Star Equity Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 13, 2024

There are 5 speakers on the call.

Operator

Greetings, ladies and gentlemen, and welcome to Star Equity Holdings 2nd 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 new 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 financial 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 Katti at 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. 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, Drew. Good morning, everyone. We appreciate you joining us today for our Q2 2024 results conference call. On the call today with me are our Executive Chairman, Jeff Eberwein and our Chief Financial Officer, Dave Noble. I'll start today by providing an overview of our recent business developments and financial highlights, then Dave will provide additional details on our consolidated financial results.

Speaker 1

Jeff will then discuss our Enservco investment announced yesterday morning. Before turning to second quarter highlights, I want to comment on a couple of recent transactions. On May 17, we closed the acquisition of Timber Technologies. I'm pleased to report that the integration of that business into our Building Solutions division and the acquisition of its associated real estate assets are substantially complete. Although Timber Technologies like Edge Builder and KBS is a wood based construction company, Its distribution channels and end products vary in important ways.

Speaker 1

As a result, we believe its revenue streams are less prone to interest rate fluctuations and the general market softness we're experiencing in the rest of the segment. It also generates healthy cash flow and substantially improves our overall profitability. We continue to believe this was a valuable and accretive acquisition for our shareholders, both in the near and long terms. Additionally, in July, we closed 2 sale leaseback transactions for our South Paris, Maine and Big Lake, Minnesota facilities, totaling approximately $7,200,000 in net proceeds. Simultaneously, we entered into long term lease agreements to continue to operate those facilities.

Speaker 1

Importantly, these financings should have no impact on operations at either business. The closing of these sale leasebacks aligns with Starters' commitment to strategic capital allocation and the prioritization of EBITDA generating assets. We seek to make high grade additions to our asset portfolio and optimize the cost of capital with the goal of growing net asset value per share over the long term. Accordingly, we announced this morning a $1,000,000 share buyback program to capitalize on what we believe is a dislocation in the market value of our common stock. Moving on to the financial and operating highlights for the Q2 of 2024.

Speaker 1

Our 2nd quarter revenue increased 51.6 percent over the Q2 of 2023, while gross margin declined by 14.9%, primarily due to a one time purchase price adjustment related to the Timber Technologies acquisition. The revenue increase was driven by the inclusion of Timber Technologies revenue beginning May 17 and the inclusion of a full quarter of revenue from our Q4 2023 acquisition of Big Lake Lumber. The decline in Building Solutions performance on an organic basis reflects the continued customer impact of credit tightening on project funding and timing. While our sales pipeline remains strong, the conversion of these opportunities to sign backlog has been slower than historical norms. However, I want to emphasize that generally we're not seeing large project cancellations, only delays and timeline extensions.

Speaker 1

We believe our reputation as a reliable and high quality partner in the markets we serve gives us a unique and sustainable position, which we will continue to leverage as the construction sector regains strength. Furthermore, we continue to focus on all elements of our growth strategy, including building solutions division expansion, acquisitions that would mark our entry into new industries and exploring new opportunities at our Investments division. As exemplified by our acquisition and integration of Timber Technologies, identifying, evaluating and completing accretive acquisitions remains an important pillar of our holding company strategy for delivering long term growth and shareholder value. Now, I'll turn the call over to Dave Noble, our CFO to provide additional 2nd quarter consolidated financial highlights. Dave, please go ahead.

Speaker 2

Thank you, Rick, and good morning. Let's now turn to Star Equity's consolidated financial results. I'd like to note that due to our sale of the Healthcare business on May 4, 2023, all results and historical comparisons relate only to continuing operations, include construction and investments. Digirad Health is now reported as part of our discontinued operations and does not appear at all in our 2024 results. In Q2, 2024 SG and A increased by 26.8% versus Q2 of 2023.

