Q2 2021 HC2 Holdings Inc Earnings Call

Good morning, and welcome to HC 2 holdings second quarter 2021 earnings Conference call. Today's call is being recorded and we've allocated 1 hour for prepared remarks and Q&A at this time I'd like to turn the conference over to Anthony Rosman Investor Relations for HC 2 thank you.

You may begin.

Good morning, Thank you for being with US to review HC 2 second quarter 2021 earnings results. We are joined today by Abbvie Glaser Chairman of HC, 2 Wayne Bar Junior CEO of HC, 2 and Mike Sena HC, 2 chief financial Officer as usual, we have posted our earnings release and our slide presentation.

On our website at H C..2 dotcom.

We'll begin our call with prepared remarks to be followed by Q&A session. This call is also being simulcast and will be archived on our website.

Now for some brief disclaimer during this call management may make certain statements and assumptions, which are not historical facts 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 HC choose actual results to differ materially from these forward looking statements the.

The risk factors that could cause these differences are more fully discussed in our <unk>.

Cautionary statement that is included in our earnings release, and our slide presentation and further detailed in our 10-K 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.

2 disclaims any intent or obligation to update or revise these forward looking statements, except 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.

Finally results for the insurance segment, which was sold on July 1st.

Excluded from today's discussion and analysis of performance for the comparable periods.

At this point, it's my pleasure to turn things over to Avi Glaser.

Good morning, everyone I'd like to thank you all for joining us today as we provide some exciting updates on our company's progress we believe that our excellent second quarter results, including record backlog of D. B M record adjusted EBITDA at spectrum and strong progress on the commercial launch of glacial Rx in life Sciences, our preview on the long term.

Power and potential of our strategic plan.

First let's talk about infrastructure.

A key milestone for our company was the recent closing of our acquisition of banker steel would you added an industry leader for GBM, expanding the size and geographic footprint, what was already 1 of the largest steel fabrication and erection companies from U S.

For the addition of bankers steel E. B M reported a record product backlog of $1.6 billion at the end of the court.

And this doesn't even include another $300 million for contracts that had been verbally awarded but not yet officially sign which makes our total adjusted backlog $1.9 billion.

I guess from additional good news to share with everyone today.

E. P. M was just last week what are the contract for the EU would basketball events Center, new home of the NBA Los Angeles Clippers. Please.

Please note that given the award was after the end of the quarter. This project is not included in our $1.9 billion of adjusted backlog.

Your action for this project was planned to start from the summer of 'twenty to be true and we look forward to keeping you posted on the progress of this new arena.

It's an outstanding asset with its expanded size and geographic reach.

Very well positioned to capitalize on this record backlog of projects in the quarters ahead. In addition, we believe the potential infrastructure spending bill before Congress can only be viewed as a positive.

Second, let's talk about Pan standard our life Sciences portfolio.

Shortly after quarter end, we increased our stake arc technologies, which recently launched its first commercial offering and is working towards the second product launch glacial spa in the coming months for.

For those of you who don't know what our 2 guys are 2 makes revolutionary devices to lightning brightens skin.

Billion dollar static dermatology market.

<unk> Revolutionary system is the first 8 spot removal treatment. They uses patented cooling technology to freeze melamine into source soothing skin, well effectively removing age spots.

Our juice products glacial or ex disrupt conventional heat based laser treatments, which often causes inflammation and other painful side effects.

We are tremendously optimistic about these new product developments and a team that supports them.

Also excited about the long term prospects for other innovative companies in the pants and portfolio.

Third we are beginning to reap the benefits of our spectrum assets, which also had a record performance reported $2.7 million in adjusted EBITDA, a dramatic reversal from the negative $1.2 million and adjusted EBITDA for the same quarter, just 1 year ago.

Operational improvements along with increased OTT or over the air broadcast revenues and the expansion of station footprint with new station construction position. This business to drive continued growth alongside the rise of OTT broadcast accessing homes across the country.

Finally, as you all know we plan to change the name to innovate Corporation during the third quarter innovators of platform of best in class assets. We believe are poised to thrive in the new economy innovating to we are maybe it means what we do this is an exciting time for everyone involved in our company employees stockholders and customers we are energized.

