INNOVATE Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 10, 2023

There are 6 speakers on the call.

Operator

Afternoon, and welcome to Innovate Corp's First Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After prepared remarks and presentation, there will be a question and answer session. Please note, this event is being recorded. I would now like to turn the conference call over to Anthony Rosmas with Investor Relations.

Operator

Please go ahead.

Speaker 1

Good afternoon. Thank you for being with us to review Innovate's Q1 2023 earnings results. We are joined today by Avi Glaser, Chairman of Innovate Wayne Barr, CEO of Innovate and Mike Sena, Innovate's Chief Financial Officer. We have posted our earnings release and our slide presentation on our website at innovatecorp.com. We will begin our call with prepared remarks to be followed by a Q and A session.

Speaker 1

This call is also being simulcast and will be archived on our website. During this call, Management will make certain statements and assumptions, which are not historical facts, will be forward looking and are being made pursuant to 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 Innovate's actual results to differ materially from these forward looking statements. The risk factors that could cause these differences are more fully discussed in the cautionary statement That is included in our earnings release and the slide presentation and further detailed in our 10 ks 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, Innovate disclaims any intent or obligation to update or revise These forward looking statements, except as expressly required by law, management will also refer to certain non GAAP Financial measures such as adjusted EBITDA.

Speaker 1

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

Speaker 2

Good afternoon. Innovate generated solid momentum across our 3 business segments during the quarter, And we continue to make progress on the transformation the company started over 2 years ago. Since that time, we have right sized the company to focus on our best in class assets and maximize their exposure to attractive areas of the economy, and we continue to evolve to capture new and emerging opportunities in the market. We are focused on ways to increase profitability, Insulate the company from market downturns and changing macroeconomic conditions and fuel growth for years to come in order to extract Optimal value from each of the businesses. In the Q1, infrastructure revenue was impacted by project delays, But the DBM team continues to build upon its strong foundation.

Speaker 2

It is important to note that these projects have only shifted in their timing And we're still in backlog at the end of the quarter. In Life Sciences, both R2 and MetaBeacon continue along their growth plans With positive progress toward anticipated milestones ahead, R2 announced 3 new FDA clearances in April And MediBeacon's pivotal study remains on track for final regulatory submission in the near future. In SPECTRUM, The legacy channels previously occupied by Asteca has largely been filled and programming on these channels began in the Q1. Also with the success of our initial experiment using LP TV frequencies in Fort Wayne, Indiana, We are designing the 2nd phase experiments intended to continue to demonstrate use of our spectrum in a variety of applications and potential opportunities for innovation in this space. With that, I am pleased to turn the call over to Wayne Barr.

Speaker 3

Thanks Avi, and thank you all for joining us today. I would like to start by sharing first quarter highlights for each of our operating segments. DBM Global delivered revenue of $311,700,000 for the Q1, which was a decrease from the same quarter a year ago. Gross margin, however, expanded 200 basis points to 13% from 11% in the quarter. Adjusted EBITDA margin for the Q1 was 5.2%, which was impacted by the lower revenues, But still 10 basis points higher year over year.

Speaker 3

We continue to expect margins to generally improve over the prior year. But as a reminder, we anticipate fluctuations quarter over quarter due to project timing. To that end, as we have explained in the past, The construction, commercial and industrial markets can be lumpy at times and cause revenue to push from 1 quarter to another. In the Q1, customer and general contractor driven delays from certain larger projects resulted in the work performed by DBM to be delayed, impacting our quarterly results. CBM continues to see sizable projects in the market and in its pipeline And the business has a total reported backlog of $1,600,000,000 providing visibility for the future.

Speaker 3

However, they are beginning to see the market somewhat tighten and more competition on project bids. Turning to Life Sciences, R2 has now shipped 2 73 glacial devices globally and its newly implemented Subscription sales program continues to accelerate its growth. As Avi mentioned earlier, R2 recently announced 3 new FDA clearances, which include minimizing pain, inflammation and thermal injury when paired with laser and dermatological treatments And providing topical anesthetic relief of injection sites, reducing patient discomfort. Artu is also partnered with renowned skincare company, Allies of Skin to launch a multi patient back bar treatment kit, Delivering more treatments with less waste and reduced packaging. At MediBeacon, following the completed enrollment of the U.

