Star Equity Q2 2023 Earnings Call Transcript

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August 11, 2023

There are 7 speakers on the call.

Operator

Greetings, ladies and gentlemen, and welcome to Star Equity Holdings, Inc. 2nd Quarter 2023 Results Conference Call. Please be advised that the 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 Star Equity's most recent 10 ks and 10 Q filings for a more complete description of risk factors that could affect these projections and assumptions.

Operator

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 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 U. S. GAAP. As required by 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.

Operator

If you did not receive a copy of the earnings release and would like When after the call, please contact Star Equity at 203-489-9500 or its Investor Relations representative, Lina Tadde of The Equity Group at 212-836 9,611. Also, this call is being broadcast live over the Internet and may be accessed at Star Equity's website at www.starequity.com. Shortly after this 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.

Speaker 1

Thank you, operator. Good morning, everyone. Thanks for joining us for our Q2 2023 results conference call. On the phone with me today are Executive Chairman, Jeff Eberwein and our Chief Financial Officer, Dave Noble. It's a pleasure to be with you today and update you on our Q2 performance.

Speaker 1

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 Digirad Health for $40,000,000 on May 4. This was a truly transformative transaction, which created immediate shareholder value and significantly strengthened our balance sheet. We ended the 2nd quarter with a cash balance of $21,400,000 And 0 debt, leaving us in a much stronger position to execute on our next stage of growth, including Bolt on and new business acquisitions and the ability to thoughtfully explore new opportunities within our Investments division. In addition to having $21,400,000 of cash and no debt, we also have a $6,000,000 equity position In TTG Imaging Solutions, the successor company to Digirad, dollars 8,500,000 in notes receivable, A $4,800,000 public equity portfolio and $5,000,000 of real estate.

Speaker 1

All of this is in addition to our valuable and growing construction businesses. Q2 of 2023, Revenue decreased 47 percent to $8,900,000 versus $16,800,000 in the Q2 of 2022, While the gross margin percentage increased to 29.3% versus 14.4% in the same period last year, The primary driver for the revenue shortfall was project timing, which in addition to normal variability was impacted by interest rates and macro Economic uncertainty. Despite lower revenue in the period, the division's gross margin percentage more than doubled versus the same period last year due to quality execution and management's ability to maintain pricing 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. As with any construction related business, revenue and expense recognition can vary greatly from project And quarter to quarter, and we caution investors to not read too much into single period results.

Speaker 1

Year to date, gross profit increased by 70.5 percent versus the 1st 6 months of last year, And we maintain our mid-20s or higher gross margin percentage target for our construction division. Despite economic headwinds across the construction space at large, our reputation as a reliable and high quality partner in select markets gives us a unique and sustainable position. Our 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. Heading into the second half of the year, we expect to maintain or grow our backlog. In addition, Our management teams continue to improve our manufacturing processes and strengthen our relationships with all of our clients and partners.

Speaker 1

Now I'll turn the call over to Dave Noble, our CFO, to provide additional 2nd quarter consolidated financial highlights. Dave, Please go ahead. Thank you, Rick, and good morning. Let's now turn

Speaker 2

to Star Equity consolidated financial results. I would like to note that due to the sale of our Healthcare on May 4, as Rick mentioned. All results and historical comparisons relate only to continuing operations, which include construction and investments. DIGRAD Health is now reported as part of our discontinued operations. In Q2 2023, SG and A increased by 31.7% versus Q2 2022.

Speaker 2

This was due to transactions related costs related to the sale of Digirad 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 point Non GAAP adjusted net loss from continuing operations in Q2 was $900,000 compared to an adjusted net loss of $800,000 in Q2 of 2022. Non GAAP adjusted EBITDA from continuing operations decreased to a negative $800,000 in Q2 of 2023 from a negative $400,000 in Q2 of 2022. Construction generated non GAAP adjusted EBITDA A positive $700,000 in Q2 this year, down from $1,300,000 in Q2 of 2022.

Speaker 2

For the year to date period, non GAAP adjusted EBITDA from continuing operations improved to a loss of $36,000 from a loss of $1,500,000 in the first half of twenty twenty two. Consolidated cash flow from continuing operations Q2 was a negative $3,300,000 versus a positive $3,600,000 in Q2 of 2022. This was driven by transactions related costs for the sale of Digirad, 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 $1,900,000 compared to a positive $2,900,000 in the prior year period. As of June 30, 2023, our consolidated balance sheet and liquidity were strong.

Speaker 2

As a result of the sale of our healthcare business, as was mentioned on May 4, We had 0 interest bearing debt remaining and our cash balance stood at $21,400,000 at the end of Q2. Now I'd like to turn the call back to Rick to add some additional remarks.

