Star Equity Q3 2024 Earnings Report

Star Equity EPS Results

• Actual EPS: -$0.29
• Consensus EPS: -$0.32
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: $0.05

Star Equity Revenue Results

• Actual Revenue: $13.66 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Star Equity Announcement Details

• Quarter: Q3 2024
• Date: 11/19/2024
• Time: Before Market Opens
• Conference Call Date: Tuesday, November 19, 2024
• Conference Call Time: 10:00AM ET

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Star Equity Q3 2024 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Reported Q3 revenue increased 30.9% year-over-year, driven by the inclusion of Timber Technologies and Big Lake Lumber acquisitions.
• Negative Sentiment: Recorded a $2.8 million impairment in SG&A related to its TTG equity investment, contributing to a 53.7% rise in SG&A expenses versus Q3 2023.
• Positive Sentiment: Secured a $3 million contract for cottages and a $1.6 million contract for affordable housing in Maine, plus deposits on two additional KBS projects totaling over $5 million, signaling returning demand.
• Negative Sentiment: Reported a net loss from continuing operations of $2 million in Q3 and a non-GAAP adjusted EBITDA loss of $0.3 million, compared to breakeven a year ago.
• Positive Sentiment: Completed sale-leaseback transactions on South Paris, ME and Big Lake, MN facilities, generating approximately $8.3 million in net proceeds to fund growth initiatives.

Presentation

[Operator]

Greetings, ladies and gentlemen, and welcome to Star Equity Holdings' third quarter 2024 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 Holdings' most recent 10-K, 10-Q, and other filings for a more complete description 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 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.

[Operator]

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. If you do not receive a copy of their earnings release and would like one after the call, please contact Star Equity at 203-489-9500 or with investor relations representative Lena Cati of The Equity Group at 212-836-9611. Also, this call is being broadcast live over the internet and may be accessed at Star Equity's website via www.starequity.com. 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. Please go ahead.

[Richard K. Coleman, Jr., Chief Operating Officer at Star Equity Holdings]

Thank you, Wyatt. Good morning, everyone. We appreciate you joining us for our third quarter 2024 results conference call. On the call with me today are our Executive Chairman, Jeff Eberwein, and our Chief Financial Officer, Dave Noble. I'll start today by providing an overview of our recent business developments and financial highlights. Then Dave will provide additional details on our consolidated financial results. Our third quarter revenue increased 30.9% over the third quarter of 2023, driven primarily by the inclusion of Timber Technologies' revenue from the date of acquisition and the inclusion of revenues from our Q4 2023 acquisition of Big Lake Lumber. Gross margin declined by 0.5%, largely due to fixed costs remaining constant despite revenue declines at both KBS and EdgeBuilder Glenbrook, or EBGL.

[Richard K. Coleman, Jr., Chief Operating Officer at Star Equity Holdings]

Overall, the organic performance of our Building Solutions division since the beginning of the year reflects the ongoing impact of higher interest rates, economic uncertainty, and corresponding delays in commercial contracts throughout the first half of the year. We're now beginning to see indications of a slow but steady return to normal, as evidenced by two large KBS projects we announced in early October: a $3 million contract to manufacture cottages and a $1.6 million contract for affordable housing units, both in the state of Maine. We've also received letters of intent and substantial deposits on two additional KBS projects totaling over $5 million, which we expect to announce within weeks. We believe all of these projects illustrate the strength of KBS's reputation as New England's premier modular manufacturer and are an encouraging sign of returning demand for large commercial construction projects.

[Richard K. Coleman, Jr., Chief Operating Officer at Star Equity Holdings]

We are also seeing increased activity and interest from customers who had previously put projects on hold earlier in the year, and fourth quarter project signings indicate a material improvement in activity across our entire building solutions division. Our construction backlog and sales pipeline remain strong, and the recent interest rate cuts coupled with high demand for housing give us confidence in our ability to convert additional pipeline opportunities into signed contracts in the near future. We believe this momentum shift will translate into significantly improved financial results for both the current quarter and fiscal year 2025. We're also confident that our market reputation as a reliable and high-quality partner gives us a unique and sustainable position, which we will continue to leverage as the construction sector regains strength.

