Star Equity Holdings, Inc.

Greetings, ladies and gentlemen, and welcome to Start Equity Holdings, Inc.' 's fourth quarter 2022 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 Start Equity's most recent 10-K and 10-Q 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. 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 Cathy, of the Equity Group at 212-836-9611. Also, this call is being broadcast live over the internet and may be accessed at StartEquity's website via www.startequity.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 StartEquity.

Thank you, operator. Good morning, and thank you all for joining us today. On the call with me today are STARS Executive Chairman Jeff Everwine and our Chief Financial Officer Dave Noble. It's a pleasure to be speaking with you today and it's especially gratifying to report significantly improved results across both our construction and healthcare divisions. The strength of our fourth quarter 2022 Consolidated financial results comes from significantly better operating performance with improvements we made throughout the year now beginning to show through in our financial results. Our construction division delivered strong top and bottom line growth resulting in fourth quarter adjusted EBITDA more than double that of the prior year quarter. Our healthcare division also performed well in the fourth quarter with adjusted EBITDA up 79% year over year. Overall, we're beginning 2023 with a significantly improved operating portfolio. In addition, we continue to identify and investigate future acquisition opportunities, either to expand our existing businesses or enter new lines of business. Now I'll focus on the results of our healthcare division. In the fourth quarter, our healthcare division revenue was $14.5 million, or 6.7% lower than the prior year period. Our termination of two unprofitable product initiatives contributed to approximately one quarter of the total decline. In addition, two external factors contributed to lower total scanning revenue for the quarter. The first was the continuing national shortage of nuclear medical technologists, which we've discussed previously. And the second was an approximately six-week worldwide shortage of radiopharmaceutical doses caused by an offline nuclear reactor. In the second quarter this year, we undertook a disciplined restructuring of our entire healthcare business. In addition to tightening our cost controls, we realigned management responsibility to leverage the strengths of our most talented employees. These changes were significant and we're now seeing the results of our efforts in our financials. Those changes, along with increased higher margin camera sales and robust scanning service margins, were significant contributors to our strong fourth quarter gross profit, which increased by 23%. Additionally, our gross margin percentage increased by seven percentage points over the same period last year. Now I'll touch on the results of our construction division. Q4 construction revenue increased 26% to $17.6 million versus $14 million in Q4 of 2021. and gross margin improved to 31% versus 27% in the same period last year. The construction division revenue increase was driven primarily by increased output at our EBGL business. The increase in gross margin percentage was due to significantly increased pricing levels to offset higher input costs in both residential and commercial projects as well as better risk management around building materials price volatility at both EBGL and KVS. Despite macroeconomic uncertainty across the construction space at large, we're a relatively small specialized player with a unique position in the market. In particular, we're experiencing secular growth in the areas of workforce housing, affordable housing, educational dormitories and buildings, and environmentally sustainable housing. We have a robust pipeline for the first half of 2023 and are working on some exciting new business initiatives that we expect will continue to fuel our future growth. Now I'll turn the call over to Dave Noble, our CFO, who will provide additional fourth quarter consolidated financial highlights. Dave, please go ahead.

Thank you, Rick, and good morning. Let's now turn to Star Equity's consolidated results. In Q4 of 2022, SG&A decreased by 0.1% versus Q4 of 2021. More importantly, SG&A as a percentage of revenue decreased meaningfully in Q4 of 2022 to 21.0% versus 22.9% in Q4 of 2021. This demonstrates good operating leverage embedded in our businesses, particularly on the construction side. Moving on to the Q4 bottom line results for Star Equity, we generated positive net income of $1.9 million compared to a net loss of $4.4 million in Q4 of 2021. Non-GAAP adjusted net income from continuing operations in Q4 was a positive $2.2 million. This compares very favorably to adjusted net income of $0.3 million in Q4 of 2021. Non-gap adjusted EBITDA increased to $3.1 million in Q4 from $1.0 million in Q4 of 2021. This substantial improvement in consolidated adjusted EBITDA was primarily due to the continuation of our bottom-line focus turnaround at our construction division, which began to bear fruit in mid-2022. Segment non-gap adjusted EBITDA at our construction division sustained its upward trend, generating $2.9 million in Q4 this year, up from $1.2 million in Q4 of 2021. Consolidated operating cash flow for Q4 resulted in an outflow of $3.6 million versus an inflow of $1.7 million in Q4 of 2021. Q4 2022's operating outflow was due to a large working capital buildup at our construction division as we executed on significant projects at the end of 2022. We have experienced normalization of working capital so far in 2023 as we have collected cash on those projects. I want to just briefly touch upon the progress we have made on the construction side since acquiring these businesses three plus years ago. Construction revenue for the full year of 2022 was $57.1 million, up 19.1% from 2021. Gross margin percentage jumped to 22.2% from 6.3% in the prior year. Construction non-gap adjusted EBITDA for 2022 rose to $6.3 million from negative $2.7 million in 2021. In 2022, our construction segment accounted for 51% of Star Equity's total consolidated revenues. While this has been a multi-year effort, we are proud of the progress we have made in strengthening the management teams and repositioning these construction businesses. As of December 31, 2022, our consolidated balance sheet and liquidity were strong. The outstanding balance on our interest-bearing credit facilities was $11.7 million, while our cash balance stood at $4.7 million, leaving us with an overall net debt position of $7.0 million. Now I'd like to turn the call over to the operator for questions.

Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Theodore O'Neill from Litchfield Hills Research. Please go ahead. Your line is open.

Sure. Congratulations on the good quarter. The question about the construction business. Last quarter, the results were unfavorable in the quarter due to timing, and I was wondering if there's also a counterbalancing in this quarter that makes it so good, or can you give us some more information about that, please?

Yeah, you know, there's always timing.

Go ahead, Rick.

Sorry. No, you go ahead, Dave. I think we have the same thought. Go ahead.

Yeah, I guess what I would say is I would focus on the full year, which was tremendous. There is You know, there can be some timing differences from quarter to quarter, especially when we're involved in large projects. So we did have one very large project last year that kind of crossed over the second and third quarter. But I would focus you on the full year results. I don't know, Rick, if you have anything more to add on that.

No, that's what I was going to say. It's a bit lumpy when you look at it a quarter at a time.

Okay. Correct me if I'm wrong, but in the healthcare side of the business, the shutdown of the reactor for making this radioactive stuff for you to use in the cameras, the imaging, is that something that you know in advance is going to get shut down, or does it come as a surprise?

No, this one came as a surprise. It was about a six-week shutdown to a reactor in Belgium. They were doing routine monitoring of the performance of the reactor and determined some mechanical difficulties that required a shutdown for repairs. So during that period, we were unable to get the number of doses that we actually required. We were able to mitigate the effects somewhat by using lower doses for some scanning procedures, but definitely had an impact on the business.

Okay, thank you very much.

As a reminder, to ask a question, please press star followed by the number one. Our next question comes from Tate Sullivan from Maxim Group. Please go ahead. Your line is open.

Thank you. Good morning. Can you talk more about the first half construction pipeline that you mentioned in the mix? And did I hear you say in the remarks that Edge Builder had a stronger quarter in 4Q22 than KBS in New England? A couple questions there.

Yeah. Yeah, sure. So on the first question, in terms of the pipeline, I mean, last year we had a very, very large project. This year the pipeline so far is made up of more single-family work. But the important thing about the pipeline this year is it's all at the much higher prices that we put in place a year ago as a reaction to the increase in materials prices. So obviously lumber has come down a lot since then. We haven't seen that as much with other building materials, but we are – sustainably producing at much better margins today than we were even a year ago. So we're very confident that our pipeline, although it's more smaller projects right now, our pipeline is very strong. Having said that, we're in touch with a number of larger projects in the workforce housing arena that we expect one or more of those potentially to hit this year. So we're very confident that that turnaround is sustainable. Our reputation is much greater today than it has been at any point in recent history. You know, we're definitely seeing a lot more opportunity than we had previously. Now, obviously, there's, you know, potential economic headwinds ahead. We just haven't felt that. We're a small player in the market. And so far, we're very confident in our first half pipeline.

One other thing I'd add about the pipeline is that it's not just the – revenue opportunity that we see moving through the pipeline, but also a good match between the timing of the projects as well as our manufacturing capacity.

Yeah, and the second question about, I'm sorry, the edge builder results in the fourth quarter. You may remember, but we had a similar situation in the fourth quarter the prior year. It's just the nature of the business. The Edge Builder business had a number of large projects to execute towards the end of the year. So when we say it had a better quarter than KBS, it's not because KBS had a bad quarter. We just had a late year surge at Edge Builder like we had seen in the prior year. That business is very lumpy. As you know, it's half of that business or a portion of that business is retail, sort of retail driven. It sells building materials to professional builders. And then the other piece of that business builds wall panels. And those are rather large projects that, you know, they come when they come. And we just had a large buildup towards the end of the year that we needed to execute into the end of the year.

