Q2 2022 Star Equity Holdings Inc Earnings Call

[music].

Greetings, ladies and gentlemen, and welcome to your Star Equity Holdings, Inc. Second quarter 2022 results conference call.

Please be advised that the discussion 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 can change in the forward looking statements.

Please refer to star equities, most recent 10-K and 10-Q filings for a more complete discussion 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.

Please also note that on this call management, where well reference non-GAAP financial measures, including EBITDA adjusted EBITDA.

Adjusted net income and adjusted earnings.

Earnings per share, which all are.

Which are all financial measures not recognized under U S. GAAP.

As required by U S. G 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 June zero three.

4899500, Orange Investor Relations representative Lena <unk> of the equity group at Q1 to 8369611.

Also this call is being broadcast live over the Internet and maybe accessed at star equities website at.

Via Www Dot star equity dotcom.

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. Thank you you may begin.

Thank you operator.

Good morning, and thank you all for joining us today for our second quarter 'twenty.

2022 results conference call.

On the call today.

Our our executive Chairman, Jeff Eberwein, and our Chief Financial Officer, David Noble.

On a consult.

And operational performance with a 19% revenue increase as well as a significant improvement in gross margins.

On a segment basis as compared to the second quarter of 2021.

Our health care Division revenue decreased by six 4% to $13 $9 million predominantly driven by a decrease in revenue from fewer total scanning days due to the national shortage of nuclear medicine technologist how.

However, gross margin improved by three and a half percentage points to 26, 4% and gross profit for the quarter increased by seven 9%.

Both due to a better mix of products and services sold.

Our construction division second quarter revenue grew by 53, 7% due to large commercial projects at KBS and pricing increases that we implemented to mitigate the impact of higher raw materials cost.

Gross margin improved substantially due to increased pricing improved operations and commodity price risk mitigation.

We believe this quarter's performance shows continued progress toward our construction division goal of generating a gross margin over 20%.

Finally, our January equity offering strengthened our cash position, which remained strong and leaves us well positioned to fund high return internal growth investments and to pursue acquisitions, which could be either bolt ons for our existing divisions or entry into a new business sector.

Now I'll turn the call over to David Noble our CFO to highlight additional construction division and consolidated second quarter financial results. Dave. Please go ahead.

Thank you Rick and good morning, Let me first touch again on the performance of our construction division as it was a major driver to the turnaround in our financial results.

Q2, construction revenue was $16 $8 million versus $10 9 million in Q2 of 2021 for 53, 7% year over year increase.

Gross margin was a positive 14, 8% versus a negative 16, 9% in Q2 of 2021.

The modular business, specifically was even higher in terms of gross margin.

The increase in revenues for the construction division was driven mainly by multifamily and commercial scale modular projects at our KBS modular business in Q2, our construction segment accounted for 54, 7% of Star Equities total consolidated revenues the increase in gross margin percentage was due to significantly increased pricing levels.

To offset higher input costs in both residential and commercial projects as well as much better risk management around building materials price volatility our construction backlog and sales pipeline remained very strong.

Let's now turn to the Star equity consolidated results in Q2, 2022, SG&A increased by 23% versus Q2 2021.

This increase was driven primarily by one time litigation costs and secondarily by severance expense associated with executive management changes both of these related to the Digirad health business.

As a result, SG&A as a percentage of revenue increased slightly in Q2 2021 to 22, 4% versus 21, 6% of revenues in Q2 of 2021.

Moving onto Q2 bottom line results for Star equity, we had a net loss from continuing operations of $1 6 million compared to a net loss from continuing operations of $1 8 million in Q2 of 2021.

non-GAAP adjusted net income from continuing operations in Q2 was a positive <unk> 5 million. This compares very favorably to the adjusted net loss of $3 7 million in Q2 of 2021.

non-GAAP adjusted EBITDA increased to a positive $1 3 million in Q2 compared to a negative $2 9 million in Q2 of 2021.

