Q2 2023 Star Equity Holdings Inc Earnings Call

Greetings, ladies and gentlemen, and welcome to Star Equity Holdings, Inc.'s second quarter 2023 results conference call.

Please be advised that the discussions on today's column 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 statement.

Please refer to Star Equities' most recent 10K and 10Q filings for a more complete description of risk factors that could affect these projections of assumptions.

The company assumes no obligation to update board looking statement.

As a result of new information, future events or other lives.

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 US gap. As required by FEC roles and regulations, these non- GAAP financial measures are reconciled.

Do 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 it's investor relations representative, Selena Caddy of the Equity Group at...

2, 1, 2, 8, 3, 6.

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Also, this call is being broadcast live over the internet and maybe accessed at StarEquitiesWebsite at www.starequity.com. Shortly after this call, every play 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, operator. Good morning, everyone.

Thanks for joining us for a second quarter 2020-23 results conference call.

on the phone with me that they are executive chairman Jeff Everwine and our chief financial officer Dave Noble.

It's a pleasure to be with you today and update you on our second quarter performance. It's especially gratifying to report on the previously announced sale of our healthcare division and its dramatic positive impact on our company.

We completed the divestiture of our healthcare division, which operated as did your at-health for $40 million on May 4th.

This was a truly transformative transaction which created immediate overall value and significantly strengthened our balance sheet.

We ended the second quarter with a cash balance of $21.4 million and zero debt.

leaving us in a much stronger position to execute on our next stage of growth, including...

and new business acquisitions.

and the ability to virtually explore new opportunities within our investments division.

In addition to having 21.4 million of cash and no debt, we also have a $6 million equity position in TTG imaging solutions to the successor company to DigiRad.

8.5 million dollars in notes receivable, a $4.8 million public equity portfolio, and $5 million of real estate.

All of this is in addition to our valuable and growing construction businesses.

Second quarter of 2023, revenue decreased 47%.

to $8.9 million versus $16.8 million in the second quarter of 2022.

While the road margin percentage increased to 29.3% versus 14.4% in the same period last year.

The primary driver for the revenue short was almost perfect timing, which in addition to normal variability was impacted by interest rates and macroeconomic uncertainty.

Despite lower revenue in the period, the division's growth margin percentage more than double versus the same period last year due to quality execution and management's ability to maintain writing levels while controlling input costs.

We remain confident in the division's ability to continue delivering good results based on a healthy sales pipeline as well as a significant project backlog. We are now in the division's ability to continue delivering good results based on a healthy sales pipeline as well as a significant project backlog.

As with any construction related business, revenue and expense recognition can very greatly from project to project in quarter to quarter. And we caution investors to not read too much into single period results.

Year-to-date gross profit increased by 70 up to 5.8%.

versus the first six months of last year.

And we maintained our mid 20s or higher gross margin percentage target for our construction division.

Despite economic headwinds across the construction space at large, our reputation is reliable and high quality water and select markets. It gives us a unique and sustainable position.

Reputation is strong and growing in the geographies we serve, and we're continuing to target expanding opportunities in workforce and affordable housing, educational dormitories and school buildings, and environmentally sustainable housing.

Getting into the second half of the year, we expect to maintain or grow our backlog. No big one.

In addition, our management teams continue to improve our manufacturing processes and strengthen our relationships with all of our clients and partners.

Now we'll turn the call over to Dave Noble, our CFO , to provide additional second quarter consolidated financial highlights. Dave, please go ahead. Thank you, Rectang. Good morning. Let's now turn to Star Recreation, Solidated Financial Results. I would like to note that due to the sale of our healthcare business on May 4th, those work mentioned.

All results in historical comparisons relate only to continuing operations, which include construction and investments.

Did your ad help us now report in this part of our discontinued operations?

In Q2, 2023, SGNA increased by 31.7% versus Q2, 2022. This was due to transactions related costs, related to the sale of digital at health, as well as increased activity at our investments division.

Moving on to bottom line results for star equity, we generated a net loss from continuing operations of 1.4 million in Q2, compared to a net loss from continuing operations of 1.3 million in Q2 of 2022.

Non-GAP adjusted net loss from continuing operations in Q2 was a .9 million compared to an adjusted net loss of .8 million in Q2 of 2022.

Non-GAP adjusted give it up from continuing operations decreased to a negative 0.8 million in Q2 of 2023 from a negative 0.4 million in Q2 of 2022.

Construction generated non-GAB adjusted EBITDA, a positive 0.7 million in Q2 this year, down from 1.3 million in Q2 of 2022.

For the year-to-date period, non-gap adjusted EBITDA from continuing operations improved to a loss of $36,000.

from the loss of 1.5 million in the first half of 2022.

A solidated cash flow from continuing operations for Q2 was a negative 3.3 million versus a positive 3.6 million in Q2 of 2022. This was driven by transactions related costs for the sale of diger ad, increased investments related expenses, as well as working capital related changes.