Okay, great. Yeah, I see the 27% margin last year, then 31% this year. And then, I mean, the guidance still for building and construction or sort of what you've talked about before, a gross profit margin annual target of greater than 20%. Is that still something to consider for 23 as well? Absolutely. Absolutely. Okay. Great. And then you mentioned working capital buildup for as of the end of 2022, which is, but then, I mean, so then implying that you had accounts receivable collections to bring cash flow from operations closer to what you had in just the first quarter. or probably some inventory build. Can you just comment on potentially what the work will look like?

Yeah, just, you know, it's normalized a bit from the end of the year. We had a huge buildup, as I mentioned, on the Edge Builder project, so AR sort of ballooned. But we have no collections problem whatsoever. In fact, we've collected a lot of older receivables on the KBS business last year as we focused on that. But we did have some, you know, we obviously can't talk about first quarter, but the cash that we would have expected to get in the first quarter did come in from those late-year projects. So things have normalized a bit. Yeah.

Okay. And then was there any other abnormal items in SG&A? I know earlier in 22 you had some litigation costs in there. Was there any leftover litigation in 4Q22? Where does that pass?

In Q4, very, very little. We were pretty much out of that legal litigation situation at the healthcare side of the business, so we had a very small impact in Q4, and there's nothing remaining for this year.

Tate, this is Jeff. If you look at the EBITDA reconciliation table in our press release, the items that were in SG&A in the fourth quarter were severance and retention costs, restructuring costs, and there was just a small amount of litigation across $61,000. And that litigation really was a one-time item. It settled in the fourth quarter, and we're not expecting any expenses like that in 2023. Okay.

Thank you, Jeff, and thank you, Dave.

We have no further questions. I would like to turn the call back over to management for closing remarks.

Thank you, Operator. Before concluding, I want to note that we're always available to take your call and discuss any additional questions, so don't hesitate to contact us. We'll continue to share our story with existing and potential investors in the coming weeks. As always, we appreciate all our shareholders and your continued feedback and support. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Thank you. Thank you. Thank you. Thank you.

Thank you. Music. Thank you. Thank you.

Greetings, ladies and gentlemen, and welcome to START Equity Holdings, Inc.' 's fourth quarter 2022 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 START Equity's most recent 10-K and 10-Q 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. 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 Cathey, 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.

Thank you, Operator. Good morning and thank you all for joining us today. On the call with me today are STARS Executive Chairman Jeff Everwine and our Chief Financial Officer Dave Noble. It's a pleasure to be speaking with you today and it's especially gratifying to report significantly improved results across both our construction and healthcare divisions. The strength of our fourth quarter 2022 Consolidated financial results comes from significantly better operating performance, with improvements we made throughout the year now beginning to show through in our financial results. Our construction division delivered strong top and bottom line growth, resulting in fourth quarter adjusted EBITDA more than double that of the prior year quarter. Our healthcare division also performed well in the fourth quarter, with adjusted EBITDA up 79% year over year. Overall, we're beginning 2023 with a significantly improved operating portfolio. In addition, we continue to identify and investigate future acquisition opportunities, either to expand our existing businesses or enter new lines of business. Now I'll focus on the results of our healthcare division. In the fourth quarter, our healthcare division revenue was $14.5 million, or 6.7% lower than the prior year period. Our termination of two unprofitable product initiatives contributed to approximately one quarter of the total decline. In addition, two external factors contributed to lower total scanning revenue for the quarter. The first was a continuing national shortage of nuclear medical technologists, which we've discussed previously. And the second was an approximately six-week worldwide shortage of radiopharmaceutical doses caused by an offline nuclear reactor. In the second quarter this year, we undertook a disciplined restructuring of our entire healthcare business. In addition to tightening our cost controls, we realigned management responsibility to leverage the strengths of our most talented employees. These changes were significant and we're now seeing the results of our efforts in our financials. Those changes, along with increased higher margin camera sales and robust scanning service margins, were significant contributors to our strong fourth quarter gross profit, which increased by 23%. Additionally, our gross margin percentage increased by seven percentage points over the same period last year. Now I'll touch on the results of our construction division. Q4 construction revenue increased 26% to $17.6 million versus $14 million in Q4 of 2021. and gross margin improved to 31% versus 27% in the same period last year. The construction division revenue increase was driven primarily by increased output at our EBGL business. The increase in gross margin percentage was due to significantly increased pricing levels to offset higher input costs in both residential and commercial projects, as well as better risk management around building materials price volatility at both EBGL and KBS. Despite macroeconomic uncertainty across the construction space at large, we're a relatively small specialized player with a unique position in the market. In particular, we're experiencing secular growth in the areas of workforce housing, affordable housing, educational dormitories and buildings, and environmentally sustainable housing. We have a robust pipeline for the first half of 2023 and are working on some exciting new business initiatives that we expect will continue to fuel our future growth. Now I'll turn the call over to Dave Noble, our CFO, who will provide additional fourth quarter consolidated financial highlights. Dave, please go ahead.