[Richard K. Coleman, Jr., Chief Operating Officer at Star Equity Holdings]

In our Investments division, we announced the further diversification of our portfolio and our entrance into the energy services and transportation and logistics sectors through our investment in Inservco, a Colorado-based energy services company that recently expanded into the transportation and logistics sector with its acquisition of Buckshot Trucking. The transaction involved an exchange of shares representative of a $2.5 million investment and a $1 million promissory note to facilitate the Buckshot acquisition. We believe Inservco's strong management team and ongoing reorganization position it well for long-term growth, and we believe that our investment will generate long-term value for our shareholders. We continue to focus on all elements of our growth strategy, including Business Solutions division expansion, acquisitions that would mark our entry into new industries, and exploring new opportunities at our Investments division.

[Richard K. Coleman, Jr., Chief Operating Officer at Star Equity Holdings]

Our fourth quarter 2023 acquisition of Big Lake Lumber, now successfully integrated into our EBGL operation, and our second quarter 2024 acquisition of Timber Technologies are both performing as expected and give us confidence in our ability to identify, evaluate, and close accretive acquisitions. In the coming quarters, we will continue to focus on profitable growth opportunities in addition to improving the strength of our existing businesses. Now, I'll turn the call over to Dave Noble, our CFO, to provide additional third quarter consolidated financial highlights. Dave, please go ahead.

[David J. Noble, CFO at Star Equity Holdings]

Thank you, Rick, and good morning. Let's now turn to Star Equity's consolidated financial results, which are represented by our two operating divisions: building solutions and investments. In Q3 2024, gross profit was $2.8 million, up 27.9% versus Q3 of 2023. This was driven by increased revenue despite slightly lower gross margins in our building solutions division. SG&A increased by $4 million, or 53.7%, versus Q3 2023, driven largely by a $2.8 million impairment related to our equity investment in TTG, which we acquired through our 2023 sale of Digirad. We recorded this impairment after analyzing the financial performance of TTG and considering comparable company EBITDA valuation multiples. Excluding all non-recurring items, SG&A expenses as a percentage of revenue for Q3 2024 were 30.0% versus 30.8% in Q3 of 2023.

[David J. Noble, CFO at Star Equity Holdings]

Moving on to the bottom line results for Star Equity, we reported a net loss from continuing operations of $2 million for Q3 of 2024, compared to a net loss from continuing operations of $2.4 million in Q3 of 2023. Non-GAAP adjusted net loss from continuing operations in Q3 was $0.9 million, or $0.31 per share, compared to adjusted net income of $0.2 million, or $0.07 per share in Q3 2023. Non-GAAP adjusted EBITDA from continuing operations was a loss of $0.3 million in Q3 versus break-even adjusted EBITDA in the same period last year. Consolidated cash flow from continuing operations for the first nine months of 2024 was an outflow of $3.7 million versus an inflow of $2.7 million in the first nine months of 2023.

[David J. Noble, CFO at Star Equity Holdings]

The negative cash flow from operating activities is attributable to lower levels of business activity in our building solutions division during early 2024 due to the macroeconomic uncertainty and the higher interest rates. However, we are seeing increased activity in Q4, as Rick mentioned. At the end of the third quarter, our consolidated unrestricted cash balance stood at $5.5 million compared to $18.3 million at the end of 2023. This difference is roughly representative of the upfront cash used to close the acquisition of Timber Technologies in the second quarter of 2024. Also, as previously announced, in the third quarter of 2024, we closed two sale-leaseback transactions for our South Paris, Maine and Big Lake, Minnesota facilities, totaling approximately $8.3 million in net proceeds. These transactions reflect Star's commitment to strategic capital allocation and the prioritization of EBITDA-generating assets and position us well to pursue our long-term growth strategy.

[David J. Noble, CFO at Star Equity Holdings]

Turning to our investments division, our holdings in public equity securities at the end of the quarter amounted to $3.2 million versus $4.8 million a year ago, as we substantially exited one of our public equity positions following its acquisition by another public company. Our rollover equity investment and seller note receivable from the sale of Digirad to TTG in May of 2023 were valued at $1.9 million and $8.0 million, respectively. Now, I'd like to turn the call back over to Rick for some additional remarks.

[Richard K. Coleman, Jr., Chief Operating Officer at Star Equity Holdings]

Thank you, Dave. As I previously mentioned, we're encouraged by the recent momentum we're experiencing at the building solutions division, as well as the progress we've been making on the M&A front. The Star Equity Board and management team are fully focused on creating shareholder value through our targeted business development initiatives and will continue to identify additional accretive opportunities at both our building solutions and investments divisions. I'll now turn the call back over to the operator for questions. Operator.