This substantial improvement in consolidated adjusted EBITDA was due to operational improvement and our bottom line turnaround in our construction Division Division where segment non-GAAP adjusted EBITDA swung from a negative $2 8 million in Q2 of 2021 to a positive $1 3 million in Q2 this year.

Importantly, consolidated operating cash flow for Q2 was a positive $3 6 million versus a negative $5.4 million in Q2 of 2021.

As of June 32022, our balance and liquidity were very strong the outstanding balance on our interest bearing credit facilities was $11 6 million, while our cash balance stood at $13 7 million, leaving us with an overall net debt position of negative $2 1 million.

Now I'd like to turn the call over to the operator for any questions.

Okay.

Operator.

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.

If you'd like to ask a question you May press star one on your telephone keypad.

A confirmation tone will indicate your line is there any question queue.

You May press Star two if you would like to remove your question from the Q4.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

Our first question comes from the line of kill Sudan, with Litchfield Hills Research.

Proceed with your question.

Yes. Thank you first of all congratulations at these tough times.

Guys are putting up tremendous results.

My first question is you have been making steady improvements in construction gross margins.

What is the upper limit for construction margins do you have a specific target.

And I don't think that I'm sorry. This is Rick I don't think that we've identified an upper limit rather we've clearly taken a top down approach to reengineering that business.

This started over a year ago and is continuing today under new leadership that we brought in at the beginning of the first quarter or the beginning of the second quarter sorry.

And what that means is examining the business club contracts to materials to tools and processes that we're using so we're making steady improvement we feel like we've got the right team in place today and they are taking all the right steps to move the business forward.

Dave I don't know if you want to add to that but Oh I'll feel like.

I don't think we want to set an upper limit we just want to continue making steady improvement.

I think that's right Rick I mean.

We used to look at 20% is sort of a benchmark number.

We like to see something in well into the Twenty's, even even mid twenties, but as Rick said, there's no real upper limit to that I would I would suggest that there are certain projects. We do that are over 30% gross margin.

Some of the more complex work, especially in the passive sort of energy efficient space, but we're definitely driving to push gross margins up and we've been very successful. Our asp's are double what they were just a year or so ago. Obviously, there's some increase in materials prices over the last couple of years, although they've been coming down.

Much of this year, so I wouldn't set an upper target, but projects in the mid twenty's or good projects and some of them are higher.

Okay.

Great. So and my second question is in your prepared remarks, you noted a shortage of nuclear medicine technologists, well there isn't a further decrease in and health care revenue.

Is this shortage and this specialty is different from the shortfalls in other areas South health care personnel and if so what are the dynamics there.

I think there are some common elements across the health care industry, but with regard to nuclear medicine texts, specifically during COVID-19 a lot of colleges that offered.

Nuclear medicine technology programs really didn't weren't able to get the students.

On site to get the necessary clinical hours to fully graduate.

And of course during that same time older nuclear medicine techs in the market, we're moving on to other positions or retiring.

That's what created the shortage of technicians just affecting us.

But we feel like you know now that the pandemic is mostly behind US we're starting to see some improvement in the availability of technicians and think that things will mostly self correct in the next 12 to 18 months.

Okay, great. Thank you.

Our next question comes from the line of Tate Sullivan with Maxim Group. Please proceed with your question.

Thank you good morning, Rick following up on that on the nuclear medicine technician.

Where the margins higher for health care in the quarter.

More camera sales or would that imply that the nuclear medicine technician.

It is lower margin.

No.

Excuse me the margins were higher mainly due to a product mix.

We've got in addition to the scanning work that we did our technicians do we also of course from selling cameras.

And we've got a range of cameras that we sell some of them knew some of them are refurbished and so depending on the mix of cameras that come through the pipeline in a quarter can affect the margin significantly.

Okay. Thank you and then.

And modular construction is the modular construction trends in new England that youre seeing much stronger than the other areas in the U S for modular construction or are there special considerations in new England.

Ma'am.

Modular construction business.

Dave you're you've been doing some work on that you want to comment.