Thank you, Rick, and good morning. Let's now turn to Star Equity's consolidated results. In Q4 of 2022, SG&A decreased by 0.1% versus Q4 of 2021. More importantly, SG&A as a percentage of revenue decreased meaningfully in Q4 of 2022 to 21.0% versus 22.9% in Q4 of 2021. This demonstrates good operating leverage embedded in our businesses, particularly on the construction side. Moving on to the Q4 bottom line results for Star Equity, we generated positive net income of $1.9 million compared to a net loss of $4.4 million in Q4 of 2021. Non-GAAP adjusted net income from continuing operations in Q4 was a positive $2.2 million. This compares very favorably to adjusted net income of $0.3 million in Q4 of 2021. Non-gap adjusted EBITDA increased to 3.1 million in Q4 from 1.0 million in Q4 of 2021. This substantial improvement in consolidated adjusted EBITDA was primarily due to the continuation of our bottom-line focus turnaround at our construction division, which began to bear fruit in mid-2022. Segment non-gap adjusted EBITDA at our construction division sustained its upward trend, generating $2.9 million in Q4 this year, up from 1.2 million in Q4 of 2021. Consolidated operating cash flow for Q4 resulted in an outflow of 3.6 million versus an inflow of 1.7 million in Q4 of 2021. Q4 2022's operating outflow was due to a large working capital buildup at our construction division as we executed on significant projects at the end of 2022. We have experienced normalization of working capital so far in 2023 as we have collected cash on those projects. I want to just briefly touch upon the progress we have made on the construction side since acquiring these businesses three plus years ago. Construction revenue for the full year of 2022 was $57.1 million, up 19.1% from 2021. Gross margin percentage jumped to 22.2% from 6.3% in the prior year. Construction non-gap adjusted EBITDA for 2022 rose to $6.3 million from negative $2.7 million in 2021. In 2022, our construction segment accounted for 51% of Star Equity's total consolidated revenues. While this has been a multi-year effort, we are proud of the progress we have made in strengthening the management teams and repositioning these construction businesses. As of December 31, 2022, our consolidated balance sheet and liquidity were strong. The outstanding balance on our interest-bearing credit facilities was $11.7 million, while our cash balance stood at $4.7 million, leaving us with an overall net debt position of $7.0 million. Now I'd like to turn the call over to the operator for questions.

Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Theodore O'Neill from Litchfield Hills Research. Please go ahead. Your line is open.

Sure. Congratulations on the good quarter. The question about the construction business. Last quarter, the results were unfavorable in the quarter due to timing, and I was wondering if there's also a counterbalancing in this quarter that makes it so good, or can you give us some more information about that, please?

Yeah, you know, there's always timing.

Go ahead, Rick.

Sorry. No, you go ahead, Dave. I think we had the same thought. Go ahead.

Yeah, I guess what I would say is I would focus on the full year, which was tremendous. There is You know, there can be some timing differences from quarter to quarter, especially when we're involved in large projects. So we did have one very large project last year that kind of crossed over the second and third quarter. But I would focus you on the full year results. I don't know, Rick, if you have anything more to add on that.

No, that's what I was going to say. It's a bit lumpy when you look at it a quarter at a time.

Okay. Correct me if I'm wrong, but in the healthcare side of the business, the shutdown of the reactor for making this radioactive stuff for you to use in the cameras, the imaging, is that something that you know in advance is going to get shut down, or does it come as a surprise?