Speaker 3

S. Pivotal study, Final reconciliations and audits are being completed in preparation of the clinical study report for FDA regulatory submission. Final regulatory submission is anticipated in the Q2. We are pleased with the progress we are making in the life sciences portfolio And we believe we are well positioned to generate long term value by executing our strategy and further leveraging these innovative solutions. At Spectrum, the new customers added to backfill the previously occupied Azteca stations are up and running.

Speaker 3

However, several of the channels that were expected to begin their programming in January did not start until March, which impacted Q1 results. The new programming will be additive to spectrum over the long term as we expect the higher gross margins To lead to greater profitability going forward. Among the new networks launched on broadcasting was Long Prime, A popular live trial network founded by Dan Abrams of ABC News, previously available only on cable. Industry wide, Broadcast Television has experienced shortfalls in advertising revenues in the face of a weaker economy and increased Competition from streaming networks and fast channels. The industry is looking ahead to more positive trends in 2024.

Speaker 3

As we reported last quarter, we were happy with the results of our initial two way experiment using certain of our LPTB channels in Fort Wayne, Indiana. We are currently working with our engineering and spectrum consultants to design additional experiments And expect to see continuing positive results as we seek to expand the uses of LPTV, while maintaining the quality of our legacy linear broadcast service. We will continue to keep you apprised of developments as they occur. While our overall results And are focused on achieving results through execution and operational excellence in the coming quarters. Finally, yesterday, we consummated the purchase of all of the Series A fixed to floating rate perpetual preferred stock issued by DBM Global Intermediate HoldCo Inc.

Speaker 3

And held by Continental General Insurance Company. The purchase price for the Series A Preferred was $42,000,000 consisting of $7,000,000 in cash and a $35,000,000 subordinated unsecured note that is due in 2026. The purchase was precipitated by a redemption notice received from CGIC, which notice was permitted to be delivered by CGIC Under the terms of the Series A preferred, the unsecured note has an interest rate that will substantially increase On the first and second anniversaries of issuance and as certain requirements to make partial payments under certain circumstances and events such as a qualified equity raise. The Board believes that while a full redemption in cash was not an option, The purchase of the Series A preferred in this structure is aligned with our short to medium term strategic planning. With that, I'll turn it over to Mike for a review of our financials and capital structure.

Speaker 4

Thanks Wayne. Consolidated total revenue for the Q1 of 2023 was 317,900,000 a decrease of 23% compared to $412,800,000 in the prior year period. The decrease was primarily driven by our Infrastructure segment and to a lesser extent our Spectrum segment. DBMG's Fabrication and Direction and Maintenance and Repair businesses encountered customer and general contractor driven delays resulted in the timing of work performed by DBMG to be delayed in the current period. Revenues at our Spectrum segment decreased primarily as a result of the termination of HC2 Network and its associated Azteca American Network content at the end of last year.

Speaker 4

Net loss attributable to common stockholders for the Q1 of 2023 was $10,200,000 or $0.13 per share compared to a net loss of $13,600,000 or $0.18 per share in the prior year period. Total adjusted EBITDA was $4,900,000 in the Q1 of 2023, a decrease from an EBITDA of $11,500,000 in the prior year period. The decrease was primarily driven by the Infrastructure and Life Sciences and Spectrum segments, as well as a decrease in our equity method income from our investment in HMN. As previously disclosed, the sale of the remaining 19 And of our H and N investment closed in March of 2023. The decrease was partially offset by lower EBITDA losses at the non operating corporate segment.

Speaker 4

At Infrastructure, revenue decreased 22.5 percent to 311,700,000 from $402,200,000 in the prior year quarter. As discussed earlier, this decrease was primarily driven by timing of projects at DBMG's Fabrication and erection and maintenance and repair businesses, both of which encountered customer and general contractor Driven delays resulting in the timing of work performed by DBMG to be delayed at several projects, including Stellantis, Ipec and JFK. Infrastructure adjusted EBITDA for the Q1 of 2023 decreased to $16,300,000 from $20,500,000 in the prior year period. The decrease was largely driven by the decrease in revenue as previously discussed and a slight increase in SG and A. While the Fabrication and erection business experienced delays in the current period that impacted Revenue.

