INNOVATE Q4 2023 Earnings Call Transcript

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March 4, 2024

There are 3 speakers on the call.

Operator

Good afternoon, and welcome to Innovate Corp's 4th Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After 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 over to Anthony Rasmus with Investor Relations.

Operator

Please go ahead.

Speaker 1

Good afternoon. Thank you for being with us to review Innovate's Q4 2023 earnings results. We are joined today by Paul Boyte, Innovate's Interim CEO and Mike Sena, Innovate's CFO. We have posted our earnings release and our slide presentation on our website atinnovacorp.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 and will be forward looking and are being 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 differ materially from these forward looking statements. The risk factors that could cause these differences are more fully discussed 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 report.

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 that these measures provide useful supplemental data that while not a substitute for GAAP measures allow for greater transparency in the review of our financial and operational performance. At this point, it is my pleasure to turn things over to Paul Voigt.

Speaker 2

Good afternoon. Innovate delivered revenues of $361,000,000 and adjusted EBITDA of 21 $5,000,000 in the 4th quarter and revenues of $1,400,000,000 and adjusted EBITDA of $65,000,000 for the full year of 2023. We are pleased with these results and the performance of our 3 operating segments in 2023. To provide some perspective of the magnitude of progress at Innovate, when we made the strategic decision to start the transformation of HC2 to Innovate back in 2020, at that time annual revenue was $716,900,000 adjusted to exclude our former insurance Innovate has experienced significant growth and today's Innovate has experienced significant growth and today's results represent roughly a 3 year 25.7 percent CAGR on the top line and approximately 36.6 percent CAGR for the adjusted EBITDA. Over that time, DBM has continued to be a cash flow machine for Innovate and most recently experienced strong margin expansions in 2023.

Speaker 2

Pansend has benefited from key milestones hit each year by MetaBeacon and R2 and Spectrum remains focused on delivering profitability by adding new station bills, launching new networks and existing exiting unprofitable operations. We are pleased with the progress that Innovate has made over the last 3 years, but there is still much work to be done. We will continue to look for ways to optimize the value in each of our assets and remain encouraged by the future prospects at Innovate. Now moving on to the Q4 highlights and results. In the Q4, DBM Global delivered another strong quarter with revenues of $353,800,000 and adjusted EBITDA of 30,000,000 dollars Year over year, DBM significantly expanded gross margins by approximately 200 basis points and adjusted EBITDA margin by 25 basis points to 16.4% and 8.5% respectively.

Speaker 2

As we forecasted at the beginning of 2023, CVM delivered increased adjusted EBITDA margins for the full year 2023 of 7.2% compared to 6.4% for the full year 2022. DBM's total adjusted backlog, which takes into consideration awarded but not yet signed contracts, is beginning to stabilize and was at $1,200,000,000 at the end of the year. Given the trend in backlog DBM experienced in the past year, we would expect 2024 results for DBM to be slightly lower than 2023. That being said, we are optimistic that this will only be a short lived phenomenon as opportunities at DBM look strong exiting the year into 2025 and beyond, when we expect to see more projects of size to enter the pipeline. Moving on to Life Sciences, R2 Technologies had another incredible quarter.

Speaker 2

On the heels of launching its new GlacialFX system in Q3 2023, R2 sold out of GlacialFX inventory in Q4, securing R2's best system sales growth in a single quarter. From Q3 to Q4, R2 experienced a 76% increase in North American system sales and in the full year 2023 experienced 111% increase in North American system sales year over year. This growth lent to R2's single largest revenue earnings quarter since inception. R2 continued its growth in other areas of the business, experiencing 173% increase 106% increase in average monthly utilization per glacial provider from the same period last year. The machine is being used post operatively to reduce inflammation, pain, recovery time and for skin conditions and greatly expanded the usefulness of the machine.

