INNOVATE Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 9, 2023

There are 6 speakers on the call.

Operator

Good afternoon, and welcome to Innovate Corp's Third Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After the prepared remarks and presentation, there will be a question and answer session. Please note this event is being recorded. I would now like to turn the conference call over to Anthony Rosmous with Investor Relations.

Operator

Please go ahead.

Speaker 1

Good afternoon. Thank you for being with us to review Innovate's Q3 2023 earnings results. We are joined today by Avi Glaser, Chairman of Innovate Paul Voigt, Innovate's Interim CEO and Mike Sena, Innovate's CFO. We have posted our earnings release and our slide presentation on our website at innovatecorp .com. We will begin our call with prepared remarks to be followed by a Q and A session.

Speaker 1

This call is also being simulcast and will be archived on our website. During this call, management may make certain statements and assumptions, which are not historical facts, will be forward looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any such forward looking statements involve risks, assumptions and uncertainties and are subject to certain assumptions and risk factors that could cause Innovate's actual results to differ materially from these forward looking statements. The risk factors that could cause these differences are more fully disclosed in the cautionary statement that is included in our earnings release and the slide presentation and further details in our 10 ks and other filings with the SEC. In addition, the forward looking statements Included in this conference call are only made as of the date of this call and as stated in our SEC reports.

Speaker 1

Innovate disclaims any intent or obligation to update or revise these forward looking statements except as expressly required by law. Management will also refer to certain non GAAP financial measures such as adjusted EBITDA. We believe These measures provide useful supplemental data that while not a substitute for GAAP measures allow for greater transparency in At this point, it is my pleasure to turn things over to Avi Glaser.

Speaker 2

Good afternoon. Innovate delivered revenue of $375,300,000 in the 3rd quarter and grew Adjusted EBITDA by 34.8 percent to $22,100,000 Our results this quarter highlight our keen focus On profitability, it is essential to the strategy of all three of our operating segments. We have executed on this initiative, Achieving year over year adjusted EBITDA improvement in multiple operating segments in the 3rd quarter. Our infrastructure business continues to deliver Strong results for Innovate, especially on the bottom line. Infrastructure experienced further growth in adjusted EBITDA margin expansion in the quarter.

Speaker 2

The backlog, while somewhat contracting this quarter, still provides strong visibility for future revenue. Turning to Life Sciences, R2 and MediBeacon continue to make progress. R2 launched a new skin wellness device, GlacialFX, along with several new product enhancements for GlacialRx, while MediBeacon remains on plan down the path for FDA approval. At Spectrum, we have a strong foundation of assets in that business. We are exploring potential opportunities for a strategic partnership To add to revenue and unlock the value in these assets, which should lead to further growth.

Speaker 2

With that, I'll turn the call over to Paul Boyce.

Speaker 3

Thanks, Avi. Our 3 operating segments continue to Perform well in 2023. In the Q3, DBM Global delivered another strong quarter with revenues of $369,300,000 and adjusted EBITDA of $30,800,000 versus $27,600,000 in the prior year. DBM expanded gross margins by approximately 2 10 basis points and adjusted EBITDA margin by approximately 100 and 70 basis points to 15.2% and 8.3%, respectively. Ruston and our DBM team has done an outstanding job protecting margins.

Speaker 3

We continue to expect to deliver increased margins for the full year 2023 compared to the prior year. We still see huge opportunity to bid on larger, more complex projects, especially out West That should continue to aid further margin expansion. DBM stays nimble with their unique expertise to capitalize was $1,300,000,000 at the end of the quarter. We remain focused on converting the sizable complex projects On our healthcare platform, R2 Technologies R2 not only launched a new device and several product enhancements, U. S.

Speaker 3

Unit sales outpaced all previous quarter results. In addition, R2 experienced a record number of patient treatments performed with Results in eclipsing over 15,000 patient treatments worldwide and 167% growth over the same period in 2022. R2 also expanded its global reach with approval to begin selling in Canada. R2 commercially launched its new system GlacialFX. GlacialFX is a skin wellness device And due to its classification has expanded R2's total addressable market to include aesthetic spas and other wellness channels.