To begin our next chapters innovate and for more color on all our growing businesses I am pleased to turn the call over to Wayne Bar Junior debt.

Our base you do.

Thanks, Avi and thank you all for joining us today.

We are pleased with our second quarter results, which we believe demonstrate the company's continued evolution and the strength and potential of our assets, which set us further along the path to succeed with our long term strategy.

Our goal is to identify unique market opportunities that will grow in value in today's evolving economy, and we've made a number of strategic decisions in the second quarter that if the debt.

That objective.

The team is excited and engaged but we know there's more work to be done to grow our business segments and unlock meaningful value for stockholders.

Importantly, we achieved the near term goals, we highlighted for you last quarter as Avi mentioned, we closed our acquisition of banker steel increasing our backlog to a record level of $1.9 billion.

We also closed on our sale of Continental east to transactional milestones for significant steps forward and provide us with enhanced liquidity to ramp up our strategy and support our businesses.

Additionally, concurrent with the completion of the bankers steel acquisition and facilitated in part by the enhanced liquidity and other improvements at HC 2.

D. B M entered into a new credit facility, which was used to fully repay dpm's existing debt obligations from.

And a portion of the bankers steel acquisition.

And provide additional working capital capacity.

More recently, we announced that we provided an additional $15 million in series seed funding to our 2 technologies through pants, and our life Sciences segment.

The additional investment will allow our true to continue the rollout of the 2 products as well as fund the further development of glacial spa glacial AI and other cutting edge aesthetic dermatological products.

I will now provide you an update on each of our 3 business segments.

In infrastructure, we completed the acquisition of banker steel and me.

Krish steels, leading presence on the east coast is an ideal complement to Dbm's, primarily west coast focused footprint and the addition of bankers steel to our portfolio more than doubles the size of our contracted backlog clearly significant.

Total adjusted backlog for D. B M was $1.9 billion at quarter end.

Price of $988 million in legacy D B M backlog.

$911 million of backlog a banker steel.

Backlog of infrastructure has grown in line with our expectations as we are starting to see the market rebound from Covid disruptions.

We are taking advantage of the recovery seen in commercial industrial services and public sector projects as the economic environment continues to evolve and believe that our current backlog provides good visibility and runway for the next couple of years.

We are also keeping an eye on the various federal infrastructure bills as a catalyst and significant opportunity for GBM.

We anticipate we would see the impact of potential new projects associated with the build in the 12 to 18 months periods following final passage.

In addition to an infrastructure bills direct impacts on our DBM business. We believe the current emphasis on infrastructure will be a boon for the construction industry generally and given the size experience and expertise of D. B M. We would expect to benefit from any increased demand for D. B M services that occurs.

We also acknowledge the presence of industry wide challenges from short term, including elevated steel prices labor constraints and supply chain issues. However, we have not seen a significant impact from these challenges and we continue to find successes in our operational efficiencies and business developed.

Efforts.

Turning now to life Sciences, our plan remains on track and we infused an additional $15 million and our 2 to further grow that business.

The funds will be used to accelerate U S commercialization of glacial or ex.

The investment will also fuel global growth and fun further innovation and product development that are true.

Given the tremendous growth potential of our true we were very pleased to be in a position to provide the additional financial resources to accelerate the revenue driving phase following the commercial launch of glacial Rx and more broadly to support the development of innovative technologies and global expansion being pursued by this world class.

Team.

We are applying the lessons learned from the glacial or ex launch to the launch of glacial spa in China.

We gained a number of important insights around manufacturing and shipping that will help to ensure a successful launch of glacial spa, which we now expect to take place during the second half of this year.

We also remain excited about prospects for that matter because the U S. Pivotal study is on track to begin in the fourth quarter and we are in constant dialogue with the FDA to ensure we are doing everything we need to begin the study on time.

We're happy with the progress made across the pension portfolio and optimistic about our ability to capitalize on the ongoing growth opportunities in this business.

