INNOVATE Q3 2024 Earnings Report

INNOVATE EPS Results

• Actual EPS: -$1.18
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

INNOVATE Revenue Results

• Actual Revenue: $242.20 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

INNOVATE Announcement Details

• Quarter: Q3 2024
• Date: 11/6/2024
• Time: After Market Closes
• Conference Call Date: Wednesday, November 6, 2024
• Conference Call Time: 4:30PM ET

INNOVATE (NYSE:VATE) is a diversified holding company focused on operating and developing businesses in infrastructure and life sciences. The company seeks to build long-term value through a portfolio of operating subsidiaries and investments rather than through a single product or industry.

Its infrastructure operations are primarily conducted through DBM Global, a specialty industrial construction and steel fabrication company. DBM Global provides structural steel fabrication, detailing, construction and project-management services for commercial, industrial, infrastructure and other large-scale projects. Its activities serve customers across the United States and select international markets.

INNOVATE’s life sciences activities include R2 Technologies, which develops and commercializes medical-aesthetic technologies and devices for dermatology and related applications. The company was formerly known as HC2 Holdings Inc. and adopted the INNOVATE name in 2021. Its corporate headquarters are in New York, although its operating businesses serve customers in multiple geographic markets.

INNOVATE Q3 2024 Earnings Call Transcript

Key Takeaways

• Innovate reported consolidated Q3 2024 revenue of $242.2M (down 35.5% YoY) and a net loss of $15.3M with adjusted EBITDA falling to $16.8M from $22.1M a year ago.
• Infrastructure segment (DBM Global) saw a 37% revenue decline but achieved a 360-basis-point gross margin improvement to 18.8% and maintained an adjusted backlog of $1.1B.
• Life Sciences (R2) posted record Q3 sales, with year-to-date top-line growth of 217% to $5.7M, secured a backlog of over 60 systems and expanded its international footprint.
• MediBeacon continues collaborative discussions with the FDA on its first-in-kind transdermal GFR kidney monitoring program, but timing of approval remains uncertain.
• Spectrum improved profitability, delivering $1.7M in Q3 adjusted EBITDA versus a $0.3M loss in the prior year, driven by new network launches and expanded coverage.

Presentation

[Operator]

Good afternoon and welcome to Innovate Corp Third Quarter 2024 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 Rozmus with Investor Relations. Please go ahead.

[Anthony Rozmus, Investor Relations at INNOVATE]

Good afternoon. Thank you for being with us to review Innovate's Third Quarter 2024 earnings results. We are joined today by Paul Voigt, Innovate's Interim CEO, and Mike Sena, Innovate's CFO. 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&A session. This call is also being simulcast and will be archived on our website.

[Anthony Rozmus, Investor Relations at INNOVATE]

During this call, management may make certain statements and assumptions which are not historical facts, will be forward-looking, and are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements involve risk 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.

[Anthony Rozmus, Investor Relations at INNOVATE]

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-K 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.

[Anthony Rozmus, Investor Relations at INNOVATE]

Management will also refer to certain non-GAAP financial measures such as Adjusted EBITDA. 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 is my pleasure to turn things over to Paul Voigt.

[Paul Voigt, Interim CEO at INNOVATE]

Good afternoon. We are pleased to report our strong third-quarter financial results and will update you on key milestones reached that exemplify the progress across each business segment. Innovate delivered consolidated revenues of $242.2 million and Adjusted EBITDA of $16.8 million in the third quarter of 2024. DBM Global achieved revenues of $232.8 million and Adjusted EBITDA of $20.9 million.

[Paul Voigt, Interim CEO at INNOVATE]

During the quarter, DBM has seen gross margin improvement year-over-year of approximately 360 basis points to 18.8% and Adjusted EBITDA year-over-year by approximately 70 basis points to 9%. As we've discussed on previous calls, we are expecting results for the full year to come in slightly lower versus last year. DBM delivered a very strong first half. However, as expected and as we signaled on previous calls, the back half of 2024 will be lighter compared to the same period of 2023.

[Paul Voigt, Interim CEO at INNOVATE]

This year has been unusual, with the first half outperforming the second half, and the results for the first nine months have met our expectations, aligning with results from the previous year. While third-quarter sales were lighter than expectations, this was offset by higher margins in the quarter. We still expect Adjusted EBITDA to be slightly lower than last year's results. DBM's total adjusted backlog, which takes into consideration awarded but not yet signed contracts, increased to $1.1 billion at the end of the third quarter.

