Star Equity Holdings, Inc.

Greetings, ladies and gentlemen, and welcome to Star Equity Holdings fourth 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's most recent 10-K PENQ 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, in 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 the 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 Cotty, 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 for joining us today for our fourth quarter 2024 results conference call. On the call with me today are Executive Chairman Jeff Everwine and 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. In the fourth quarter of 2024, revenue increased by 21.1% to $17.1 million versus $14.1 million in the fourth quarter of 2023. For the full year of 2024, revenue increased 16.5 percent to 53.4 million from 45.8 million in 2023. The revenue increases in both periods are largely attributable to M&A activity, particularly the acquisition of timber technologies, which we completed in the second quarter of 2024, and the full-year revenue impact of our Big Lake lumber acquisition, which we completed in the fourth quarter of 2023. Fourth quarter 2024 gross profit increased 55.3% to $4.5 million versus $2.9 million in Q4 2023, due primarily to the inclusion of gross profit from timber technologies, which generates the highest gross margin of STARS Business Solutions businesses. Full year 2024 gross profit declined 7.2% due to a one-time $574,000 purchase price accounting adjustment related to the timber technologies acquisition, as well as lower revenues and utilization at our KVS and EBGL businesses. Our building solutions division was negatively impacted by demand softness during the first half of 2024, as project starts were delayed primarily due to interest rate sensitivity and credit availability. However, during the second half of 2024, and especially in Q4, momentum shifted as several large projects placed on hold earlier in the year received final approvals and began production. This positive momentum has continued into the first quarter of 2025 as evidenced by our recent announcements of multiple large project signings. Our signed backlog representing committed projects and orders stood at $17.2 million at year end and has increased year to date as demand continues to build. Over the long term, we have conviction in the structural tailwinds for our building solutions division as factory built construction continues to gain market share versus traditional building methods. While we are well positioned for a strong 2025, we are continuing to monitor the potential impact of the current administration's fiscal policy on our operating businesses. The application of tariffs is one example, and we have taken preemptive action to reduce our businesses' exposure to Canadian lumber in favor of domestic lumber. In addition, we have implemented strategies and enhanced our contract language to further reduce the risks associated with changes in input costs. Although we can pass some price increases through to the customer, drastic or rapid price increases risk impacting overall demand for wood-based construction. Lastly, I want to highlight our recently announced acquisition of Alliance Drilling Tools, which established our energy services division, diversifying our operating business portfolio and providing a new platform for growth. We are excited to partner with a business of ADT's caliber and growth potential, and expect them to contribute significantly to STAR's consolidated results going forward. Since its founding, ADT has exhibited strong revenue and profitability growth with consistent cash generation. As previously announced, for full year 2024, ADT generated revenue of approximately $10.5 million, gross margin of 48 percent, and adjusted EBITDA of $2.4 million. Its business model allows for the majority of costs, including freight, repairs, and damages, to be passed directly to customers, which minimizes ADT's operational expenses, CapEx, and risk exposure. We believe all of our operating companies operate in industries that support further expansion and will continue to evaluate opportunities for organic growth as well as additional acquisitions. Now I'll turn the call over to Dave Noble, our CFO, who will provide additional fourth quarter consolidated financial highlights. Dave, go ahead.