At spectrum, we achieved record level, adjusted EBITDA of $2.7 million and with improved operations cost cutting and revenue improvements. We saw both our network operations and station group contributing to the third straight quarter of positive adjusted EBITDA results.

On the station group side, we reached an agreement with Scripps networks to broadcast all 9 of their networks and 47 stations, which represent 143 channels for programming and the meaningful annual revenue contribution for broadcasting.

These networks comprise 9 of the 81 networks using our platform today.

We are in ongoing discussions with Scripps and other content providers about broadcasting additional digi nets on our platform as we seek to take advantage of the increased interest. These content providers are exhibiting and our extensive distribution platform.

While the scripts agreement has a fixed rate and eastern arrangement.

Environment has also provided broadcasting with more opportunities to structure, our business deals as revenue shares, which we believe present more revenue upside.

We've previously disclosed that broadcasting is in the process of constructing new stations using our portfolio construction permits.

As of today, we are targeting 25, new station builds which are on schedule for completion by the end of the first quarter 2022.

These 25, new stations will bring us to a total of 252 stations in the station group once completed.

We plan to fund the construction of these new stations from the proceeds from asset sales, including construction permits as well as cash from operations.

Overall, we are seeing the benefits of innovate sharpened focus on our 3 operating segments and we entered the third quarter with strong momentum.

All 3 businesses continued to reach important milestones in their business life cycles, and we remain confident in their ability to deliver meaningful growth and value creation in the years ahead.

We are highly confident in the value of our current assets and we believe that our businesses are exceptionally well positioned to benefit from the growth catalysts that are emerging as part of the new economy.

With that I'll turn it over to Mike for a review of our financials and capital structure.

Thanks, Wayne I will first review our financial performance and then I'll walk you through key changes to our capital structure to help you bridge the quarter and the key transactions that have taken place in the first half for 'twenty 'twenty 1.

Consolidated total revenue for the second quarter of 2021 was $243.8 million an increase from $34.1 per cent compared to 181.8 million in the prior year period.

The increase was driven by our infrastructure segment due primarily to Dbm's recent acquisition of bankers steel.

As well as from higher revenues across the B M service offerings attributable to timing of project work under execution and backlog mix.

Net loss attributable to common and participating preferred stockholders for the second quarter of 2021.

It was $23.7 million or <unk> 31 per share compared to net income of $12.7 million or <unk> 25 per share in the prior year period.

Total adjusted EBITDA, which excludes discontinued operations was $6.5 million in the second quarter 2021 down from adjusted EBITDA of $10.6 million in the prior year period.

The decrease was driven by margin compression and infrastructure combined with the timing of work under execution and increased spend that our life Sciences segment.

This was offset by continued improvement in our spectrum segment.

Now onto some color for each of our 3 operating segments at infrastructure revenue increased 34, 6% for 232 million from $172.3 million in the prior year quarter.

As discussed earlier this increase is due to the acquisition of bankers deal as well as higher revenues Crusty B M service offerings.

Infrastructure adjusted EBITDA for the second quarter of 2021 decreased from $19.1 million in the prior year period for $13.9 million.

The decrease was driven by the timing of project work under execution and the change in backlog ex including the impact of market pressures on point of sale margins in the current year period.

Partially offset by the contribution from bankers steel as.

As we have previously discussed in our fourth quarter lack of new work being released due to uncertainty during the peak of the pandemic was putting downward pressure on point to show margins.

Burning off the backlog signed during the height of the pandemic.

Well, we have signed a number of large projects into our backlog, we continue to see larger more complex projects come into the market larger long term projects to give us greater opportunity to improve margin through optimization of execution strategies.

The infrastructure segment continued to experience additional costs of $4 million during the quarter related to certain measures to comply with COVID-19 protocols and consistent with prior periods, we have excluded them from our adjusted EBITDA.

While these costs remained elevated in the second quarter, we expect COVID-19 related cost add backs to be minimal for the remainder of the year.

As of June 32021 reported backlog was $1.6 billion up from $395 million at the end of the fourth quarter 2020.

Adjusted backlog, which takes into consideration awarded but not yet signed contracts was $1.9 billion up from 608 million net yeah end of last year.