Speaker 3

Additional product enhancements for GlacialRx include the launch of larger disposable treatment DIP For the body and culture, FDA cleared advanced clinical protocol called GlideRx. These enhancements improve treatment utility for providers, enhance patient experience and outcomes, making Glacial Product Portfolio the emerging Standard of care. For MediBeacon, we explained last quarter, the FDA reviewed the full module submission package for completeness and is now conducting the substantive review for the kidney monitoring program, which was previously granted FDA Breakthrough Device Designation in the United States. In addition, the FDA provided feedback on MediBeacon Clinical plans for other applications of the Fluorescence Technology Platform in Gastroenterology, ophthalmology and surgical visualization. MediBeacon received FDA authorization to begin the first In human study to evaluate the use of MediBeacon's priority agent ophthalmology.

Speaker 3

This study is expected to begin in Q1 of 2024 in the United States. We are pleased with the progress MediBeacon has made as they continue to work through the FDA approval process for the innovative kidney monitoring technology. The FDA approval process typically takes an average of 6 12 months submission to approval. And lastly, at Spectrum, we are starting to see encouraging signs of growth In broadcast television, which was soft over the last 18 months across the industry. Our stations are picking up new network distribution as advertising prices stabilize, and our outlook for 2024 looks promising.

Speaker 3

Earlier this week, Free TV, a new startup backed by Warner Studios and Lionsgate, announced January 24 launch of 2 new nationwide networks. Our broadcast platform together with Gray TV will provide national coverage for the Jonathan Katz, the TV executive who founded FreeTV is responsible for designing and launching some of the most profitable Over the air broadcast networks over the last 15 years and we will continue to work with him on developing new revenue opportunities. We are also working with a number of streaming and cable networks looking to broaden their distribution to over the air, particularly now that advertising Revenues are picking up. Also in the coming year, we are implementing the conversion of several of our stations to take advantage of We are very excited about these and other revenue opportunities for Spectrum in the years ahead. Like I said on the last conference call, we have over 2,300,000,000 Megahertz POP, a very valuable UHF spectrum with our 2 51 TV stations.

Speaker 3

Lastly, over the past quarter, I've had the opportunity to work closely with each of the management teams across our 3 operating segments. I've come away from these discussions even more encouraged At the prospects and strength of our assets and look forward to continuing to work with each CEO on ways we can further unlock the value of each of these businesses. As I mentioned on the last call, we Continue to explore strategic alternatives on our non cash flowing assets. We are starting to see R2 build the right momentum in their market And MediBeacon continues to go through FDA approval process. With that, I turn it over to Mike for a review of our financials and capital structure.

Speaker 4

Thanks, Paul. Consolidated total revenue for the Q3 of 2023 was $375,300,000 A decrease of 11.3% compared to $423,000,000 in the prior year period. The decrease was primarily driven by our The Q3 of 2023 was $7,300,000 or 0 point 0 $9 per share compared to a net loss of $6,600,000 or 0 point 0 $9 dollars per share in the prior year period. Total adjusted EBITDA was $22,100,000 in the Q3 of 2023, an increase from $16,400,000 in the prior year period. The increase was driven by the Life Sciences, Infrastructure and Non Operating Corporate segments, which was partially offset by the elimination of equity method income from our investment in HMN, which was sold in March of 2023 And our Spectrum segment.

Speaker 4

At Infrastructure, revenue decreased 10.5 percent to $369,300,000 from $112,700,000 in the prior year quarter. As discussed earlier, this decrease was primarily driven by the timing And size of projects at DBM's Commercial Steel Fabrication and erection business and lower revenue at the Industrial Maintenance and Repair Business, which was partially offset by an increase in revenue at Bankers Steel and the Construction Modeling and Detailing business due to timing and size of projects. Infrastructure adjusted EBITDA for the Q3 of 2023 increased to $30,800,000 from $27,600,000 in the prior year period. The increase was primarily driven by timing of higher margin projects at the steel fabrication and erection Business, increased contributions from the construction modeling and detail business and a decrease in recurring SG and A expenses. This was partially offset by lower contributions from Bankers Steel due to timing and size of projects.