Speaker 1

Thanks, Dave. The Digirad sale was a monumental Change to our business. The team worked diligently on this for several months with an impressive result for our shareholders. However, I don't want to overlook the exceptional work that's being done in both of our construction businesses. Strong leadership along with disciplined We'll continue to assess and prioritize the next steps of our growth strategy.

Speaker 1

We look forward to sharing more details with shareholders as our plans evolve. I'll turn the call over to the operator now for questions.

Operator

Thank you. We will now begin the question and answer session. From group. Please go ahead.

Speaker 3

Hi, thank you. I mean just looking where the stock is and I mean and your book value Per share or less the preferred with an equity of around a little above $3 I mean, can you give more detail on the value you realized In your healthcare business, I mean $27,000,000 in the quarter from income from discontinued operations. Was that All the gain on the sale of Digirad or was some of that a loss on operations or income from operations since you sold it in the quarter? Please just start there.

Speaker 2

Yes. Thanks, Tate. The actual gain from the sale was $26,000,000 for the sale of Digirad. In terms of value realized, we've received the cash portion of that. We also have $6,000,000 Equity in the entity that we sold Digirad to and $7,000,000 of sellers note.

Speaker 2

So we believe that we realize a tremendous amount of value. It may not be We've cleaned up the balance sheet. We've really set up a platform for growth with no debt and a lot of cash.

Speaker 1

Yes, Tate, this is Rick. I would add that we really fought hard for the equity. We believe in the strategic plan that TCG has going forward and we're

Speaker 3

You have a slide in your presentation this morning on the I mean that realize roughly around $63,000,000 in value through the healthcare division through going back to 2018. I mean internally, do you look at it as Full of invested capital on the cash that you've outlaid in that business or do you have that figure available?

Speaker 2

We don't. We can certainly try

Speaker 1

to put that together for you, Tate, but we don't have that available.

Speaker 3

But suffice to say, I mean, you grew that $63,000,000 Okay, I can figure out the cash outlays through that. And then the out what is your current investment Portfolio value or not current as of sixthirty, is it understanding through and how many have you disclosed how many unrealized gains or profits are in that

Speaker 4

Hey Tate, this is Jeff. So Yes. On the investment portfolio under GAAP, we mark that to market every quarter. So the value That's in the investor deck that we published this morning will match what's in the 10 Q It's going to 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 for those securities. So it's in the footnotes, it's all kind of level 1

Speaker 3

Okay. I'll look for that in the queue. 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 us figure before that the real estate appraised value It's much higher than on your books and I'm just looking for it now as well.

Speaker 2

Yes. 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 2 factories that we retained. We did sell a third during the quarter that we really didn't see any use for and that was the smallest of the 3. But we believe the market value of those 2 remaining facilities It is significantly above where we have it booked. That's point 1.

Speaker 2

Point 2 is, we have significant upside in that business. We're operational in one of those two factors, 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 The factories that we own.

Speaker 4

Tate, this is Jeff. This may or may not be helpful, but there's kind of 3 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 book value. And so If this is helpful, the 3rd factory that Dave was just talking about, we sold it for approximately $1,200,000 That was its appraised value.

Speaker 4

And then if you look at financials or like the adjusted EBITDA table, you'll see a gain $424,000 So that gives you a sense of what the book value was. And so the appraised value was higher than the book value and we're saying we think The market value of those assets is at least the appraised value and probably higher.

Speaker 3

Thank you. And then last for me is on the construction gross profit margin consistently well above 20% for the last 4 quarters, it sounds like you have a good backlog in that business, based on the visibility of the projects. Is that still it seems like can you maintain this type level of gross profit margin recently? I think historically You said, a target of greater than 20%, is that still the case?

Speaker 1

Yes. Our target remains mid-20s or higher.

Speaker 3

Excellent. Thank you very much.

Speaker 1

Thanks, Damian.

Operator

Our next question comes from Theodore O'Neill with Litchfield Hills Research. Please go ahead.

Speaker 5

Thank you very much. Rick, probably I'll use a little guidance on the revenue going out. Is it going to be A variable around the current quarter's level or does it vary between the current quarter and the year ago quarter? If you could give us any kind of sense for that?

Speaker 1

Yes, 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 We could have 1 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 our revenues and our profits don't fall into the quarter that they may have if we had a different project Julio?

Speaker 4

And Tio, this is Jeff. I would just add, the production flow is It's fairly steady, but revenue recognition has gotten a lot of scrutiny in 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 a way, if you look at A rolling 4 quarter average or you look at last year's results, I mean, we think we have a business that Should do $50,000,000 to $60,000,000 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 part of construction With a lot of the themes that we've talked about, factory build, we think is going to take share and there's a lot of emphasis on workforce housing, Environmentally friendly housing and we have great products for that.

Speaker 4

So we think there's some secular growth characteristics in what Can be a cyclical business, and we would just caution people to not read too much into any one quarter's Revenue, if you took any 1 quarter and multiply it times 4, you get a lot more volatility than you would if It's looking like a 4 quarter average.