The bankers steel acquisition added roughly $911 million of backlog.

We are beginning to capture some larger project wins, finishing by Wayne over the past 2 quarters and expect to be running at a high capacity in the second half of 2021 and into 'twenty 'twenty 2 as we burn off the record level backlog.

We generated nearly $400 million of sales into backlog in the quarter for D. B M exclusive of the backlog added by the bankers steel acquisition.

Which highlights the continued strength of our pipeline.

In addition, we are starting to see improvements in point of sale margins as we see more and more construction projects being awarded.

This prospect combined with a robust backlog of the business are providing greater visibility as we look into the future.

At life Sciences, the increase in adjusted EBITDA losses were primarily driven by scaling of operations that are true technologies, including an increase in sales and marketing expenses.

To support sales revenue growth and further commercialization efforts as well as continue the development of its product platform and an increase in spend net of beacon as they prepare for their final pivotal study.

At spectrum revenue increased 11, 6% for $10.6 million driven by high station revenues as we continue to increase utilization across our stations from both new and existing customers, which more than offset lost revenue from the sale of non core stations.

Vectren delivered adjusted EBITDA of $2.7 million in the second quarter compared to an adjusted EBITDA loss of $1.2 million in the prior year quarter.

Results reflect SG&A cost reductions continued cost savings in the network business and exiting high cost non core stations combined with the revenue improvement as described above.

Non operating corporate adjusted EBITDA losses for $5.7 million for the second quarter 2021 up from the second quarter of 2020 by $2.1 million.

The increase was largely driven by acceptance of our mediators proposal with the former chairman President and CEO regarding a separation from the company.

In addition, the prior year second quarter reflected a benefit from changes to the executive compensation plan that went into effect in the comparable period, which reversed executive and employee bonus accruals recorded in previous periods.

The end of the second quarter, the company had $18.1 million of cash and cash equivalents compared to $43.8 million as of December 31, 2020.

On a standalone basis as of June 32021, the corporate segment had cash and cash equivalents of $2 million compared to $27.5 million at the end of 2020.

During the quarter, we used $25 million of cash to fund a portion of the bank for steel acquisition.

In addition, we made an initial draw on our revolver, which requires a minimum balance of $5 million and used the proceeds along with cash on hand for the DS $10.6 million of our series day and 18 preferred stock.

Subsequent to the quarter on July 1 we closed on the sale of Continental assurance and received $65 million in cash as well as an exchange of approximately $16 million of the remaining agency preferred shares which were owned by Continental for me.

New classes of preferred shares for them extended maturity to 2026.

Our indenture allows us to use the first $50 million of asset proceeds from the continental shelf for working capital and combined with the expected cash flows from our infrastructure segment and availability under our credit line, we remain confident in our ability to execute our strategy across our business segments.

As of June 30 day, 2021 HC 2 had total principal outstanding indebtedness of $679.6 million up 103 million from $576.6 billion at the end of 2020 drift.

Driven primarily by infrastructure financing related to the banker acquisition.

As Wayne mentioned earlier than currently with the banker acquisition.

Infrastructure entered into a new credit agreement that provides for senior secured debt of D. B M from there.

Total amount of 220 million.

Price of $110 million term loan, which will mature on May 31.2026.

And 110 million revolving credit facility, which will mature on May 31.2024.

This new credit agreement significantly reduces D. B M <unk> cost of capital and will provide us with continued liquidity and flexibility to operate efficiently.

The additional borrowing capacity will meet working capital requirements of the business and support continued growth.

In conclusion, the second quarter results and more recent milestones and provide a good momentum going forward, while there's still more work to be done we.

We have accomplished a lot over the last day, and we're very happy with our progress in building value across our segments.

We're looking forward to the launch of a new name and branding in the third quarter and we remain optimistic about the back half of the year and beyond.

With that operator, we'd now like to open the call up for questions.

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May press star 2 if you'd like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick.

Up your handset before pressing the star keys, 1 moment, please poll for questions.

Yeah.

Yes.

Thank you ladies and gentlemen, my first question comes from the line of Brian Charles with RW Press print. Please proceed with your question.