[Operator]

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 speakerphone, 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, and the first question comes from Theodore O'Neill with Litchfield Hills Research. Please go ahead.

[Theodore R. O'Neill, Analyst at Litchfield Hills Research]

Oh, thanks very much. Rick, my first question is, on the improved outlook, we had a couple of quarters of things getting pushed out. Is the improvement here those older issues, those older things getting pushed out coming back in, or is this new business or some combination of the two?

[Richard K. Coleman, Jr., Chief Operating Officer at Star Equity Holdings]

Thank you, Theo. It's actually both. We're seeing new business coming in, filling the pipeline, and also a number of those deals that had never been canceled out have just been delayed are now coming to fruition as builders and homeowners are adjusting to the change in interest rates and the overall environment. There's still strong demand for housing, and we weren't really seeing major elimination of projects, just continued delays.

[Theodore R. O'Neill, Analyst at Litchfield Hills Research]

For Dave, the impairment cost of $2.8 million recorded in SG&A, should we expect more of that? And how much is left to write down, if any?

[David J. Noble, CFO at Star Equity Holdings]

Yeah, we would hope for not to see more of that. There is a restructuring underway that Rick is on the board at TTG, so he knows a lot more about it, but they are making a lot of efforts to kind of exit some unprofitable businesses around. So it's hard for us to say sitting on this side, but we do not anticipate further write-downs, although that could happen.

[Theodore R. O'Neill, Analyst at Litchfield Hills Research]

Okay. Sorry, go ahead.

[Jeffrey E. Eberwein, CEO and Director at Star Equity Holdings]

Jeff, just to go back to May of 2023, when we sold Digirad to TTG, we got cash, a seller note of $7 million, and equity of $6 million, so that's kind of $13 million of potential future proceeds, so the $7 million in debt has accreted up to $8 million because of the fixed interest, and the $6 million of equity has been written down to $1.9 million, so it is possible the equity could be written down further, but the max that could be written down is $1.9 million. We don't see a scenario where we'd have to write down the debt piece, and as you know, in GAAP accounting, we might have to write things down, but we never write them back up, but TTG is owned by a PE firm, and we expect it to be sold at some point in the coming years.

[Jeffrey E. Eberwein, CEO and Director at Star Equity Holdings]

And we'll see what our proceeds are at that time. And if it gets sold for a higher price than the mark, those write-downs would turn into gains at some point in the future.

[Theodore R. O'Neill, Analyst at Litchfield Hills Research]

Right. That's helpful. Thanks, Jeff. I know this is going to be probably hard to gauge, but if we end up with the new administration putting tariffs on everything, how much of the business is exposed to imported lumber products?

[Richard K. Coleman, Jr., Chief Operating Officer at Star Equity Holdings]

Yeah, that's a really good question.

[Jeffrey E. Eberwein, CEO and Director at Star Equity Holdings]

Theo, so we don't buy much imported lumber, but the market would be impacted by that. And we do tend to hedge the bigger projects. So even if we don't buy imported lumber, other people do, primarily from Canada. So that would be the main market to watch: is there an increase in tariffs on lumber from Canada? And I would suggest that if that were to happen, it would be an industry issue, not a Star issue, and everyone would have to raise prices to pass that through. But it's hard to see anything that's Star-specific on that.

[Theodore R. O'Neill, Analyst at Litchfield Hills Research]

Yeah. And would you be able to have it in your contracts that if those prices change, you could pass that on?

[Jeffrey E. Eberwein, CEO and Director at Star Equity Holdings]

Yeah. Another good question. One thing we did when you had the big run-up in lumber prices after COVID, and there have been long periods of stability in lumber prices, but there was a run-up before COVID, and then there was another run-up after COVID. And we have pushed that risk much more to the client side. So clients have several choices. We can fix the price, and then they give us the money to buy the lumber, and that's the best hedge. The second option is that the price and the contract have some openers where it could be revised if lumber prices move. And a third option that we're happy to do is we will hedge, and then they have to pay us for managing that hedge, but we will effectively hedge on their behalf.

[Theodore R. O'Neill, Analyst at Litchfield Hills Research]

Okay. Thanks very much.

[Operator]

Again, if you have a question, please press star, then one. Our next question comes from Tate Sullivan with Maxim Group. Please go ahead.