Yeah, I don't know that it's any different I mean on the modular side you know it is a secular secular trend that.

Modular as is.

Picking up a higher share of housing starts both single family and multifamily. So I don't know that new England is different in that way I do know that we have a relatively strong position, especially in the multifamily commercial scale modulus.

We are based in new England, Theres nobody else really in in New England. It provides the same product we do have some competition from Canada, and Pennsylvania, but we're able to service those projects a lot better given our proximity to those projects, which tend to be in the Boston area are down on the Cape and islands. So.

I think you know obviously everybody's wondering about <unk>.

Interest rates rising and housing starts coming off a bit.

We feel within that we have some secular trends that are in our favor such as like I said, the take up of modular as a percentage of housing starts.

And also our business is diversified we do single family residential.

Both second homes and starter homes, but we really have pushed aggressively into.

Into the multifamily space and there is a big housing shortage and you can read in the papers every day that.

You know governments are getting involved in an encouraging multifamily housing in that.

Renting rentals are very strong right now so we think we've got some very positive factors given our location and our.

Our our expertise.

And then David you mentioned, the Nantucket Nantucket Affordable housing project earlier.

Energy efficiency element to it.

Will that help you win future projects and affordable housing.

Or can you talk about energy efficiency and modular construction and how it might be is it better than an onsite construction in terms of integrating energy efficiency work complete.

Yeah I mean.

You know you can do energy efficient, whether you are building onsite or building in our factory, but I would suggest that.

The quality is better when you do it in a factory, it's a controlled environment.

Not every you know public housing project or every municipal driven.

Driven project is going to have an energy efficient element necessarily but those are two themes right servicing workplace in affordable housing and servicing.

Projects that have a.

Energy efficiency element to them often those are the same project, but those are both very important themes to be able to do that type of work I think is a real strength of our business.

I liked.

David.

With each there those are very distinct pipelines for our business. We're obviously mining those opportunities and more of them present themselves as we develop a reputation for being able to deliver.

Okay. Thank you and a couple more on the financials, if I may add David I mean, $3 6 million in cash flow from operations in the quarter.

A great number, but then just backing into it it looks like Capex did increase can you remind us what the capex requirements are and is that mostly for KBS in the next couple of quarters as well.

Sure.

I don't have that number at our at my fingertips, but I mean, the group as a whole we spend about 1 million around $1 million a year I believe in cash capex.

We do.

Add leases here and there on the health care business, particularly but you know capex is not a major component we are a relatively capital light business across the whole. So that's not a huge factor.

Okay and last name.

Bert I think you can re categorized the preferred.

Is that just can you go over the accounting treatment for that.

While the change from <unk> to <unk>.

Yeah, there was a provision in that preferred debt in a change of control the owners of the preferred could elect to have that redeemed.

And we changed that provision we.

We had a vote that allowed us to change that provision so that in the case of a change of control only the board can decide whether or not to redeem that preferreds. So effectively it's really.

It receives equity treatment based on the current form of that preferred so we can just drop that into it.

And to stockholders' equity.

Okay Alright. Thank you all thank you Rick and thanks, Thank you David.

Thank you.

As a reminder, it is star one to ask a question. Our next question comes from the line of Adam Waldow with Lismore Partners. Please proceed with your question.

Good day, Rick and David Thanks, very much for taking my questions I Wonder if you can hear me okay.

Yes, we can okay. So can you speak to the new business pipeline on both principal division side and can you give us some quantification as to what the new business pipeline and backlog look like at the end of the quarter.

Yeah.

Sure sure which businesses, particularly.

Well I'm, particularly interested in the construction business, but to the extent that you're able to provide any directional quantification on the health care business side as well that would be helpful.

Sure well I'll take on the construction side of things. So we have really two companies in that.

Construction division in the first one is the modular business.

In Maine.

Yes, they have a very strong pipeline I think it's in that sort of 50 million ish range of identified opportunities.

As I mentioned before they have single family homes, both the energy efficient regular.