Hi, Thanks, Thanks for taking my questions and congratulations on the quarter good quarter and congratulations on the paper steel acquisition. It is very nice to see that backlog.

I've just got a couple of questions. So.

Could you give me a little more color on the second quarter EBITDA.

And maybe how is that different structure and how that progression going forward into context for this backlog.

Imagine it was down of debt and I know your comments.

So we had a market pressures on point of sale contracts as well as her for construction delays exact clearing up or is there kind of a.

Oh, a trend you can give us and how EBITDA might be going kind of looking at for how it might be looking going forward.

Yeah, I would say a couple of points on that this is Mike.

Thanks for that question.

1 is that we are starting to see point of sale margins coming back just based on the level of work that's coming into the into the market. So that's that's a positive sign and when you look at the backlog and you look at.

When that comes in and if you you know.

Around a $1 billion of that backlog is going to burn off over the next 12 months.

And we're in the early stage of ramping up these projects and we've also talked about as we start to sign some of these larger projects.

Versus the small to medium sized projects that we've been working on in the last couple of years.

You see.

For 200 days to find execution improvements so for them over the bigger longer more complex projects.

Yeah.

Okay.

Okay.

Thinking I guess, we've talked about in the past I had a sort of a run rate of about $90 million of EBITDA.

No.

I.

I'm inclined to think that with this backlog over the next couple of years, that's something I'm still comfortable with it may be growing from there.

If you have any.

Guidance on that.

Yeah.

Well.

All we can really just talk about.

What we've done historically from a from a EBIT perspective, and when you combine what we said also that.

Bankers steel is roughly half the size of DPM.

Yes.

Hmm.

What <unk> done over the last 12 months you can you can get there.

Okay. Good enough. Thanks, alright.

And my next question and then I'll get back from Q, just for housekeeping with the sale of the insurance subsidiary I understand 65 million for cash and the remainder for $25 million of H C..2 securities debt I think were characterized in the press release as broadcast securities.

Correct, we're seeing a combination of that for sure is $25 million. I think you mentioned also HC 2 preferred I don't know from.

Okay.

Alright.

That's right you have it right when you talked about in the press release to the securities that came back but related to broadcasting.

There was some preferred there and also some common.

Down there that we that that works returned the insurance company also holds.

HC 2 breath. So if you look at you know what.

The 8-K, we filed in early July.

That perhaps was set to had a redemption day to May 29.2021.

We entered into exchange agreements with virtually the same terms that extended the maturity for the redemption date out to 2026.

Hey, Brian its Wayne.

The press that did come back, though was the DBM broadcasting price.

Okay, Okay, good enough for sure.

I'm, sorry, I'm, sorry, the HC 2 broadcasting fresh.

Alright.

Alright, good enough. Thanks, again, sorry, that's it for.

For me.

Thank you, ladies and gentlemen, if you'd like to join the question queue. Please press star 1 on your telephone keypad will pause a moment to allow for other questions.

Okay.

Okay.

Okay.

Thank you. Our next question comes from the line of Derrick Wenger with concise capital. Please proceed with your question.

Yes. Thank you if I could just drill down on Brian second question, the $25 million of Securities that you got can you delineate what those are and how they will be paid off.

So so those are securities of our underlying subs in broadcasting.

Day.

Right now they were received.

The insurance company was owned by Itchy too. So those securities were transferred up to HC, 2 and Theyre being held.

At that level for the time being.

And what is the breakdown of the 25.

It's primarily HC 2 b preferred shares.

Which will be paid off bullet in 26 for.

We have no its intercompany so from a consolidated basis for the HC 2 it's all eliminated in consolidation and all within the same house.

Alright, thank you.

Thank you.

Ladies and gentlemen, once again, if you'd like to ask a question. Please press star 1 on your telephone keypad, we'll pause another moment.

Yes.

Ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. Glaser for any final comments.

So.

I want to thank everyone for joining us on our call. This morning.

I'm sure you are as excited as we are about the future of innovate and I look forward to speaking with you again on our next call. Thanks for joining us.

Okay.

Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.