Speaker 2

To date, R2 has provided over 20,000 patient treatments. R2 continues to expand global reach in 4th quarter with market approvals received in both Saudi Arabia and the UAE. Additionally, market awareness continues to skyrocket. From 2022 to 2023, R2 experienced a 2 13% increase in social media impressions, a 4 91% increase in provider location searches and a 50% increase in lead generation and product interest. Our 2 glacial providers surveyed say that the customer satisfaction and practice retention rates have dramatically increased since the introduction of a glacial product, solidifying that the glacial product portfolio's ability to improve patient outcomes through the reduction in inflammation is the new standard of care.

Speaker 2

At MediBeacon, the company continues to work through their substantive review for the kidney monitoring program with the FDA. MediBeacon met with the FDA in the Q1 of 2024 and is working interactively to resolve outstanding questions in order to move to approval status. MediBeacon has disclosed positive findings in its pivotal study in 2023 for which it met the pre negotiated primary and secondary endpoints for efficacy and safety respectively. The study can be found at clinicalstudies.gov. The study results are expected to post on this site within the next 30 days.

Speaker 2

As a reminder, the FDA previously granted FDA breakthrough device designation in the United States. We continue to be pleased with the progress across the Pansend portfolio. And at Spectrum, the company is gaining considerable traction with sizable new network launches. Specifically, we've launched free TV and 3 large sports networks. These new network launches include favorable revenue agreements across the board and early results are promising.

Speaker 2

As a reminder, we are also focused on repurposing our spectrum to maximize revenues. We are entering into an agreement with the public broadcasters to provide ATSC 3.0 stations to lighthouse their network signals. We are pursuing a much larger relationship with Public Media Venture Group, who represent over 100 PBS stations in major markets across the country. In addition to light housing PBS signals, we will be pursuing PBS station commercial opportunities and data casting and other profit applications. As it relates to 5 gs broadcast TV, we are actively exploring opportunities in the United States and have filed an application with the FCC to convert existing stations to 5 gs broadcast in order to participate in Phase 2 proof of concept.

Speaker 2

The most important reminder here is that 5 gs technology will be able to readily deliver broadcast signals to 100 of millions of smartphones across the United States using its existing technology. We are working closely with Qualcomm, the technology leader in 5 gs Broadcasting. This will allow Broadcasting to optimize for future revenues moving forward. We are highly focused on addressing our capital structure, which we believe is the key driver to the to underperformance of our stock price. Our focus for 2024 will be to utilize our non cash flowing assets to address our capital structure and set the company up for a refinance in 2024.

Speaker 2

To that end, we continue to make progress exploring opportunities for our non cash flowing businesses. However, exiting these businesses for the right value takes time. We are optimistic on the overall M and A market and hope to reach resolution in 2024 as we are beginning to see positive indicators in the market along with positive momentum with these assets as discussed above. We have engaged bankers as there has been incoming interest from strategics on both R2 and MetaBeacon. As we announced in late February, we are launching a fully backstopped $35,000,000 rights offering and a private sale to shore up our liquidity needs for 2024 and believe this will give us the runway we need to push our non cash flowing assets past important milestones and exit these businesses for the right value.

Speaker 2

As we move into 2024 here, we are encouraged by the positioning of each of our business segments and look forward to updating you on their progress throughout the year. With that, I'll turn it over to Mike for a review of our financials and capital structure.

Speaker 1

Thanks, Paul. Consolidated total revenue for the Q4 of 2023 was $361,000,000 a decrease of 11.8% compared to $409,300,000 in the prior year period. The decrease is primarily driven by our Infrastructure segment and to a lesser extent our Spectrum segment. Net loss attributable to common stockholders for the Q4 of 2023 was $9,600,000 or $0.12 per share compared to a net loss of $7,000,000 or $0.09 per share in the prior year period. Total adjusted EBITDA was $21,500,000 in the Q4 of 2023, a decrease from $28,100,000 in the prior year period.

Speaker 1

The decrease was driven by our Infrastructure, Life Sciences and segments and by the elimination of equity method income from our investment in HMN, which was sold in March of 2023, which was partially offset by our non operating corporate segment. At Infrastructure, revenue decreased 10.9% to $353,800,000 from $397,300,000 in the prior year quarter. This decrease was primarily driven by the timing and size of projects at DBMG's commercial steel fabrication and erection business, which was partially offset by an increase in revenue at the industrial maintenance and repair business, Anchor Steel and the construction modeling and detail business due to timing and size of projects. Infrastructure adjusted EBITDA for the Q4 of 2023 decreased to $30,000,000 from $32,700,000 in the prior year period. The decrease is primarily driven by an increase in recurring SG and A expenses and lower contributions from Bankers Steel, which was partially offset by increased margins of the industrial maintenance and repair business.

