Star Equity Holdings, Inc.

Greetings, ladies and gentlemen, and welcome to the Star Equity Holdings Incorporated first quarter 2022 results conference call. Please be advised that 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-K and 10-Q filings for a more complete description of risk factors that could affect those projections and assumptions. The company assumes no obligations 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. 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 its investor relations representative, Lena Caddy, at 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 Jeff Everwine, Executive Chairman of Star Equity.

Thank you, Operator. Good morning and thank you all for joining us today for our first quarter 2022 results conference call. On the call with me today are Chief Executive Officer Rick Coleman and Chief Financial Officer David Noble. In the first quarter of 2022, we reported improved financial and operating performance with a 12% increase in revenues and an improvement in our margins. Our healthcare division grew revenue by 0.8% versus the prior year quarter and gross margin improved by 4 percentage points to 23.7%. Our construction division grew revenue by 28.6% due to large commercial projects at Edge Builder and pricing increases that we implemented to mitigate the impact of higher raw material costs. Gross margin improved substantially due to increased pricing, improved operations, and commodity price mitigation. We continue to make progress toward our goal of achieving and maintaining a gross margin over 20% for our construction division. With the completion of our January 2022 equity offering for gross proceeds of $14.3 million, we're now well positioned to fund high-return internal growth investments and to pursue acquisitions, which could be either bolt-ons for our healthcare or construction divisions or entry into new business sectors. With that, I'll turn it over to our CEO, Rick Holman. Rick, please go ahead.

Thanks, Jeff. In the first quarter, our healthcare division revenue increased by 0.8% over the same period last year to $13.4 million. The increase was driven primarily by the mix of products sold in the quarter, including higher radio pharmaceuticals contract revenue and a more favorable mix of higher profit cameras. Customer, patient, and employee availability were also positive contributing factors as our business continues to recover from the COVID-19 pandemic. These positive drivers were partially offset by a decrease in total cameras sold, as well as fewer total scanning days. Gross profit for the quarter increased by 22.2%, and gross profit margin increased by 4.2 percentage points over the same period last year. also due to increased percentage of higher margin products sold. Now we'll turn the call over to Dave Noble, our CFO, who will review the results of our construction division and provide additional first quarter financial highlights. Dave, please go ahead.

Thanks, Rick. Let me first touch upon the construction division. First quarter 2022 construction revenue and gross margin percentage were 11.6 million and 13.6% respectively. This compares to $9.0 million and 6.0% in the prior year first quarter. The increase in revenues for the construction division was driven by large commercial projects at our edge builder business, which more than offset a small $0.6 million decrease in revenues for our KBS business, really based on revenue timing. as I mentioned, was due to revenue timing, but we're in the midst of executing a very large contract for $9 million to build dormitories during the second quarter. Together, construction revenue accounted for 46.4% of Star Equity's consolidated revenues in the first quarter. The increase in gross margin percentage was due to an increase in revenue during the period, as well as better mitigation of materials risk, price risk. We have also significantly increased pricing levels on our projects to offset higher input costs in both the residential and commercial projects. Our backlog and sales pipeline remain at record levels. Now let's turn on to Star Equity Holdings. On a consolidated basis, SG&A increased by 34.3% in Q1 2002 versus Q1 last year. While this was due in part to increase headcount and outside services, One-time litigation costs on the healthcare side was also a big factor. SG&A as a percentage of revenue increased in Q1 to 27.1% versus 22.6% in Q1 of 2021. Moving on to bottom line results for Star Equity for the first quarter of 2022, we had a net loss from continuing operations of 3.7 million compared to a net loss from continuing operations of 0.6 million in the first quarter of 2021. Non-GAAP adjusted net loss from continuing operations in the first quarter of 2022 was 0.7 million. This compares to an adjusted net loss of 1.7 million in the first quarter of 2021. Non-GAAP adjusted EBITDA increased to a positive 0.1 million for the first quarter of 2022 compared to a negative 0.9 million in the first quarter of 2021. This improvement was due to improvements across the company's operations leading to increased gross profit at both the company's healthcare and construction divisions. For the first quarter of 2022, we registered an operating cash outflow of 0.6 million compared to an operating cash outflow of 2.2 million in the first quarter of 2021. As of March 31st, 2022, our balance sheet and liquidity were strong. The outstanding balance on our credit facilities was 13.3 million. With 15 million in cash and cash equivalents, Our overall net debt position was a negative $1.7 million at the end of the first quarter. Now I'd like to turn the call over to the operator for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment, please, while we poll for your questions. Our first questions come from the line of Theodore O'Neill with Litchfield Hills Research.

Please proceed with your questions.

Thanks very much. On the KBS business being down in the quarter, you're saying this is just a timing issue and that should rebound in Q2? Is that what you were saying?

Yeah, we recognized some revenues on a project late last year that continued into this year. But as I mentioned, the second quarter, we're executing a $9 million project. So, you know, there's lumpiness in revenues, but it's not due to any slowdown in business. Our pipeline is strong and our production schedule is full.