No, this one came as a surprise. It was about a six-week shutdown to a reactor in Belgium. They were doing routine monitoring of the performance of the reactor and determined some mechanical difficulties that required a shutdown for repairs. So during that period, we were unable to get the number of doses that we actually required. We were able to mitigate the effects somewhat by using lower doses for some scanning procedures, but definitely had an impact on the business.

Okay, thank you very much.

As a reminder, to ask a question, please press star followed by the number one. Our next question comes from Kate Sullivan from Maxim Group. Please go ahead. Your line is open.

Thank you. Good morning. Can you talk more about the first half construction pipeline that you mentioned in the mix? And did I hear you say in the remarks that Edge Builder had a stronger quarter in 4Q22 than KBS in New England? A couple questions there.

Yeah. Yeah, sure. So on the first question, in terms of the pipeline, I mean, last year we had a very, very large project. This year the pipeline so far is made up of more single-family work. But the important thing about the pipeline this year is it's all at the much higher prices that we put in place a year ago as a reaction to the increase in materials prices. So obviously lumber has come down a lot since then. We haven't seen that as much with other building materials, but we are – sustainably producing at much better margins today than we were even a year ago. So we're very confident that our pipeline, although it's more smaller projects right now, our pipeline is very strong. Having said that, we're in touch with a number of larger projects in the workforce housing arena that we expect one or more of those potentially to hit this year. So we're very confident that that turnaround is sustainable. Our reputation is much greater today than it has been at any point in recent history. And, you know, we're definitely seeing a lot more opportunity than we had previously. Now, obviously, there's, you know, potential economic headwinds ahead. We just haven't felt that. We're a small player in the market. And so far, we're very confident in our first half pipeline.

One other thing I'd add about the pipeline is that it's not just the revenue opportunity that we see moving through the pipeline, but also a good match between the timing of the projects as well as our manufacturing capacity.

Yeah, and the second question about, I'm sorry, the edge builder results in the fourth quarter. You may remember, but we had a similar situation in the fourth quarter the prior year, It's just the nature of the business. The Edge Builder business had a number of large projects to execute towards the end of the year. So when we say it had a better quarter than KBS, it's not because KBS had a bad quarter. We just had a late year surge at Edge Builder like we had seen in the prior year. That business is very lumpy. As you know, it's half of that business or a portion of that business is retail, sort of retail driven. It sells building materials to professional builders. And then the other piece of that business builds wall panels. And those are rather large projects that, you know, they come when they come. And we just had a large buildup towards the end of the year that we needed to execute into the end of the year.

Okay, great. Yeah, I see the 27% margin last year, then 31% this year. And then, I mean, the guidance still for building and construction or sort of what you've talked about before, gross profit margin annual target of greater than 20%. Is that still something to consider for 23 as well? Absolutely. Absolutely. Okay. Great. And then you mentioned working capital buildup for as of the end of 2022, which is, but then, I mean, so then implying that you had accounts receivable collections to bring cash flow from operations closer to what you had in just the first quarter. or probably some inventory build. Can you just comment on potentially what the work will look like?

Yeah, just, you know, it's normalized a bit from the end of the year. We had a huge buildup, as I mentioned, on the Edge Builder project, so AR sort of ballooned. But we have no collections problem whatsoever. In fact, we've collected a lot of older receivables on the KBS business last year as we focused on that. But we did have some, you know, we obviously can't talk about first quarter, but the cash that we would have expected to get in the first quarter did come in from those late-year projects. So things have normalized a bit. Yeah.

Okay. And then was there any other abnormal items in SG&A? I know earlier in 22 you had some litigation costs in there. Was there any leftover litigation in 4Q22? Where does that pass?

In Q4, very, very little. We were pretty much out of that legal litigation situation at the healthcare side of the business, so we had a very small impact in Q4, and there's nothing remaining for this year.

Kate, this is Jeff. If you look at the EBITDA reconciliation table in our press release, the items that were in SG&A in the fourth quarter were severance and retention costs, restructuring costs, and there was just a small amount of the litigation cost, $61,000. And that litigation really was a one-time item. It settled in the fourth quarter, and we're not expecting any expenses like that in 2023. Okay.

Thank you, Jeff, and thank you, Dave.

We have no further questions. I would like to turn the call back over to management for closing remarks.

Thank you, Operator. Before concluding, I want to note that we're always available to take your call and discuss any additional questions, so don't hesitate to contact us. We'll continue to share our story with existing and potential investors in the coming weeks. As always, we appreciate all our shareholders and your continued feedback and support. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.