Speaker 1

As of December 31, 2023, reported backlog was $1,100,000,000 and adjusted backlog, which takes into consideration awarded but not yet signed contracts, was $1,200,000,000 compared to reported an adjusted backlog of $1,800,000,000 at the end of 2022. As Paul explained earlier, we continue to see meaningful opportunities in the market and DBM remains focused on converting those opportunities into backlog. DUMG ended the quarter with $198,800,000 principal amount of debt, which is a decrease of $44,200,000 from year end 2022, primarily driven by an early note repayment, normal debt amortization payments and the reduction of the credit facility. BBMG has been able to reduce its debt obligations through early payments and line reductions as invested working capital has begun to return to the business, a trend we continue to see in early 2024. As the backlog stabilizes, we expect flat working capital needs in 2024.

Speaker 1

Additionally, on December 12, 2023, BBMG and UBM entered into an amendment that extended the maturity date of the revolving line from May 31, 2024 to August 15, 2025, increased the interest rate spread for the revolving line by 0.35% across all peers and established an interest rate floor of 4.25%. At Life Sciences, the increase in adjusted EBITDA losses for the quarter was primarily due to higher equity method losses recognized from Pansend's investment in MetaBeacon due to our additional investment into MetaBeacon, which resulted in previously suspended losses to be recognized due to investments carrying amount being reduced to 0. This was partially offset by a decrease in SG and A expenses at R2, driven by a decrease in marketing costs as a result of cost reduction initiatives and a decrease in compensation expenses. At Spectrum, revenue was $5,700,000 a decrease of $5,000,000 compared to the Q4 of 2022, primarily driven by the elimination of advertising revenues at Azteca, which ceased operations at the end of 2022. This was partially offset by an increase in station revenue, which launched new markets and networks with its customers during 2023.

Speaker 1

Spectrum reported adjusted EBITDA in the 4th quarter decreased to $1,100,000 from $2,500,000 in the prior year quarter. The decrease was primarily due to a one time related to the termination of Ozteca in the prior year period, which was partially offset by a decrease in unrepeated SG and A expenses in the prior period. Non operating corporate adjusted EBITDA losses were $2,500,000 for the Q4 of 2023, an improvement from the Q4 of 2022 of $1,200,000 The improvement was primarily driven by a decrease in bonus expense and legal expenses. For the full year, adjusted EBITDA losses for 2023 were $13,500,000 an improvement from the full year 2022 of $3,200,000 At the end of the Q4, the company had $80,800,000 of cash and cash equivalents, excluding restricted cash, compared to $80,400,000 as of December 31, 2022. On a standalone basis, as of December 31, our non operating corporate segment had cash and cash equivalents of $2,500,000 compared to $9,100,000 at the end of 2022.

Speaker 1

As mentioned by Paul, we are launching the fully backstop rights offering and private sale to shore up liquidity. The proceeds would be used to settle an intercompany advances for our February 1, 2024 interest payment and to help meet our liquidity needs while we execute our strategy in 2024. As of December 31, 2023, Innovate had total principal outstanding indebtedness of $722,800,000 down $2,500,000 from 725 $300,000 at the end of 2022, driven primarily by the decrease in infrastructure's outstanding debt, which is partially offset by corporate's new unsecured note with CGIC and R2's additional borrowings from Lancer Capital. With that, operator, we'd now like to open up the call for questions.

Operator

Thank There are no further questions at this time. Paul, please proceed with the closing remarks.

Speaker 2

Yes. Thank you. I just want to say thank you to everybody for your continued support and we're working very hard and diligently to make this a very profitable company. Thank you very much.

Operator

Ladies and gentlemen, this concludes today's

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Earnings Conference Call
INNOVATE Q4 2023
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