Speaker 4

As of September 30, 2023, reported backlog and adjusted backlog, which takes into Consideration awarded but not yet signed contracts was $1,300,000,000 compared to $1,800,000,000 at the end of 2022. As Avi explained earlier, we continue to see meaningful opportunities in the market and DBM remains focused on converting those opportunities into backlog. BBMG ended the quarter with $232,800,000 in principal outstanding debt, which is a decrease of $10,200,000 from year end 2022 driven by normal debt amortization payments, a partial note repayment and a partial loan repayment resulting from an asset sale, offset in part by an increase in the credit facility. At Life Sciences, the decrease in adjusted EBITDA losses It's primarily due to a decrease in SG and A expense at Artoo, driven by a decrease in compensation related expenses, Research and development and marketing costs as a result of cost reduction initiatives as well as lower equity method losses recognized as a result of suspended losses due to the investments carrying amounts being reduced to 0. At Spectrum, revenue was $5,400,000 a decrease of $3,700,000 compared to the Q3 of 2022, primarily driven by the elimination of advertising revenues at Ozteca, which ceased operations at the end of 2022.

Speaker 4

This is partially offset by an increase in station revenues, which launched new markets and networks with its customers in the current period. Spectrum reported adjusted EBITDA losses of $300,000 in the 3rd quarter compared to adjusted EBITDA income of $300,000 in the prior year quarter. The decrease was primarily due to an increase in SG and A expenses at Station Group, driven by an increase in severance and salary and benefit related Non operating corporate adjusted EBITDA losses were $4,100,000 for the Q3 And decreases in employee related expenses from reduced headcount as well as a net decrease in severance expense. At the end of the Q3, the company had $55,700,000 of cash and cash equivalents, Excluding restricted cash compared to $80,400,000 as of December 31, 2022. On a standalone basis, As of September 30, 2023, our nonoperating corporate segment cash and cash equivalents of $1,500,000 compared to $9,100,000 at the end of 2022.

Speaker 4

As mentioned in previous calls, the cash balances changed as a result of working capital movements As of September 30, 2023, Innovate had total principal outstanding indebtedness of $756,800,000 up $31,500,000 from $725,300,000 at the end of 2022, driven primarily by corporate's new unsecured note with CGIC, Infrastructure's draw on their respective credit line and R2's additional borrowing from Lancer Capital, which is partially offset by Infrastructure's principal payments. Lastly, HC2 Broadcasting Entered into an amendment to its secured notes today, which extended the maturity date of its principal amount $69,700,000 from August 15, 2024 to August 15, 2025. With that, operator, we'd now like to open up the call for questions.

Operator

Thank you. Ladies and gentlemen, we will now conduct the question and answer One moment please for your first question. Your first question comes from the line of Brian Charles from R. W. Press and Pritchard.

Operator

Your line is now open.

Speaker 5

Hi. Thanks for taking my question. Hi. It's good to see the continued progress in the infrastructure business and the And the growth in EBITDA this year after kind of bottoming out a little earlier. But it does, as looking at the presentation, I just see the backlog has been Kind of consistently declining and I guess that dovetails with your talk about being more selective about the projects You take on.

Speaker 5

And I like is it fair to say that the backlog as it stands now What likely reflects higher margins coming remaining in the business and then continue to improve in the business in 2024?

Speaker 4

Yes, thanks. What I'd say is that We have seen continued margin improvement as you've seen throughout the year. We've started to see margins somewhat Stabilize, but so we expect to see come in exactly where we had discussed earlier, which was Improved margins for 2023 over 2022. And I think we'll continue to see The margins, where they're at over in what we have in backlog.

Speaker 5

Okay, fair enough. And just one follow-up there. Some of the commentary in the earnings release talked about tightening in the credit markets that is continuing to impact Commercial space. Is that more of an impact on your customer base and making them selective about which projects to go forward with? Or Is that influencing your evaluation of certain projects?

Speaker 4

I think what we've seen with the management team, with Ruston and the management team at DBM is them to be able to pivot into the markets That have the right work. And the commercial sector, As we've mentioned, has tightened mainly related to the credit markets, But we still see pretty sizable opportunities in the market and DBM has been working on converting them.

Speaker 5

Okay. If I had asked, do you think the backlog would be growing into 2024 stabilizing or Yes, continuing to decline if you can still be selective about higher margin projects.

Speaker 3

I would say it's going to be flat year over year. But that being said, there's some big projects out west, especially in Vegas That there's 4 or 5 big projects that if we get our hands on 1 or 2, we could be up big.

Speaker 5

Okay. Okay, good. Thanks. I'll get back in the queue.

Speaker 3

Thank you very much for your questions.

Operator

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
INNOVATE Q3 2023
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