Speaker 2

This was largely attributable to a one time $1,300,000 impairment related to our cost method equity investment in TTG, which we acquired through

Speaker 3

a rollover equity stake as part of

Speaker 2

the Digirad sale last year. We reported this impairment after analyzing the financial performance of TTG and considered comparable company EBITDA valuation multiples. Moving on to the bottom line results for Star Equity, we reported a net loss from continuing operations of $3,800,000 in Q2 of 20 24 compared to a net loss from continuing operations of 1 point $4,000,000 in Q2 last year. Non GAAP adjusted net loss from continuing operations in Q2 was $900,000 which is roughly the same as in Q2 of 2023. Non GAAP adjusted EBITDA from continuing operations was a loss of $500,000 in Q2 versus a loss of $800,000 in the same period last year.

Speaker 2

Consolidated cash flow from continuing operations for Q2 was an outflow of $4,300,000 versus an inflow of $1,900,000 in Q2 of 2023. The negative cash flow from operating activities is attributable to weaker operating performance as gross margins were lower than in the previous year despite higher revenues. As of June 30, 2024, our consolidated balance sheet considerable cash outlay associated with our acquisition of Timber Technologies and its related real estate. At the end of our Q2, our consolidated unrestricted cash balance stood at $2,500,000 as compared to $21,400,000 a year ago. As Rick mentioned, in July, we closed 2 sale leaseback transactions, which added approximately $7,200,000 in cash to our balance sheet.

Speaker 2

Turning to our investments divisions, our holding our investment division, our holdings in public securities at the end of the quarter amounted to 3,800,000 dollars versus $4,800,000 a year ago. Our private common equity investment and note receivable from the sale of Digirad to TTG were valued at $4,700,000 $7,800,000 respectively. Now I'd like to turn the call back over to Jeff for some additional remarks regarding our recent ENSERVCO investment. Thank you, Dave.

Speaker 3

We were excited to announce yesterday our investment in Emservco. This investment advances Star's expansion strategy by further diversifying our portfolio beyond building solutions, marking our initial entry into the energy services and transportation and logistics sectors. We believe the strength of ENSERVCO's management team and its ongoing reorganization position it well for long term growth. We look forward to participating in ENSERVCO's future success and believe this investment will be highly accretive to our shareholders. Creating value in microcap companies undergoing change has been a core tenant of Star's public holding company strategy since inception, and we're excited to partner with ENSERVCO on this investment to further validate this strategy.

Speaker 3

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

Operator

We will now begin the question and answer The first question comes from Tate Sullivan with Maxim Group. Please go ahead.

Speaker 3

Thank you. Good morning all. Jeff, starting with Enservco, can you talk about the benefits of how you structured the acquisition of the share interest versus the entire company? Yes. We think our common stock is significantly undervalued, which is why we announced the $1,000,000,000 stock repurchase program.

Speaker 3

So we just had a creative discussion about how to help them close the transaction that they're working on with the acquisition of Buckshot and also boost their shareholder equity. And what we came up with is taking an initial stake in the company It's around 20% to start a Board seat. And so we got a common equity interest in exchange for our preferred stock. And we get to monitor the transition. So we're not ruling anything in, we're not ruling anything out at this time, but we strongly believe in the walk, run, sprint philosophy.

Speaker 3

And this gives us a chance to observe and help and learn about these 2 sectors. Great color. Okay. Thank you. And then Dave, going forward to mark, will you mark to market the share interest in Servco?

Speaker 3

It will be within the investments division, will it work that way? Or how will the accounting treatment work? Dave, you take that?

Speaker 2

Yes, it will fit in the investments division. I mean, there's two pieces of this and we're still working out the accounting of a loan that was given to them to help finance the acquisition of Buckshot.

Speaker 3

But yes,

Speaker 2

it will it's not going to be consolidated. We don't have control of the entity. So it's a mark to market position.