Speaker 4

The decrease in adjusted EBITDA was partially offset by a margin improvement as the projects completed in the comparable period, which had lower margins due to market pressure on point of sale project margins during the COVID-nineteen pandemic, were replaced with more recent projects with higher point While EBITDA margin was up slightly year over year, EBITDA margin was sequentially lower as a result of the lower profit Contribution caused by the project delays and largely fixed SG and A costs. As of March 31, 2020 3, reported backlog was $1,600,000,000 compared to $1,800,000,000 as of December 31, 2022. Adjusted backlog, which takes into consideration awarded but not yet signed contracts, was 1,700,000,000 compared to $1,800,000,000 at the end of December 2022. While we have now seen our revenues exceed our backlog sales The size of the projects in the market that DBMG is pursuing would have a meaningful impact on backlog in the upcoming quarters if successful in their bid process. DBMG ended the quarter with $237,000,000 of debt, which is a decrease of $6,000,000 from year end 2022, driven by normal debt amortization payments and a small reduction in the credit facility.

Speaker 4

At Life Sciences, the increase in adjusted EBITDA loss is primarily driven by higher equity method losses from our investment in MetaBeacon. In February of 2023, MetaBeacon issued $7,500,000 of preferred stock to Huadong in exchange for additional shares of preferred stock. As a result of this equity transaction, Pansend recognized $3,800,000 of unrecognized equity method losses As Pansend's carrying amount of its investment in MetaBeacon had been previously reduced to 0. At Spectrum, revenue decreased $4,100,000 or 41.8 percent to $5,700,000 primarily driven by the elimination of advertising revenues at Asteca, which ceased operations at the end of last year. This is partially offset by an increase in station revenues, which launched new customers in the current period.

Speaker 4

Spectrum delivered adjusted EBITDA of $400,000 in the Q1 compared to adjusted EBITDA of $1,300,000 in the prior year quarter. The decrease was primarily driven by the termination of HC2 network and increases in SG and A to satisfy responsibilities previously performed by the Network Group. Our Spectrum has backfilled the channels that were broadcasting Azteca content. Several of the channels were not launched until the back end of the Adjusted EBITDA losses were $3,500,000 for the Q1 of 2023, down from the Q1 of 2022 by 1,100,000 The improvement was driven mostly by unreported expenses related to the settlement with the former CEO recorded in the prior period and a decrease in accounting and employee costs. During the Q1, the company closed on the sale of 19% interest in HMN and received $32,000,000 in proceeds.

Speaker 4

The proceeds were used to repay $15,000,000 of the corporate credit line and provide $10,000,000 of working capital funding to DBMG through intercompany and fund normal overhead costs in the Q1. At the end of the Q1, the company had $16,600,000 of cash and cash equivalents compared to $80,400,000 as of December 31, 2022. On a standalone basis, as of March 31, 2023, the corporate segment had cash and cash equivalents of $3,600,000 compared to $9,100,000 at the end of 2022. As mentioned in the previous call, the cash balance at year end was elevated As of March 31, 2023, Innovate had total principal outstanding indebtedness of 706,500,000 down $18,800,000 from $725,300,000 at the end of 2022, driven primarily by corporate's credit line repayment and infrastructure's principal payments, which was partially offset by RTU's additional borrowings from Lancer Capital. As Wayne mentioned above, after the quarter, we also entered into a new $35,000,000 unsecured note yesterday.

Speaker 4

Additionally, subsequent to the quarter, the company amended the credit agreement corporate credit agreement, which pushed the majority date to March 20 25 with the other terms materially unchanged and borrowed an additional $8,000,000 on the credit line on May For the most part, the draw was to purchase the DBMGI preferred stock previously discussed. With that, operator, we'd now like to open up the call for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. You will hear a 3 tone prompt acknowledging your request. Questions will be taken in the order received. Thank you.