[Paul Voigt, Interim CEO at INNOVATE]

There continues to be high volume of bidding opportunities in the commercial market today, although many projects have not yet been released to start construction. Moving on to life sciences, R2 posted another strong financial quarter and made significant commercial progress. Year-to-date, worldwide top-line sales reached $5.7 million, a record high.

[Paul Voigt, Interim CEO at INNOVATE]

R2's top-line sales grew 217% for the first nine months ended September 30, 2024, compared to the same period last year, and also already 73% higher than top-line sales for the full year 2023. System unit sales worldwide saw a massive increase of 416% growth from third quarter 2023 to third quarter 2024. R2 has also secured a robust backlog of over 60 systems worldwide, positioning the company well as it heads into the fourth quarter.

[Paul Voigt, Interim CEO at INNOVATE]

Since its commercial launch, R2 has sold systems into multiple countries outside the U.S., including Canada, Mexico, UAE, Saudi Arabia, Qatar, Hong Kong, Japan, Singapore, Vietnam, and China. R2 plans to expand its international footprint in months to come. R2 is also pleased to announce the launch of a partnership with its very first national account chain.

[Paul Voigt, Interim CEO at INNOVATE]

Glacial providers continue to see incredible results using Glacial Skin devices, evidenced by 168% growth in patients treated and the increase in average monthly utilization by 58% per Glacial provider over the same period. Glacial brand awareness has a significant impact on sales, and we have seen repeated and continued growth in this area throughout 2024, exceeding industry competitor growth by 1,429%.

[Paul Voigt, Interim CEO at INNOVATE]

R2 experienced year-over-year growth of 4,086% increase in social mentions, a 498% increase in web users, and a 104% increase in patient-provider searches. We are extremely pleased with the progress and momentum of R2. They are well-positioned in the market and have enough product capabilities to meet the current demand. MediBeacon remains dedicated to collaborating with the FDA as they conduct substantive review of the kidney monitoring program. MediBeacon continues to see great opportunities in the market for real-time monitoring of kidney functions.

[Paul Voigt, Interim CEO at INNOVATE]

The transdermal GFR is the first in-kind product for real-time assessment of kidney function, which is unlike any current methodologies in the market. Finally, Spectrum continues to achieve strong financial results with the launch of new networks and expanded coverage with existing customers. The quarter was highlighted by an improvement in profitability once again, with Adjusted EBITDA of $1.7 million in the third quarter, a $2 million improvement year-over-year.

[Paul Voigt, Interim CEO at INNOVATE]

Year-to-date, Spectrum has delivered $4.8 million in Adjusted EBITDA, a significant increase compared to $900,000 through the first nine months of 2023. New launches once again drove higher revenue growth in the quarter. Of note, Free TV's network, Defy, launched in the third quarter. Broadcasting continues to see many OTA network opportunities on the horizon for 2025 as streaming networks explore over-the-air coverage.

[Paul Voigt, Interim CEO at INNOVATE]

Broadcasting also continues to make progress on discussions with prospective strategic partners in pursuit of new Spectrum-related revenue opportunities in ATSC 3.0, lighthousing, datacasting, and 5G broadcasting. We are very happy with the operational results of all three of our segments. DBM's margin continues to be strong, and business has a robust pipeline well-positioned for 2025.

[Paul Voigt, Interim CEO at INNOVATE]

At quarter end, R2 made significant progress in way of growth, and we continue to make progress at MediBeacon. Spectrum's profitability has improved dramatically in the quarter and year-to-date. We continue to see the benefits firsthand of the strong management teams in place at each of our business segments, with the right path forward as evidenced by key milestones achieved so far in 2024. Addressing our capital structure remains a primary focus. We are consistently making headway in exploring strategic alternatives with non-cash-flowing businesses.

[Paul Voigt, Interim CEO at INNOVATE]

We are encouraged by 2024 milestones we have seen at our non-cash-flowing businesses as we work to execute on a strategy to address the capital structure. Our strategy requires patience within our established timeframe to ensure we maximize the value of these assets. We maintain optimism about the overall M&A market and remain encouraged by the positive market indicators, along with ongoing progress and momentum around these assets. With that, I'll turn it over to Mike Sena, our CFO, for a review of our financials and capital structure.