For the year-to-date period, consolidated cash flow from continuing operations was a positive 1.9 million compared to a positive 2.9 million in the prior year period.

As of June 32, 2023, our consolidated balance sheet and liquidity were strong. As a result of the sale of our healthcare business, as it's mentioned, on May 4th, we had zero interest sharing debt remaining and a cash balance, our cash balance stood at 21.4 million dollars at the end of June 2.

Now I'd like to turn the call back to Rick to add some additional remarks. Thanks, Dave.

However, I don't want to overlook the exceptional work that's being done in both of our construction businesses. Strong leadership along with discipline planning and execution gives us confidence in the potential for continued strong performance and growth. The Star Equity Board and Management Team are fully focused on creating additional shareholder value through our targeted business development initiatives and will continue to assess and prioritize the next steps for growth strategy.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Tate Solven with Max and Groves. Please go ahead.

Right, thank you. I mean, just looking where the stock is and your book value per share less of a ferv with inequity is around a little above $3. I mean, can you give more detail on the value you realized in your healthcare business? I mean, $27 million.

in the quarter from income from discontinued operations. Was that all again on the sale of a TZRIDER with some of that a loss on operations or income from operations since you sold it in the quarter? Please start there.

Yeah, thanks, Tate. The actual gain from the sale was $26 million for the sale of DigiRet. In terms of value realized, we've reached the cash.

portion of that we also have $6 million in equity in the entity that would solve the Dred 2 and 7 million of sellers now so we believe that we realize a tremendous amount of value it may not be completely reflected in our stock price but we cleaned up the balance sheet we really set up a platform for growth with no debt and a lot of cash.

Yeah, I changed this is Rick that would add that we really hard for the equity. We believe in the strategic plan that TCG has going forward and we're excited to be a shareholder. So you have a slide in your presentation this morning on the, I mean, that you realize roughly around 63 million value.

Through the healthcare division, through going back to 2018, and internally do you look at it as a multiple of invested capital on the cash that you've outlaid in that business, or do you have that figure available? Now, this is called Can Iyön pay me all your expenses, for many more arriving only to get a payment so children live at home, driving

But, so please, this is that, and you grow like the 60, 30 million. Okay, I can figure out the cash I'll raise through that. And then the, what is your current investment portfolio value, or not current as a 630, is it I'm standing through, and how many, have you disclosed how many unrealized games or profits are in that portfolio? For. Hey, take, this is Jeff. So, or, on the investment, on the investment portfolio under gas, we mark that to market every quarter.

So the value that's in the investor deck that we publish this morning will match within the 10 queue that's gonna be filed soon as well as what's on our balance sheet at the end of June , and that's just all based on the market price.

in a footnote, it's all level one at the... Okay. Okay, I'll look for that. Thank you. And then you talked about some available real estate before to potentially expand the KBS footprint. Are you, do you have any real estate available for sale? Because I think you've given a figure before that the real estate appraised value is much higher than in on your books. And I'm just looking for it now as well. Yeah, yeah, so we, I think the recent appraisals, the most recent appraisals of the real estate around 5.000,000, but these are old.

appraisals and that's just for the two factories that we retain. We did sell a third factory during the quarter that we really didn't see any use for. And that was the smallest of the three. But we believe the market value of those two remaining facilities.

significantly above where we have it booked. That's point 1.2 is we have significant upside in that business where operational in one of those two facets and we believe that the other factory would have a similar throughput to what we're able to do in the first one. So we have significant upside potential factors that we own.

So, take, this is Jeff. You know, this may or may not be helpful, but there's kind of three different.

numbers to think about. One is what's the market value which you don't know until you actually go to sell real estate. Then you have the appraised value which was done by a third party and that was for our credit lines and that was done in 2019 and that's what's in our investor deck and then you have our actual

Look value. And so if this is helpful, you know, that third factory that Dave was just talking about, we sold it for approximately 1.2 million. That was its appraised value. And then if you look at financials or like the adjustedeebe.table, you'll see a gain of 424,000.

So that gives you a sense of what the book value was. And so the phrase value is higher than the book value. And we're saying we think the market value.

Based on the visibility of the project, is that still, it seems like, can you maintain this type level of gross profit margin? Recently, I think book historically you said a target of greater than 20% is that still a case. Yeah, our target remains mid 20s or higher. Excellent, I'll get to that. Thank you very much. Thanks, David. Our next question comes from theodore Emil with Lichfield Hills Research. Please go ahead.

Thank you very much. Rick, we'll probably all use a little guidance on the revenue going out. Is it going to be

variable around the current quarters level or does it vary between the current quarter and the year ago quarter? If you give us any kind of sense for that.

Yeah, that's one of the challenges of the construction business. Every quarter is different if you think of a quarter as being a portfolio of projects. We could have one quarter with a smaller number of very large projects and that impacts our...

financials much differently than a quarter that had a large number of smaller projects. So sometimes the, you know, our revenues and our fits don't fall into the quarter that they may have if we had a different projection plate with a larger amount owe that less than a count of quarter here or thirty.