Operator

And your first question comes from the line of Brian Charles from RW Press Break. Your line is now open.

Speaker 5

Hi, good afternoon. Thanks for taking my call. I'm just wondering, I guess, about the trend for EBITDA in infrastructure going forward over the course of the year. The delays that affected the Q1 Pushed some revenue, I guess, into the Q2. Is that would that make the Q2 sort of a catch up quarter?

Speaker 5

Or are we in just sort of a delayed environment in which we might see some headwinds over the course of the year.

Speaker 4

Right now, Yes. The current thinking is that these are just project delays in the start of the projects or the delays In completing certain work in the case of IBAC, but they expect I wouldn't say that it all gets made up in a quarter, everything shifts, Right. So, but by year end, I think they are still largely in line with what we were expecting to happen.

Speaker 5

Okay. Okay, fair enough. And the other projects you're looking at now, you see I guess you're saying The environment is getting a bit more competitive, but there are still some large scale projects that you're bidding on that you can reasonably expect to land That would be still in that sort of margin improved margin area that you were discussing at year end and I guess today?

Speaker 4

Yes. I mean, I think, like we said, we're starting to see some tightening in certain areas that were previous We were Ruston and the team were able to negotiate around. We still see better margins. So the margins haven't really been Active in the process at this point from what Ruston has told us.

Speaker 5

Okay. Okay. Another quick question about broadcasting. I guess you I think you had said you had signed up the bandwidth vacated by Asteca By quarter end, is there any kind of guidance you can give us on what maybe the run rate might be for EBITDA Once now that this all the space is signed

Speaker 4

up? Yes. I mean, I think we'll continue to fill space. We've largely Phil, we've exceeded what we were from an intercompany perspective, charging Astec at a broadcast on those stations and still have more space to sell. I think when you think about how the quarters progressed last year, 1 through 4, Azteca was profitable in 2021 and really into the Q1 of 2022, It then started to go flat to a slight loss by the end of Q3 when we made the decision to shut it down.

Speaker 4

There were some one time good guys, small things that helped a little bit in the Q4. But we should continue to see Improvement as we get the full impact of the quarter for those new customers And continue to sell out the space. But I think you have to be cautioned And what you're thinking as far as it's not going to all of a sudden jump up significantly, it's going to gradually increase. We should see a pretty decent bump in by getting the full quarter impact in Q2. But I think it's going to increase gradually over the course of time.

Speaker 5

Okay, thanks. Just one last question about the unsecured note issued to Continental. You say The coupon is going to jump up, I guess, on an annual basis over the next couple of years. Well, what are your plans for Dealing with that, would you try to pay it off sooner than later or let's see outstanding for a while?

Speaker 3

Yes. I think we wanted to have a little bit of a runway and a little bit of flexibility so that the Board can continue To make good decisions and not be forced into having to do something because of timing or maturities. And so our plan definitely is to take a look at the entirety of the debt across the holding company. And we're obviously looking at different opportunities to handle that debt and to refinance it, then The subordinated note would be no different.

Speaker 4

And I think by the time we get to the 2nd anniversary, We're already that's already well inside a year of when our senior secured notes mature. So we would obviously have to take care of this at the same time. So that's the thought process there.

Speaker 5

Okay. Okay, that's all I've got for now. I'll jump back in queue. Thanks.

Speaker 3

Great. Thank you.

Operator

Thank you. And your next question comes from the line of Andrew White from Nautry. Please proceed.

Speaker 4

Hey, guys. Can you clarify if that new note is Issued by DBM or issued by the Holdco? Thank you.

Speaker 3

Sure. So it was issued by the Holdco, By Innovate Corp. And we now the HoldCo owns that preferred stock as well.

Speaker 4

It's unsecured that's subordinated to notes in the convert.

Speaker 3

Correct. Got it. Thanks, Ken. Thank you.

Operator

Thank you. There are no further questions at this time. Please continue.

Speaker 3

Very good. We'd like to thank everybody for joining us today. We will continue to keep you apprised as developments warrant. We look forward to speaking to you next quarter. Thank you.

Operator

Thank you. And that does conclude our conference for today. Thank you all for participating. You may now

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