[Mike Sena, CFO at INNOVATE]

Thanks, Paul. Consolidated total revenue for the third quarter of 2024 was $242.2 million, a decrease of 35.5% compared to $375.3 million in the prior year period. The decrease was primarily driven by our infrastructure segment, which was partially offset by increases at our life sciences and Spectrum segments.

[Mike Sena, CFO at INNOVATE]

Net loss attributable to common stockholders and participating preferred stockholders for the third quarter of 2024 was $15.3 million, or $1.18 per fully diluted share, compared to a net loss of $7.3 million, or $0.93 per fully diluted share in the prior year period, which has been retroactively adjusted to reflect the 1-for-10 reverse stock split effected on August 8th, 2024. Total Adjusted EBITDA was $16.8 million in the third quarter of 2024, a decrease from $22.1 million in the prior year period.

[Mike Sena, CFO at INNOVATE]

The decrease was driven by the infrastructure segment, which was partially offset by our Spectrum, life sciences, and non-operating corporate segments. At infrastructure, revenue decreased 37% to $232.8 million from $369.3 million in the prior year quarter. The decrease was primarily driven by the timing and size of projects at Banker Steel and DBMG's commercial structural steel fabrication and erection business, both of which had increased activity in the comparable period on certain large commercial construction projects that are now at or near completion in the current period.

[Mike Sena, CFO at INNOVATE]

This is partially offset by an increase in the industrial maintenance and repair business as a result of an increase in project work. Infrastructure Adjusted EBITDA for the third quarter of 2024 decreased to $20.9 million from $30.8 million in the prior year period.

[Mike Sena, CFO at INNOVATE]

The decrease was driven by lower revenue at both DBMG's commercial structural steel fabrication and erection business and Banker Steel, partially offset by higher margins due to timing of projects that are now at or near completion, as well as low margins at the construction, modeling, and detail business.

[Mike Sena, CFO at INNOVATE]

This was partially offset by an increase in revenue and margins at the industrial maintenance and repair business and a decrease in recurring SG&A expenses, primarily as a result of a decrease due to timing of compensation-related expenses in the current year period. As of September 30, 2024, and in line with our expectation, reported backlog was $916.1 million, and adjusted backlog, which takes into consideration awarded but not yet signed contracts, was $1.1 billion, compared to reported backlog of $1.1 billion and adjusted backlog of $1.2 billion at the end of 2023.

[Mike Sena, CFO at INNOVATE]

DBMG ended the quarter with $176.8 million in principal amount of debt, which is an increase of $3 million from the second quarter, primarily driven by an increase in the credit line due to normal working capital fluctuations, which was partially offset by normal debt amortization payments. DBMG has been able to reduce its debt obligations since this time a year ago through line reduction as invested working capital has continued to return to the business, a trend that began at the end of 2023.

[Mike Sena, CFO at INNOVATE]

As backlog stabilizes, working capital needs have flattened throughout 2024 and expect to continue as such. As a reminder, DBMG has reduced its outstanding debt by approximately $56 million in the last 12 months. At life sciences, revenue increased 400% to $3 million from $600,000 in the prior year quarter.

[Mike Sena, CFO at INNOVATE]

The increase in revenue was attributable to R2, primarily due to an increase in Glacial FX system sales in North America, which launched during the third quarter of 2023. An increase in consumable sales, incremental Glacial Spa unit sales outside of North America, and the launch of the Glacial FX system outside North America subsequent to the prior period.

[Mike Sena, CFO at INNOVATE]

Life sciences Adjusted EBITDA losses decreased for the quarter, which was primarily due to fewer equity method losses recognized from our investment in MediBeacon and Triple Ring, and an increase in gross profit at R2 driven by the increase in revenue, which was partially offset by a slight increase in recurring SG&A expenses.

[Mike Sena, CFO at INNOVATE]

At Spectrum, revenue was $6.4 million, an increase of $1 million compared to the third quarter of 2023, primarily driven by network launches and expanded coverage with existing customers, which was partially offset by the termination of a small number of smaller networks in individual markets subsequent to the comparable period.

[Mike Sena, CFO at INNOVATE]

Spectrum reported Adjusted EBITDA in the third quarter increased to $1.7 million from a loss of $300,000 in the prior year quarter. The increase was primarily due to the increase in revenue and unrepeated severance in the prior year period. Non-operating corporate Adjusted EBITDA losses were $2.8 million for the third quarter of 2024, a $1.3 million improvement from the third quarter of 2023. The improvement was primarily driven by unrepeated severance in the prior year period.