Speaker 5

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

Speaker 1

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

Speaker 5

Does it get disclosed annually? Is that what it is, not just quarterly?

Speaker 4

Well, we have some information in our investor deck that we filed this morning. Fairly consistently, we've had a sales pipeline of $50,000,000 or greater That's been pretty consistent for a year or 2 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 just the point we're trying to make on that is that our sales pipeline has been pretty consistent. Our backlog has been pretty consistent.

Speaker 4

And what's not consistent is the quarterly revenues just because of the revenue recognition rules. So our businesses Isn't nearly as lumpy as the quarterly revenue ups and downs would imply.

Speaker 5

I can appreciate that. Okay, thanks very much.

Operator

Our next question comes from Mark Ross with Aegis. Please go ahead.

Speaker 1

Yes. I was just a little perplexed as to Being where the stock price is, you guys wouldn't be buying back some stock?

Speaker 4

Yes. This is Jeff. 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 last quarter's activity and that's a tool in the toolkit.

Speaker 4

We Have bought back stock historically. And as a microcap, We also need to focus on just having more critical mass as a company. So the Board thinks about those things all the time and talked about those things and our focus is growing value per share And stock repurchases, we agree, is one way to do that.

Speaker 1

All right. Thank you.

Operator

Our next question comes from Kevin Exel with North First. Please go ahead. Hi.

Speaker 6

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 IRR compared to some of your potential microcap investments versus buying back shares. And then, as I understand it, some of the story is you need to get to scale 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 thoughts on how you get there?

Speaker 4

Yes, a lot of things in there. This is Jeff again. The primary focus is growing value per Sure. And everything else is a means to that end. And so when we make investments, whether it's A CapEx investment in our construction division or in any other investment, It's definitely got to have a high return and we think buying back stock has a high return.

Speaker 4

We think Getting more scale adds 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 to size. So for example, 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 $100,000,000 instead of $50,000,000 The multiple at which we could sell that business at would be higher Then for what it is today, which is a $50,000,000 revenue business. And that was one of the reasons why we've made the decision to So the healthcare business, we were doing about $50,000,000 to $60,000,000 in revenue.

Speaker 4

We didn't see a path to get to 100,000,000 Unless we were willing to aggressively make acquisitions and we just didn't think that was an attractive Return on capital, so we made the decision to merge it with another business, got cash, Got sellers note and also got equity in that new entity. So I think over the long term, you'll see us Buy things and sell things and it's all driven by our expectation for internal rate of return with the goal of maximizing value per share over the long term.

Speaker 6

Got it. Okay. All right. Thank

Operator

Our next question is a follow-up from Tate Sullivan with Maxim Group. Please go ahead.

Speaker 3

Hi. Thank you for taking the follow-up. I think you've talked about Revenue capacity in construction before, if it does not include opening the other facility, Is it just a matter of flexing up the labor or have you mentioned a revenue capacity number or unit capacity before, please?

Speaker 1

Yes, Tate. 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 trust manufacturing

Speaker 6

or

Speaker 1

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 You'll get that factory open and producing additional revenue. Yes. The only thing

Speaker 2

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.

Speaker 1

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

Operator

Okay.

Speaker 1

Without having to expand into the other factory.

Speaker 6

Okay.

Speaker 3

All right. Thank you.

Operator

That concludes today's question and answer session. I will now turn the call back over to Rick Coleman for closing remarks.

Speaker 1

Thank you, operator. Before concluding the call, I want to note 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 months. And as always, we appreciate all of our shareholders and your continued feedback and support.

Speaker 1

Thank you.

Operator

Thank you for joining the Star Equity Holdings Second Quarter Conference Call. Today's call has been recorded and will be available on the Investors section of our website, www.starequity.

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Key Takeaways

  • Star Equity completed the divestiture of its healthcare division (Digirad Health) for $40 million on May 4, ending Q2 with $21.4 million in cash, zero debt and additional equity, notes receivable and real estate assets to support growth.
  • Q2 2023 revenue declined 47% to $8.9 million vs. prior year, but gross margin more than doubled to 29.3% from 14.4%, driven by pricing discipline and cost control.
  • Non-GAAP adjusted EBITDA from continuing operations was a negative $0.8 million (vs. –$0.4 million in Q2 2022), while construction generated +$0.7 million, and year-to-date EBITDA loss improved to –$36 000.
  • The construction division targets mid-20s% gross margins, backed by a healthy sales pipeline (~$50 million) and backlog, with plans to sustain or grow volumes in workforce, affordable and modular housing markets.
  • With a strengthened balance sheet and no debt, management is focused on bolt-on acquisitions, returns-driven investments and exploring share repurchases to maximize long-term value per share.
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Earnings Conference Call
Star Equity Q2 2023
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