Homes starter homes as well as second homes and then we have.

The commercial scale, we call it multifamily business.

Both of those pipelines remain very strong in fact, our.

Production schedule is booking into early next year so.

We're full up for the rest of the year in terms of production.

And at very high Asps like we've been experiencing all year. So that business remains very robust obviously, we look for signs of slowdown with the interest rates coming up and such but so far that business has really held in there I think there was a real shortage of capacity. So it will take quite a while for that to turn around even if things slow down a bit.

On the other side in Minneapolis on the edge builder business.

That's both sort of a retail lumber yard or professionally focused lumberyard as well as.

Wall panel business both of those businesses remained strong on the wall panel side, we had a.

A few projects that got delayed into the third quarter that we were hoping would be done in the second quarter, but our pipeline there remains as strong as it's ever been.

As multifamily housing continues to be a very strong segment in the upper Midwest and that's the market that we serve with wall panels. So we're cautiously optimistic those businesses remain very very strong.

And at.

At this point in time.

Oh, yes.

Oh, sorry.

I'm sorry go ahead.

No I'm sorry.

I was just going to say the same is true for our health care business, we have a <unk>.

Strong pipeline.

Carrying us forward at least through the remainder of the year. The health care business is a bit different because you know, it's typically a doctor's office, considering purchasing a quarter of a million dollar a camera and a change in their operating methodology to allow us to do scanning on their behalf is a is a big decision.

But our pipeline of opportunities is strong and the same is true in terms of our existing.

Scanning customers, who have you know.

Perhaps deferred some business and slowed down a bit during COVID-19 or now ramping up.

And that is continuing.

So given the positive commentary around new business pipeline backlog in both divisions are you comfortable that you have good visibility out at the end of the year and being able to post similar revenues for each division or perhaps even somewhat better than you posted during the second quarter.

We're not going to forecast the revenues, but I would say that we do feel very comfortable with the health of the business and the backlog for the remainder of the year.

Very helpful. Thank you and then with respect to margin structures.

Obviously, you've done a lot of things on the pricing side somewhat on the hedging side and the construction business.

Feel reasonably well what timeline do you think is reasonable for trying to meet or exceed your sort of intermediate term target for 20% plus gross margin on the consolidated construction businesses.

Yeah.

Yeah, I mean I'm.

I'm not sure how much we can say on that at what I would say is we are there on the KBS side already.

There's a little lumpiness in the other business, but I mean, where essentially there were pricing projects at our target gross margin right. So we don't have any lower margin projects that are still in the pipeline as.

As I mentioned our year over year results are dramatically different we had some projects last year that we got caught when commodity prices ramped up quickly and they were they were.

Sub par gross margin projects, but we don't have any of that work to be completed so everything going forward, we are pricing at our target.

Margin level.

Great and everything.

Sorry.

And everything in the current production pipeline everything that's currently on the line is that our target gross margin level.

Terrific and so finally, you've obviously had litigation expenses in the first half and then you continue to classify it as onetime in nature.

How long a tail do you expect on those litigation expense.

Should it be continuing through the end of the year, how do we think about that impacting the free cash flow profile of the business for the second half of the year.

[laughter] Yeah that's.

We have that same question, we have one case, it's been quite expensive over the last couple of years, it where we're literally on the tail end of waiting for a judge's determination.

So it's very difficult to forecast out that one.

But we're hopeful it will be over soon.

Okay. That's fair. Thank you so it sounds like net net debt.

We should be seeing free cash flow operating and free cash flow in the second half of the year in each quarter that looks similar to or possibly even a little better than what you posted in the second quarter based on everything you know now is that.

A reasonable guesstimate on my part.

Certainly our hope as well.

Terrific, Thanks very much.

There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.

Thank you operator before concluding I'd like to note that we're always available to take your call. Please don't hesitate to contact us to discuss any additional questions you might have.

And we will continue to share our story with existing and potential investors in the coming weeks and months as always we appreciate all of our shareholders and your continued feedback and support thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.