Q4 2021 Star Equity Holdings Inc Earnings Call

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Greetings, ladies and gentlemen, and welcome to the Star Equity Holdings, Inc. Fourth quarter and year end 'twenty 'twenty. One results conference call. Please be advised that 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 start equities. Most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions.

Company assumes no obligation to update forward looking statements as a result of new information future events or otherwise.

Please also note that on the call management may refer to non-GAAP financial measures.

Yours.

EBITDA adjusted EBITDA adjusted net income 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 measure.

Measures in our earnings release issued this morning, if you did not receive a copy of the earnings release and would like one please contact star equity at.

She loves 34895900, or its Investor Relations representative Lena cat of the equity group at 212836.

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Also this call is being broadcast live over the Internet.

Be accessed at Star equities website via Www Dot start equity dot com. Shortly after the call. A replay will also be available on the company's website. It is now my pleasure to introduce Jeff Eberwein, Chief Executive Chairman of Star equity.

Thank you operator, good morning, and thank you all for joining us today for our fourth quarter and year end 2021 results conference call on the call with me today are Chief Financial Officer, David Noble Chief Operating Officer, Rick Coleman.

Matt Molchan CEO of Digirad Hill.

In the fourth quarter of 2021, our health care Division continued to rebound to more normal levels with revenue, increasing 16, 9% versus the prior year quarter.

Our construction division grew revenue by 42, 3% due to higher output and pricing increases we implemented throughout the year to mitigate the impact of higher raw materials costs.

Gross margin at our construction Division also rebounded strongly in the fourth quarter due to increased pricing improved operation and commodity price risk mitigation.

Our construction division gross margins improved significantly off the bottom in 2021, and we made progress toward our goal of gross margins exceeding 20% for this division.

With the completion of our January 2022 equity offering for gross proceeds of $14 3 million. We're now well positioned to fund high return internal growth investments and pursue acquisitions, which could be either bolt ons or health care or construction divisions.

Our entry into a new business sector.

With that I'll turn it over to our health care CEO .

Matt Molchan, Matt. Please go ahead.

Thanks, Jeff.

Revenue from our health care Division in Q4, 2021 increased by 16.9% to 15.6 million over the same period in the prior year. This was mainly driven by stronger diagnostic imaging camera sales.

Gross profit for Q4, 2021 reporting period increased by 22, 3% and gross profit margin increased by four 6% over the same period last year due to an increase in the number and a favorable product mix of cameras sold in the quarter.

In diagnostic services revenue and gross margin percentage for the fourth quarter of 2021 was $10 7 million and 13, 5%.

Impaired to 10.6 million and 16, 3% in last year's fourth quarter.

The relative gross margin percentage decrease was primarily due to a sharp decrease of customer patient and employee availability due to the Covid omicron variant.

Led to lower volumes and lower gross profit and gross margin.

In our diagnostic imaging business revenue and gross margin percentage for the fourth quarter of 2021 was $4 9 million and 35, 9% respectively.

<unk> to $2 7 million and 32, 7% respectively in the prior year fourth quarter.

As mentioned earlier, the relative increase in diagnostic imaging revenue and gross margin was due to a higher number of cameras sold and a favorable product mix now.

Now I'll turn the call over to Dave Noble, our CFO , who will provide additional financial highlights for the fourth quarter they'd. Please go ahead.

Thank you, Matt and good morning, Let me first touch on the construction Division fourth quarter 2021, construction revenue and gross margin were $14 million and 27% respectively.

This compares to $9 8 million and 13, 7% in the fourth quarter of 2020.

Strong revenue growth year over year and construction is attributable both to both increased pricing and increased business activity in residential and commercial projects at each KBS and edge builder.

The increase in gross margin percentage was due to the positive impact of our price increases and better risk management around commodity price volatility.

In the fourth quarter $1 1 million of the construction Division gross profit was attributable to unrealized gains on the etch builders open derivative contracts, which are used to help protect our margins on certain long lead time commercial projects.