Thank you, Rick, and good morning. Let's move on to Star Equity's consolidated financial results, which for the fourth quarter and full year of 2024 are represented by our two operating divisions, Building Solutions and Investments. In Q4 2024, consolidated gross profit was $4.4 million, up 55.9% versus Q4 of 2023, driven by increased revenues and higher gross margins in our building solutions division. However, for the full year, gross profit decreased by 7.3% to 11.1 million from 11.9 million in 2023, driven primarily by lower gross margin percentages in our building solutions division during the first half of the year. SG&A increased by $1 million or 31.7% versus Q4 of 2023. As a percentage of revenue, SG&A increased in Q4 of 2024 to 24.7% versus 22.8% in Q4 of 2023. For fiscal year 2024, SG&A was 17 million versus 14.5 million in 2023. The main driver of the increase in SG&A are the full year impacts of the timber technologies and the big lake lumber acquisitions. In the fourth quarter of 2024, we reclassified the 2024 impairments of our cost method investment from SG&A to other income and expense to align this with the gains and losses of our investments division. For reference, these impairments follow the mark-to-market valuations done by Catalyst, formerly TTG, their largest shareholder, the private equity fund. Moving to the bottom line, in Q4, our net loss from continuing operations was 2.5 million versus net income from continuing operations of 1.8 million in Q4 of 2023. Non-GAAP adjusted net income from continuing operations in Q4 was 0.5 million, or income of 15 cents per diluted share. This compares to adjusted net loss of 0.3 million in Q4 of 2023, or a loss of 10 cents per diluted share. Non-GAAP adjusted EBITDA from continuing operations increased to 1.1 million in Q4 from a negative 0.1 million in Q4 of 2023. Segment non-GAAP adjusted EBITDA at our business solutions division increased to 2.3 million in Q4 this year, up from 0.7 million in Q4 of 2023. Q4 2024 cash flow from consolidated operations was an outflow of $1.5 million compared to an inflow of $28,000 for the same period in the prior year. The decrease in operating cash flow was primarily due to increases in working capital associated with the increased business activity in Q4 of 24. As of December 31, 2024, the outstanding balance in our interest-bearing debt was $11.3 million versus $2.0 million at the end of December 2023. Our cash balance, including restricted cash, stood at $5.6 million, down from $18.9 million at the end of 2023. The changes in both debt and cash balances can largely be explained by the timber technologies acquisition and its related financing, both of which closed in May of 2024. Turning to our investments division, our holdings and public equity securities at the end of the year amounted to $3.4 million versus $4.8 million a year ago, as we substantially exited one of our public equity positions following its acquisition. Our rollover equity investment and seller note receivable from the sale of Digirad Health to Catalyst, formerly TTG, in May of 2023, were valued at $1.4 million and $8.2 million, respectively. As disclosed in NSERVCO's public filings, in the fourth quarter of 2024, we provided Inservco a notice of default regarding the million dollar promissory note issued to Star related to our initial investment. As a result of this default, we canceled the issuance of 250,000 Star preferred shares, which collateralized that note. We continue to hold approximately 12 and a half million of common shares on Inservco, and we remain in contact with Inservco regarding potential opportunities to collaborate on business opportunities. Now I'd like to turn the call back over to Rick for some additional remarks.

Thank you, Dave. We ended 2024 with strong activity across our business solutions division, and that momentum was carried forward into the first quarter of 2025. We're encouraged by the recent performance at all of our businesses, our growing sales pipeline and backlog, and the opportunities presented by our establishment of our energy services division. In short, We're excited for the year ahead. Now I'd like to turn the call over to the operator for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are 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 for a moment to assemble our roster. Our first question today will come from Theodora Neal of Litchfield Hills Research. Please go ahead.

Thank you very much, and congratulations for meeting the revenue and the non-GAAP EPS numbers. I'd like to ask about the building side of the business. The building solutions, so two questions. One is you announced two big wins in March, and I think you disclosed how those are going to flow through 2025. Can we read anything into that in terms of additional business? And I'd like to know what accounts for the margin improvement in building solutions?

Thanks, Theo. Appreciate the question.

This is Rick. One of the things that definitely impacts the margin improvements in the Building Solutions Division is increased revenues. We do have a platform in place that's necessary to operate the business, and those fixed costs are now being spread across a number of different projects and are broader revenue base. So that's a big piece of it. What we're looking for in the future is really indicated by what our sales pipeline looks like. The new opportunities that come into the pipeline are evaluated every week. We negotiate those deals, and hopefully when we win them, we add them to our backlog. And what we see in the pipeline and the backlog is fairly substantial growth beginning in the fourth quarter of 24 and carrying forward into 2025.