[Tate Sullivan, Managing Director and Senior Research Analyst at Maxim Group]

Thanks, Rick. To start with the $14 million of revenue in the quarter in building solutions, can you give a little context around what was in there? I mean, how many projects or type of projects? If you can share that.

[Richard K. Coleman, Jr., Chief Operating Officer at Star Equity Holdings]

Yeah. I mean, that's a little hard to do on the fly, but I mean, it's a good contribution from all of our businesses, from the modular side as well as EdgeBuilder with the new Big Lake acquisition. I would say wall panels were a little slow. So on the EdgeBuilder side, it was more the professionally driven retail distribution business that contributed. And also Timber Technologies. Timber Technologies is amongst the steadiest of our businesses. They sell a lot of their product to distributors. So I'd say the volatility of their revenue is less than what our legacy business is. But I think it's a good contribution across the board. And being in the fourth quarter is a pretty strong performance from each of those three businesses.

[David J. Noble, CFO at Star Equity Holdings]

Yeah. And Tate, I would just add the business of the three businesses we have, the one that has the most variability, especially relative to its size, is KBS, just because they get these really large multifamily or commercial projects from time to time. And that's why when you see us issuing a press release, it's only ever on a large project, and those are disproportionately related to KBS. And there has been a lack of those in the first three quarters of this year as projects got delayed. And so as we look forward into Q4 and the first half of next year, we do anticipate a significant increase in revenue, particularly at KBS. But we are seeing improvement in all three of our businesses.

[Jeffrey E. Eberwein, CEO and Director at Star Equity Holdings]

Related to that, Jeff, the order announcement, the $5 million project indication, you called out receiving deposits on that. Is that a normal course of business for KBS to get deposits, or is it part of the negotiation?

[Richard K. Coleman, Jr., Chief Operating Officer at Star Equity Holdings]

Yeah, I'll take that one, Tate. That is a normal course of business for larger commercial projects such as that. Those typically run about 10% of the value of the project and are non-refundable deposits that are used for purchasing materials and initiating other things related to the project.

[Richard K. Coleman, Jr., Chief Operating Officer at Star Equity Holdings]

Our policy on that is we don't issue a press release. We only do a press release on a project above $2 million, and almost all of those tend to be KBS projects. We don't issue a press release until we have a signed contract. In this instance, we're very far along. Contracts on those two are almost done. The clients feel so strongly about getting started that they've, even though the contract isn't signed yet, they've given us a deposit so we can start purchasing materials so that there's no delays and we can meet their delivery dates and have it be on time and on budget. Given how close that is, we went ahead and put it in our earnings press release.

[Tate Sullivan, Managing Director and Senior Research Analyst at Maxim Group]

Thank you. And last for me is the sequential quarter-over-quarter improvement in the margins. I mean, Building Solutions gross profit went from 16% to 21%. Was that project, can you call out anything specific, or was it across the three businesses that you indicated earlier for the increase in revenue?

[Tate Sullivan, Managing Director and Senior Research Analyst at Maxim Group]

I'm sorry. You're asking about Q3 versus a previous period?

[Theodore R. O'Neill, Analyst at Litchfield Hills Research]

Yeah, versus Q2.

[Tate Sullivan, Managing Director and Senior Research Analyst at Maxim Group]

Q2. I'm guessing that that is having a full quarter of Timber Technologies in there, whereas Q2 only had a partway quarter. And that is the highest margin business of the three and most consistent is Timber Technologies.

[Tate Sullivan, Managing Director and Senior Research Analyst at Maxim Group]

Okay. Thank you very much.

[Operator]

Once again, if you have a question, please press star, then one. With no further questions, this concludes today's question and answer session. I would now like to turn the call over to Rick Coleman for closing remarks.

[Richard K. Coleman, Jr., Chief Operating Officer at Star Equity Holdings]

Thank you, operator. Thanks for your time today. We appreciate your interest and your continued feedback and support. So please don't hesitate to contact us. We're excited about the steps we're taking on your behalf and look forward to updating you as our story develops.

[Operator]

All right. Thank you for joining the Star Equity Holdings third quarter conference call.

Participants

Executives

• Richard K. Coleman, Jr., Chief Operating Officer
• Jeffrey E. Eberwein, CEO and Director
• David J. Noble, CFO

Analysts

• Tate Sullivan, Managing Director and Senior Research Analyst at Maxim Group
• Theodore R. O'Neill, Analyst at Litchfield Hills Research