Unrealized gains generally suggest an increase in lumber prices between the signing of a commercial contract or contracts and the purchase of the raw materials required while unrealized losses generally suggest a decrease in lumber prices between the signing of a commercial contract or contracts and the purchase of the raw materials required.

Turning to Star equity holdings on a consolidated basis SG&A increased by 21, 2% in Q4 2021 versus Q4 2020.

This was due in part to head count increases in corporate as well as both an increase in head count and sales commissions in the construction segment, which were needed to support the growth of those businesses.

In addition, we took a noncash charge to operating expenses of $1 3 million to write off cloud based software implementation costs and a $3 4 million dollar charge for goodwill impairment at our KBS reporting unit.

Moving on to bottom line results for Star equity for the fourth quarter of 2021, we had a net loss from continuing operations of $4 4 million compared to a net loss from continuing operations of <unk> 5 million in the fourth quarter of 2020.

non-GAAP adjusted net income from continuing operations in the fourth quarter of 2021, which excludes the two write offs I mentioned was a positive <unk> 3 million.

This compares to an adjusted net loss of $1 6 million in the fourth quarter of 2020.

non-GAAP adjusted EBITDA increased to a positive $1 million for the fourth quarter of 2021 compared to a negative <unk> 7 million in the fourth quarter of 2020.

This improvement was due to both an increase in demand for high margin cameras in our health care business as well as a strong turnaround in the bottom line and our etch builder business unit on the construction side.

For the fourth quarter of 2021, we registered an operating cash inflow of $1 4 million compared to an operating cash inflow was $3 1 million in the fourth quarter 2020.

As of December 31, 2021, the outstanding balance on our credit facilities was $12 9 million, our overall net debt position, including $4 5 million of cash and cash equivalents was $8 3 million now I'd like to turn the call back to the operator for any questions.

Thank you if he would like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove the question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star he is.

Our first question is from Theodore O'neill, which Litchfield Hills Research. Please proceed.

Very much.

First question I have is that given the spike in diesel costs can you give us any color on direct or indirect cost impacts and I ask this because I I did call a couple of local lumberyards here before the call and they they're not flying any surcharges, yet, but it sounded like they might in the future.

Yeah, well I mean it.

The two construction businesses.

One is KBS, where we do the modular homes.

That's a pass through to the transport for those homes, So you might imagine.

And it could affect demand, although we have not seen any sign of that.

In terms of raising the overall price, but we pass those costs directly through to the customer.

We do do some in house transport on the edge builder side, but I don't think it's a super significant.

Kris so far in terms of okay.

That business I mean, we'll we'll we'll look into it and keep on it but I don't think it is a major concern at this point.

I'm on the software the software write off the software implementation write off of 1.3 million what was that for and what was it supposed to do that it's not doing anymore.

Yeah, we were looking to conform all of our ERP systems.

Two one system cloud based system.

But you know over the two or three year process that we were you know attempt.

Attempting to implement the system, we realize it just didn't fit the needs perfectly well in each of the independent company. So what we've done is we've kind of pivoted to.

Upgrading the ERP systems at each of the operating entities.

To a system that makes the most sense for those entities.

Okay and my last question is that.

Your SG&A costs fell as a percent of sales and I was wondering if we can expect that to continue.

Yeah, I mean, you know what.

We're always looking at ways to cut out unnecessary costs. We do think there's a lot of operating leverage in our businesses in general.

So we would hope that that happens I mean, I don't see that we're going to cut.

SG&A on an absolute level, but we would hope as a percentage of sales than it does fall over time.

You very much.

As a reminder, this star one on your telephone keypad, if he would like to ask a question. Our next question is from Tate Sullivan with Maxim Group. Please proceed.

Thank you David starting with you if I may on the hedge for for edge builder does.

Are you using hedges for KBS or had you always use them French builder can you talk about the dynamic between the two.

Yeah, we we had to use them in etch builder in the past and we had pause that program for a while but we've kind of brought it back and these are really simple hedges, thus far they're typically futures hedges.

Sometimes options, but they really are matched exactly two specific contracts. So you can imagine if we sign a contract that is not going online for three or four or five months Theres a lot of time in between that guaranteed pricing.

