Star Equity Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 20, 2024

There are 5 speakers on the call.

Operator

Greetings, ladies and gentlemen, and welcome to Star Equity Holdings First Quarter 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 ks, 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 due information, future events or otherwise.

Operator

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 U. S. 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, Lina Katy of The Equity Group at 212-836 9611.

Operator

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.

Speaker 1

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.

Speaker 1

Additional acquisition details can be found on the 8 ks 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 Business Solutions division. Specifically, 4 large commercial projects, which we expected to be completed in the Q1, could not be completed due to customer financing delays. 3 of these projects slipped into the 2nd 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 percent to $9,100,000 compared to $12,300,000 in the Q1 of 2023.

Speaker 1

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.

Speaker 1

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.

Speaker 2

Dave? All right.

Speaker 1

Dave is mobile and doing some connection difficulty. So we're going to have our Senior Vice President of Finance. Okay. Go ahead, guys. I'm sorry, I was on mute.

Speaker 2

All right. Let's now turn to Star Equity's consolidated financial results. Due to the sale of our Healthcare business on May 4, 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, twenty twenty four, SG and A increased by 11.1% versus Q1 of 2023.

Speaker 2

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 $2,200,000 in Q1 compared to a net breakeven results in Q1 of 2023. Non GAAP adjusted net loss from continuing operations in Q1 was $1,400,000 compared to an adjusted net income of $500,000 in Q1 of 2023. Non GAAP adjusted EBITDA from continuing operations was a loss of $1,100,000 in Q1 versus a positive $800,000 in Q1 of 2023. On a standalone basis before public company costs, our Building Solutions division generated a non GAAP adjusted EBITDA loss of $300,000 in Q1, which was down from positive $2,200,000 in Q1 of 2023.

Speaker 2

Consolidated cash flow from continuing operations for Q1 was an outflow of $2,400,000 versus an inflow of $5,100,000 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 first quarter, we had just $1,900,000 interest bearing debt and our consolidated unrestricted cash balance stood at $14,700,000 at the end of Q1 as compared to $5,000,000 a year ago. Turning to our investments division, our equity securities at the end of the quarter amounted to $5,600,000 while our rollover equity and note receivable investments resulted from the sale of our healthcare business to TTG are valued at $6,000,000 $7,600,000 respectively.

Speaker 2

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

Speaker 1

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. TimberTech 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 square foot 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.

Speaker 1

With the acquisition of TimberTech, we entered the engineered wood products industry, one that is experiencing increasing adoption over structural alternatives. Its glulaminated wood products or Glu Lam 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 TempurTech's products are important components of a broader range of end markets.

Speaker 1

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 hangers. 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 Tempurtech's history of profitability and strong cash generation to improve our overall financial position. In fiscal year 2023, TempurTech's unaudited financials reported revenue of $18,800,000 and adjusted EBITDA of $5,500,000 In comparison, our Building Solutions division reported 2023 revenues of $45,800,000 and adjusted EBITDA of $4,400,000 Again, using unaudited financials on a trailing 12 months pro form a basis, TimberTech would have represented roughly 1 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.

Speaker 1

As has been the case for several years and especially following the $40,000,000 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 had 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.

Speaker 1

I'll now turn the call over to the operator for

Operator

The first question today comes from Theodore O'Neill with Litchfield Hills Research. Please go ahead.

Speaker 3

Hey, thanks very much. Rick, the quarter seems self explanatory. So I'd like to ask questions about Timber Technologies. The a couple of things. Could you talk about what the synergies are between Timber Technologies and the other components of Building Solutions?

Speaker 3

And is there is this going to 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 just talk about the financing for it as well, please?

Speaker 1

Yes. 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 recall, and we have an expanding group of very, very talented executives in our Building Solutions division.

Speaker 1

We're looking at a number of different alternatives of how to expand into our vacant factory and the expansion of our Gluam business is one of those alternatives. We are 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.

Speaker 3

And could you talk a little bit about the financing for this?

Speaker 1

Dave, can you take that one? Sure. Yes. So on the financing piece, we did use a lot of our cash hoard to help purchases, 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 $7,000,000 acquisition term loan.

Speaker 1

It's a 5 year structure that amortizes over those 5 years and it's at a 7.85% rate, which we think in this environment is pretty attractive.

Speaker 3

Okay. Thanks very much.

Operator

The next question comes from Tate Sullivan with Maxim Group. Please go ahead.

Speaker 4

Thank you. On Timberlake, 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 GluLamp?

Speaker 1

Yes, I would say it's a 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.

Speaker 4

And just so EWP or Engineered Wood Products, I mean specifically refers to Timber Technologies, the industry there else?

Speaker 1

Yes. Timber Technologies is a part of the Engineered Wood Products Industry.

Speaker 4

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

Speaker 1

First of all, it's a very impressive facility. It's very large. The company has been building and expanding in that facility for 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.

Speaker 1

And we're really pleased with the talent and dedication that this team has undertaken over the years and built a very, very successful business.

Speaker 4

Thank you. And did you mention it to the 2 separate facilities, the 69,000 square foot facility and then the separate manufacturing facility or is it all one facility? No, it's all one. Okay. So the subsequent real estate transaction is for the 69,000 Square?

Speaker 1

Yes. Correct. Right.

Speaker 4

Okay. And then on KBS, are 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?

Speaker 1

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 financial.

Speaker 4

Okay. Thank you very much.

Operator

This concludes today's question and answer session. I will turn the call back over to Rick Pohlman for closing remarks.

Speaker 1

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

Thank you for joining the Star Equity Holdings First Quarter Conference

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