Okay. And on the SG&A project, Since there's almost nine, it looks like, if I got this right, $900,000, almost $900,000 of litigation costs in the quarter. If I pull that out, are we going to see Q2 SG&A drop by that amount?

Yeah, sure, I'll take that. Yeah, that will not repeat itself in the second quarter. I mean, there's some other increases in costs around some audit costs, et cetera, but, yes, that's a fair statement.

Thanks very much.

Thank you. Our next question has come from the line of Tate Sullivan with Maxim Group. Please proceed with your questions.

Hi, thank you. Good morning. Rick, you've been COO since the beginning of the year and CEO starting last month. But can you talk about your near-term strategic goals for STAR versus long-term and and what you've seen so far that you can implement?

Sure. I'm happy to do that. So from the, I guess since the time that I got it on board, you know, the first month is as usual diving in and catching up with what the rest of the team has already been doing. We're making great progress at KBS. I would say that Dave and the rest of the team during the last half of 2021 really began positioning that business for success going forward. Our healthcare business, of course, has been strong and continues to be that way. We're making some minor changes now to try to position ourselves for even stronger growth. And the edge builder portion of our construction business as well is strong. And again, looking at opportunities for growth there.

Thank you. Thank you, Rick. And then on KBS side, the nine million university project and David, I think Dave mentioned record backlog and sales pipeline. Do you hope to duplicate that kind of size of project? Is that still going to be an above average size project? Is it better to have multiple projects that are much smaller? Can you talk about going forward the types of project concentration, please?

Sure. You want to go, Rick, or you want me to go?

No, go ahead.

Okay. Yeah, so that's clearly the largest single project that we've done in that business ever. And I would say we evaluate projects based on the fundamentals and the ASPs. So it's not that we would shy away from doing anything that size, but realistically, that's a large project. And we've got a number of other commercial scale multifamily projects in the two and three and $4 million range, which is probably more typical. But if it makes sense for us, we will do projects of that size as well. I would state that in the last 18 months, we have really focused on trying to win some of these multifamily projects. They do bring a little bit more standardization and hopefully higher margins and secure, you know, more production slots in our factory. So I would say that's a big one, but we would not shy away from doing others of that size, but typically they're going to be more in the half that size sort of range.

Okay. This is a, Jeff, a really good question. One other thing about that is $9 million is a total project size, but it's four dorms, and so in a way it's kind of four subsets of that project. I think an important thing with that is it gets us into a new vertical. It's a prestigious, well-known university that we're working with, and it's It's just a great case study for working with other colleges, universities on their student housing needs. And we all know that construction can be cyclical. We're a very small player in a big market. And our thought is to have a lot of different end markets, a lot of different things we can do. There's a lot of different things that can be modular. And so the more diversity we have of projects, clients, and markets, the better.

Thank you, Jeff. And one more for me. I mean, with everything going on in the just general market and interest rates, and we always hear about higher costs and you addressed higher lumber costs, but With your customer conversations on the KBS side, have any projects been delayed or has funding come through slower than you expected? And any fundamental concerns in that end market or none at this point?

You know, we haven't seen that yet. I mean, it's one might expect that in an extreme condition, but our pipeline is still very full. It's as high as it's as strong as it's ever been. You know, the project for the university that we're doing, I mean, that's funded by their endowment, which is very large, so there's no real financing element to that. We just finished a workforce housing project on Martha's Vineyard that was about $2 million in size, and that was funded by a 501c3 with some help from the Massachusetts government. So, you know, I really don't see – we have not seen that yet. Even in the private projects, we haven't seen any slowdown. Financing seems to be in place, and the demand is still there. I mean, at some point you might see that, but we just haven't seen that yet.

I would say, too, a good question. Over a long period of time, we've transformed this business. It used to do a lot more lower-end residential, and we've gone higher-end, higher price point, more complicated projects. And like Dave was saying, it's a less price-sensitive client, much more focused on quality and time to deliver. So I think that business transition we've done over a period of years is helpful.

Thank you. One more for me, if I may, on health care. Sorry, 24% gross profit margins. Can you talk about, I mean, up from 21% the prior quarter, is it still, should we look at that still being as a 20% gross profit margin business as well, where there are one-time benefits to that margin in the quarter? Can you expand on that margin?

Yeah, this is Jeff. No, there were no one-time benefits. I would say that the highest gross margin thing we do is selling cameras. The services business is... doesn't have the same margins that selling cameras does. And, um, we usually camera sales are highest in the fourth quarter and, um, often very low in Q1. Uh, but we had a pretty good Q1 in that department. And, uh, so that was hopeful. So I, I would be disappointed if the gross margin of business is only 20%. We're, we're, We'd like it to be higher than that over time, so call it low 20s.

Thank you all.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad.

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

I would like to turn the call back over to Jeff Eberwein for any closing comments.

Thank you, Operator. Before concluding this call, I'd like to note 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 will continue to share our story with existing and potential investors in the coming weeks and months. As always, we appreciate all our shareholders and your continued feedback and support. Thank you.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.