So we've done a number of things that our contracts are one option is that we let some of the materials float and the customer will pay any increase in those costs. When we acquire the materials and other option is for the lumber portion we will do the hedging.

And that's worked actually really well for us.

Over the last.

910 months at edge builder as far as doing in a K B S.

We are contemplating that.

Issue there is there's a lot more inputs and they really the only hedge instrument is on lumber itself and that's a smaller percentage of the <unk>.

Modular home than it is a whole wall panel. So it's something we're looking into but it's it doesn't provide as much cover as much you know margin protection as it does on the edge builder side, but it's something we're looking into.

And then in building and construction with your comment about margins exceeding gross profit margin exceeding 20%. So I mean, excluding the hedges should I look at it excluding the hedge unrealized gain and for Q looking at almost a sequential improvement in gross profit margin throughout the year could be.

A little bumpy or can you just talk a little about that target for great about 20%.

On the on the commercial side of edge builder member edge builders to businesses as the distribution business and then the commercial wall panels.

We're targeting sort of high teens in gross margin over the long haul.

The gross margin target at the modular side, a little bit higher than that.

But if you take out the hedge gains we were just talking about it.

The 27% gross margin in the fourth quarter.

We're around 20, if you take out those unrealized hedge gains and that really was mostly edge builder to be to be honest I mean, we're still.

Getting up to scale at KBS.

But we do think that we can gradually increase those gross margins can be S. We have a target you know over 20% that's more complex in a way that product.

But I would expect as we scale up that gross margins will generally drift upwards.

Great, Thanks, and that shifting to medical imaging and diagnostic services.

And you mentioned can you just talk about what the total margin in health care with the camera sales in the diagnosis service I mean in an ideal environment, what sort of well average.

With with normal traffic foot traffic I mean, it is the margin range in this business above 20% or can you talk about where we're at could approach. It both camera sales and diagnostic services rebound in places.

Yes for combined a combined gross margin, yes, we believe that that that's that's correct that that we should be above 20% in a normalized business.

Without you know.

Further interruptions from from Covid or anything like that so yes that that would be that would be the goal for the.

So to the health care sector.

About 20%.

Thank you and then for Q for diagnosis services can.

Can you just review your comments there was it just a lower lower.

Your people in the hospitals in general or.

Well, yes sure.

People.

<unk> to scan because you know you know.

I'm trying to kind of hit it.

Pretty hard when it did hit and it also affected our employees. If we didn't have employees going out to be able to perform the scans as well so that really especially in the December month really hit us hard and that had an impact because of our fixed fixed cost that we werent able to overcome.

So, but I will say, though.

Things have turned around here in the first quarter, we still had some aftereffects early on in the quarter, but things are getting back to our new normal here and here and as we ended the first quarter here in 2022.

Thank you, Matt and last for me if I may just thought not since the capital raise in January and with everything in the market has done since then and geopolitics Ivy can you update on the acquisition environment are you seeing more opportunities or less or does it potentially delay deals.

Can you just give a general comment.

Yeah no. Thanks for the question Dave.

And we we are we think we're entering a period that's better for acquisitions, we are seeing more targets.

We talked in our press release in January about I'm looking at the health care staffing business.

That is one area and then there's also some interesting bolt on opportunities and are in the construction sector.

And.

You know we have the capital to pursue those.

And where we're looking at several and I would just say stay tuned on that but we think the environment for doing acquisitions is.

It is.

Gotten stronger and is much better than it was say last year.

Okay. Thank you all.

As a reminder, this star one on your telephone keypad, if he would like to ask a question. We will just pause for a brief moment to Paul for our final question.

There are no further questions at this time I would like to turn the conference back over to management for closing comments.

Thank you operator before concluding the call I'd like to note that we're always available to take your calls and discuss any questions. You might have so please don't hesitate to contact us.

We will continue to share our story with existing and potential investors in the coming weeks and months.

Always we appreciate all of our stockholders and your continued feedback and support. Thank you have a good day.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

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