamed our construction division to Building Solutions to better describe the division's expanded capabilities and future opportunities. With the acquisition of TimberTech, we entered the engineered wood products industry, one that is experiencing increasing adoption over structural alternatives.

Its glue laminated wood products, or glulam, have superior strength, durability, and environmental sustainability compared to solid timber, and are also taking market share from less sustainable building materials such as steel, concrete, and aluminum. We believe that this market is poised for long-term growth and consolidation. TimberTech has a strong market footprint in the Midwest and Northwest. They manufacture products that augment the multifamily and residential construction segments we currently serve, but TimberTech's products are important components of a broader range of end markets. For example, their agricultural and industrial products are used to build livestock and dairy barns, bridge decking, wastewater treatment facilities, crane mats, machine sheds, and even airline hangars. We believe this is an expanding market, and we're looking forward to sharing more with you in the coming months.

In addition to creating scale, we expect TimberTech's history of profitability and strong cash generation to improve our overall financial position. In fiscal year 2023, TimberTech's unaudited financials reported revenue of $18.8 million and adjusted EBITDA of $5.5 million. In comparison, our Building Solutions division reported 2023 revenues of $45.8 million and adjusted EBITDA of $4.4 million. Again, using unaudited financials on a trailing twelve months pro forma basis, TimberTech would have represented roughly one-third of our Building Solutions division revenue and over half of the division's EBITDA. Before opening the floor to questions, I want to emphasize that this transaction and the 2023 acquisition of Big Lake Lumber are significant steps in the execution of our overall growth strategy.

As has been the case for several years, and especially following the $40 million sale of our Digirad business last May, we are focused on creating additional shareholder value through our targeted business development initiatives. Star Equity today is a much better business, operationally and financially, than 5 years ago when we established our holding company structure. We've also made great progress in the last 12 months. We have a stronger and cleaner balance sheet, a well-established Building Solutions division, and an investments division with stakes in several undervalued public and private companies, which we believe have significant upside potential. In the coming months, we look forward to sharing our progress as we continue our determined efforts to create shareholder value through profitable organic growth and disciplined accretive acquisitions. I will now turn the call over to the operator for questions.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Theodore O'Neill with Litchfield Hills Research. Please go ahead.

Theodore O'Neill (CEO)

Hey, thanks very much. Rick, the quarter seems self-explanatory, so I'd like to ask questions about Timber Technologies. A couple of things: Could you talk about what the synergies are between Timber Technologies and the other components of Building Solutions? And is this gonna be helpful to you on the East Coast? Can you ship this stuff out here? Does that make sense, or is this something that is pretty much a local business, limited by shipping? And then, could you talk about the financing for it as well, please?

Rick Coleman (CEO)

Yeah, just give me, let me take the question about shipping first. That's the easy one. I think, shipping the product from Wisconsin to the East Coast is probably not the best approach. However, we do have a vacant factory, as you'll recall, and we have an expanding group of very, very talented executives in our building solutions division. We're looking at a number of different alternatives of how to expand into our vacant factory, and the expansion of our glulam business is one of those alternatives. We're located, I'm currently sitting very close to our new factory in Colfax, Wisconsin. Short drive to our businesses in and around the Minneapolis area. So there are obvious opportunities for synergies.

We haven't identified those as the rationale for the deal, but we do expect that the cooperation and coordination between the different divisions is going to yield benefits for us.

Theodore O'Neill (CEO)

Could you talk a little bit about the financing for this?

Rick Coleman (CEO)

Yeah. Do you want to take that one?

David Noble (CFO)

Sure. Yeah, so on the financing piece, we did use, you know, a lot of our cash hoard to help purchase this, but we were able to leverage it to some extent with Bridgewater Bank, which is a local bank in the Minneapolis area. And so we did a $7 million acquisition term loan. It's a five-year structure that amortizes over those five years, and it's at a 7.85% rate, which we think in this environment is pretty attractive.

Theodore O'Neill (CEO)

Okay, thanks very much.

Operator (participant)

As a reminder, if you would like to ask a question, please press star then one to enter the question queue. The next question comes from Tate Sullivan with Maxim Group. Please go ahead.

Tate Sullivan (Senior Research Analyst)

Thank you. On Timber Tech, can you say that the engineered wood products label or EWP applies to what you already do at KBS and EdgeBuilder, or is it a different consideration with the glulam?

Rick Coleman (CEO)

Yeah, I would, I would say it's a different, different sector. Obviously, there are some opportunities for expansion in both of those businesses, so there's probably some overlap down the road. But, it is a new sector for us and one that we believe is strong and growing.

Tate Sullivan (Senior Research Analyst)

Just so, EWP or engineered wood products, I mean, specifically refers to Timber Technologies, is the industry there else?

Rick Coleman (CEO)

Yes. Timber Technologies is a part of the engineered wood products industry.

Tate Sullivan (Senior Research Analyst)

What is the manufacturing process, or just briefly, for glue laminated timber? What kind of facility does the company have?

Rick Coleman (CEO)

First of all, it's a very impressive facility. It's very large. The company's been building and expanding in that facility for, you know, since its inception. The primary inputs are lumber and glue, but the process of combining those to build structural wood products is much more sophisticated than one might think. There have been a number of different companies that have attempted over the years to get into the business and failed. And, you know, we're really pleased with the talent and dedication that this team has undertaken over the years and built a very, very successful business.

Tate Sullivan (Senior Research Analyst)

Thank you. And is it, did you mention it, is it two separate facilities, the 69,000 sq ft facility and then the separate manufacturing facility, or, or is it all one facility?

Rick Coleman (CEO)

It's all one.

Tate Sullivan (Senior Research Analyst)

Oh, okay. So the subsequent real estate transaction is for the 69,000 square?

Rick Coleman (CEO)

Yes, the-

Tate Sullivan (Senior Research Analyst)

Okay.

Rick Coleman (CEO)

Right.

Tate Sullivan (Senior Research Analyst)

Okay. And then on KBS, you mentioned, I mean, it's mostly related to the financing environment. And to confirm, are you seeing any competition willing to take lower prices in this market, or is it purely the pipeline being pushed out from the financing availability?

Rick Coleman (CEO)

From the feedback that we're getting and the intelligence that we can gather, everyone in the industry is experiencing, to some degree, the same issue. Financing is just taking longer and costing more. So in a small business, relatively small business like ours, if we expect a large project to be completed in this particular month, it has a significant impact on our quarter or the month when that project is delayed for financing.

Tate Sullivan (Senior Research Analyst)

Okay. Thank you very much.

Operator (participant)

Once again, if you would like to ask a question, please press star then one to enter the question queue. This concludes today's question and answer session. I will turn the call back over to Rick Pohlman for closing remarks.

Rick Coleman (CEO)

Thank you, operator. Before concluding, I want to reemphasize that we're always available to take your call and discuss any additional questions you might have. Don't hesitate to contact us. As always, we appreciate your interest in our company, as well as your continued feedback and support. Thank you.

Operator (participant)

Thank you for joining the Star Equity Holdings Q1-