[Mike Sena, CFO at INNOVATE]

At the end of the third quarter, the company had $51 million of cash and cash equivalents, excluding restricted cash, compared to $80.8 million as of December 31, 2023. On a standalone basis, as of September 30, 2024, our non-operating corporate segment had cash and cash equivalents of $20.2 million compared to $2.5 million at the end of 2023.

[Mike Sena, CFO at INNOVATE]

As announced earlier in the year, we received notice that we were not in compliance with NYSE listing requirements as our stock price had fallen below $1 per share. As a result of the reverse stock split, we were notified by the NYSE that, as of August 26, we have regained our compliance.

[Mike Sena, CFO at INNOVATE]

As of September 30, 2024, Innovate had total principal outstanding indebtedness of $699.2 million, down $23.6 million from $722.8 million at the end of 2023, driven by the decrease in infrastructure's outstanding debt, a decrease in corporate debt as a result of the partial redemption of the CGIC note and partial convertible note repurchases, which was partially offset by R2's extension with Lancer Capital, which capitalized interest payments into the principal balance. With that, Operator, we'd now like to open the call up for questions.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star, followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star, followed by the number two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Brian Trout from R.W. Pressprich & Co. Your line is now open. Please go ahead.

[Brian Trout, Analyst at RWPressprich]

Thanks for taking my question. A couple of questions. I'm just wondering, I know you're waiting for approval from the FDA at MediBeacon. Do you have any color on the communication that you've had with the FDA? Is it ongoing? Are they asking for more material? Or are you just sort of in waiting mode until they come back with an approval?

[Paul Voigt, Interim CEO at INNOVATE]

No, we continue to work with the FDA. I mean, we can't really get too far into the details, but we continue working with the FDA as we work towards hopefully getting approval.

[Brian Trout, Analyst at RWPressprich]

Okay, so have there been any developments that you were not expecting, or are things just sort of progressing as you expected?

[Paul Voigt, Interim CEO at INNOVATE]

As soon as we have something to update the market with, we certainly will. We need to just continue through the process, and as the FDA gets comfortable, that time will come, and we'll obviously update the market when we can.

[Brian Trout, Analyst at RWPressprich]

Okay. Good enough. Then over to DBM Global. It looks like your year-end guidance or full-year guidance is coming in pretty much as expected. With the bump in the backlog, is it too soon to talk about 2025 and what that profile might look like in terms of revenue and EBITDA?

[Paul Voigt, Interim CEO at INNOVATE]

It is. I mean, look, we are expecting, as we kind of said in the beginning of the year, we expect the backlog to kind of settle in around this area. It's continued to do that throughout the year. We continue to see a lot of activity in the market. There has been some holdback in releasing jobs, but we're expecting at some point those to get released. And I think we have great confidence in the DBM team and their ability to win projects with a good profit.

[Brian Trout, Analyst at RWPressprich]

Okay. Thanks. And then finally, I know sort of the monetization of life sciences could help refinance the holdco notes that are coming up. Are there other avenues you're also exploring as you wait for approval?

[Paul Voigt, Interim CEO at INNOVATE]

Yeah. I mean, we continue to explore strategic alternatives with the non-cash-flowing assets, and we are looking at a host of other ways to address the capital structure. But I think as we continue to make progress on these initiatives, we're very happy with the way everything is, our operating subs are performing. As you kind of noted, R2 had a great quarter. Spectrum continues to improve, and infrastructure is coming in as we kind of expected.

[Brian Trout, Analyst at RWPressprich]

Okay. Fair enough. Thanks. I'll get back to you, too.

[Paul Voigt, Interim CEO at INNOVATE]

Thank you.

[Operator]

Again, should you have a question, please press the star, followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Once again, for questions, please press the star, followed by the number one on your touch-tone phone. There are no further questions at this time. Please continue, Mr. Paul Voigt.

[Paul Voigt, Interim CEO at INNOVATE]

Yeah. We appreciate everybody's support, time, and patience. Again, all of our platforms are performing very well, and hopefully, we'll have some very, very positive news in the very near future for everyone. Thanks again.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Participants

Executives

• Anthony Rozmus, Investor Relations
• Mike Sena, CFO
• Paul Voigt, Interim CEO

Analysts

• Brian Trout, Analyst at RWPressprich