Speaker 3

Okay. But we take we do show the numbers both ways. So any unrealized gains, losses we have on equity securities or lumber derivatives that we used to hedge, we back those out of adjusted EBITDA. So investors can look at it. We give them the data to look at it both ways.

Speaker 2

Perfect.

Speaker 3

Okay. Okay, thank you.

Operator

The next question comes from Theodore O'Neil with Litchfield Hills Research. Please go ahead.

Speaker 4

Okay. Thanks very much. First question I have is about gross profit. In the prepared statement here, it says it's impacted by the TimberTech acquisition. And then further on, it says the impact was 574,000.

Speaker 4

Dollars Is that the entire amount that impacted cost of goods in the quarter?

Speaker 2

Yes, they'd be 574,000 is purely due to evaluation that we were required to do for TimberTech and allocate that purchase price. So that relates to TimberTech. That's a one time write up of the finished goods inventory and they have to write that up to what we could sell it for. So because we purchased that company and finished goods existed, we had to write that up as part of that. So it's really an accounting adjustment, it's a one time thing.

Speaker 2

It's going to reappear in future quarters. And then additionally, we did suffer some on our legacy business, some decrease in gross margins just given current market conditions, which impacted profitability.

Speaker 4

Okay. And I'm just curious, is purely an accounting issue, but the $1,300,000 of related to the cost method investment in TTG that impacted SG and A in the quarter. Why isn't that just in other income? Why is that in SG and A?

Speaker 3

It's just U. S. GAAP. Yes. I asked the same question of our accounting team.

Speaker 3

And U. S. GAAP is what it is. I agree logically, you think it'd be in other income, not SG and A, but the GAAP requirements, don't care about my logic. And unfortunately,

Speaker 2

GAAP is one way as well. So we took an impairment, should that company expect it will recover over time and produce more EBITDA. We're not ever allowed to write it back up until at some point we sell it.

Speaker 3

And Tay, what we do on that is we just follow whatever the private equity firm does. We're not doing anything higher or lower or different. They do an analysis every quarter. And if they write it down, we write it down.

Speaker 2

We did diligence that calculation

Speaker 3

and we deem it reasonable.

Speaker 4

Sure. And just overall on the tone of business, I mean, I understand what it says here in the press release about stuff being pushed in the second half, but is that are you comfortable it's going into the second half or do you think more of it's going to go into the first half of next year? What's happening out there?

Speaker 3

Rick, why don't you take that one?

Speaker 1

Sure. We're seeing visibility to the future is getting a little bit hazy in this environment as things are slipping to the right, if you will. But we feel like in the second half, we're going to see some improvement. We just don't have the ability to say how much. And this is based primarily on the feedback that our customers are giving us about their ability to fund their construction projects and to acquire financing where that's required.

Speaker 4

Okay. Thanks very much.

Operator

Again, if you have go ahead, sorry.

Speaker 3

Yes. This is Jeff. I was just going to add, if there is a silver lining or good news, we're not seeing projects get canceled. It's more just construction starting later than what the original plan was and not been due to delays in getting financing. In some cases, there have been some permitting delays, some weather delays.

Speaker 3

But there's so there's a general lack of urgency and then the ones that do want to go fast that are dependent on financing, It's just taking longer to get the financing in place than say 2 years ago. But like I said, if there's good news, it's that we're not seeing projects to get canceled. We're just seeing them get pushed to the right.

Operator

That concludes today's question and answer session. I will now turn the call over to Rick Coleman for closing remarks.

Speaker 1

Thanks, Drew. Thanks for your time today, everyone. We appreciate your interest and your continued feedback and support. So don't hesitate to contact us anytime. We're excited about the steps we're taking on your behalf, and we look forward to updating you as our story develops.

Operator

Thank you for joining the Star Equity Holdings 2nd quarter conference call. Today's call has been recorded and will be available on the Investor section of our website, www.starequity.com. Thank you. You may now disconnect your line.

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Star Equity Q2 2024
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