And Tio, this is a just add, the production flow is typically fairly steady, but revenue recognition has gotten a lot of scrutiny and recent years. And there's a lot of...

different rules around when we recognize revenue on projects. And it just causes the revenue recognition to be lumpier than our actual production.

in the way you know if you look at

A rolling four-quarter average, or you look at last year's results, and then we think we have a business that should do 50 to 60 million of revenue a year. It's got a nice...

growth trajectory to it. Of course, it can be a cyclical business, but we think we're in a growthy...

of construction with a lot of the themes that we've talked about. In fact, we built, we think it's gonna take share. And there's a lot of emphasis on workforce housing, environmentally friendly housing, and we have great products for that. So we think there's some secular growth characteristics in what can be a cyclical business.

And we were just caution people to not read too much into any one quarters.

Revenue, if you took any one quarter multiple times four, you'd get a lot more volatility than you would if it...

These look like a 4-quarter.

of the Florida Bridge?

Okay, fair enough. And are you disclosing what the backlog is?

No, we haven't really disclosed the details in the back one.

Does it get disclosed in the key? Annually is that what it is, not sure that quarterly? Well, we have some information and our investor deck that we filed this morning.

You know, fairly consistently, we've had a sales pipeline of 50 million or greater that's been pretty consistent for a year or two now. That doesn't mean we're going to win every one of those projects, but that's kind of a leading indicator to our backlog.

And I guess this point we're trying to make on that is that our sales pipeline has been pretty consistent, our backlog has been pretty consistent, and what's not consistent is the quarterly revenues just because of the revenue recognition rules, so our business is.

isn't nearly as lumpy as the quarterly revenue up to down to what I'm talking about.

I can appreciate that. Okay, thanks very much.

Our next question comes from Mark Ross with ages, Pizzkella Head.

Yeah, I was just a little perplexed as to...

Being where the stock price is, you guys wouldn't be buying back some stock.

Yeah, this is...

Jeff, you know, we, we think.

the stock is ??

dramatically undervalued relative to NAB.

The window isn't open as often as you might think it is. It all depends on what we have going on, but there has been significant insider buying if you look at the last quarter's activity.

And that's a tool in the toolkit. We have blocked back stock historically. And as a microcap, we also need to focus on just having more critical math as a company. So the board thinks about those things all the time and talks about those things. And

All right, thank you. Our next question comes from Kevin Exel with Moorx Burst. Please go ahead. Hi, thanks for taking my question. I just kind of to follow up with that last question. How do you guys look at your internal hurdle rate or IR, compared to some of your potential microcap investments And then...

As I understand it, some of the story is you need to get to skill and maybe make your currency or your equity attractive as a currency for a roll-up. Is that kind of your view on how this might work and how maybe some Bob and how you get there?

Yeah, a lot of things in there. This is a Jeff again, you know, the primary focus is growing value per share and everything else is in means to that end.

So when we make investments, whether it's a CAPEX investment in our construction division or in any other investment, it's definitely gotta have a high return. And we think buying back stock has a high return. And we think getting more scale as value, you definitely see in the private market, a strong correlation between multiples of businesses and size, multiples tend to go up as you get.

Besides, so for example, you know, not that we're trying to get bigger just for the sake of getting bigger, but if in theory

So for example, you know, not that we're trying to get bigger just for the sake of getting bigger, but if in theory We could double our construction business

and the revenue was more like a hundred million, it's at a 50 million, the multiple at which we could sell that business at, would be higher than for what it is today, which is a 50 million revenue business.

We just didn't think that was an attractive return on return of cash return on capital. So we made the decision to merge it with another business got cash.

by things and sell things and it's driven by our expectation for internal rate return with the goal of maximizing value per share of the long term. Got it. All right, thank you. OK, if you'd like to ask a question, please press star then one at this time. Our next question is a follow up on tape Sullivan with Max in group. Please go ahead. Go ahead.

Yeah, Tade. So as we continue our growth, our first step, I think, in the existing factory, would be to add another shift to extend the work hours and be able to get additional production that way. But as we expand into other related businesses, it could be expressed manufacturing or cabinetry or related things that we currently do associated with building modules. Then we would expand into the other factory. On top of that, we're looking at a number of different...

alternatives to partner with other companies and potentially get that factory open and producing additional revenue. Yeah, the only thing I would add is we believe we have the facilities to more than double that modular revenue, which is about half of our total construction revenue today.

We've probably got 25 to 30% additional capacity in our current plan.

without having to attract them to the other factory.

Okay.

All right, thank you.

Thank you, operator. Before concluding the call, I want to know that we're always available to take your call and discuss any additional questions you might have. So please don't hesitate to contact us. We'll continue to share our story with existing and potential investors in the coming weeks and months, and as always, we appreciate all of our shareholders and your continued feedback and support. Thank you. 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 web.