Okay. And can you break out what's in the $1.7 million of other expense in the quarter?

Dave, do you want to take that one?

Sure, I can take that. Yeah, the big thing, we mentioned this in the commentary. We had to take a bit of a write-down on our investment in the – equity of a former Digirad, which we sold to TTG, now Catalyst. And, you know, we pretty much have stayed in sync with the private equity firm that put that company together. And given that they're in the midst of a turnaround, they've had some write-down of that equity. We've had that in three of the four quarters of last year, and so the final quarter was around that 1.7 number. Furthermore, we recharacterized that. We had been showing that in SG&A, but we've reclassify that into other income because it better aligns with our other investments-related activity.

Okay. All right. And that's pretty much all of it now. You've written that down to close to zero?

The equity portion is down to one or two. Again, they're in the midst of a turnaround, and this is a long-term hold. So, you know, from an accounting perspective, we can never write it back up. But, you know, I think all of the senior management are super hopeful that this is going to be a win over the long term. We believe Sentinel, who's the prime firm, is going to turn this thing around and make it a good investment. So we're happy to be part of it.

Okay, so there's nothing from – go ahead.

Yeah, this is Jeff. We also have a debt investment. So we own equity and we own debt and catalysts. And unfortunately, the way that GAAP accounting works is we have to write it down if there's a possibility of it being impaired. And as Dave said, our methodology is just to follow the mark-to-market that the PE firm does. And if it does turn around the way we think it will, unfortunately, we don't get to write that back up under the GAAP accounting rules. The more important thing is that the PE firm will sell this business at some point. It's in a fund that ends in a few years. And so what we really care about is that exit a few years from now. And our hope is that both the note and the equity or original equity of $6 million are fully recouped, and there's even an upside to that. So the mark-to-market is just a non-cash item on paper until the business gets sold.

Right, right, okay. And I asked about it because I thought there ought to be something from the Inservco issue, but will that appear in next quarter?

Bill, do you want to handle that? Write down on the InserveCo note.

The write down on the InserveCo note actually ends up hitting our stockholders' equity because it was over collateralized. So it never hit the P&L.

Okay. And my last question is, what's going on in InserveCo having impact on alliance drilling?

No.

Great. Thanks very much.

Our next question today will come from Tate Sullivan of the Maxim Group. Please go ahead.

Thank you. You covered this on the acquisition call in Alliance Drilling, but what specifically did you like about their business, even after your investment or during your investment in Servco, and can you comment on Alliance Drilling's customer mix? Is it smaller operators, larger operators, or a mix thereof, please?

Rick, why don't you handle that? Rick? Are you there, Rick? This is Jeff.

I'm sorry. I was on mute. I appreciate the question, Tate. I apologize for that. Yeah, one of the things we liked about Alliance Drilling, obviously, was the fact that they operate in multiple sectors of the drilling stream. They're Experience is pretty substantial. The founders are still part of the company and are planning to stay for a while while we transition. There's a strong management team beneath them. And all of them, when we've talked to them about their growth opportunities, have noted that they think that the company has a great upside potential with additional customers, but also tapping into additional revenue from their current customer base. So we believe that a minimal investment in additional tools and some geographic expansion will really help grow that business over time.

Yeah, there are two biggest customers are household names in the energy sector. So great counterparties. I think they have no credit risk with their customers, no history of bad debt expense. So it's a mix of public companies and some private companies. And we think it's a healthy mix. And as Rick mentioned, it's about two-thirds traditional energy, but they've been very successful in growing other sectors, geothermal, water wells, a little bit of minerals and mining. It's mainly in the U.S., but there's some occasional activity elsewhere in the Americas.

Thank you.

And then not to overlook the tariff issue, which I tend to, but you commented on the timber from Canada for your modular construction business and Is that mostly the New England KBS operation? Does KBS mostly get its timber from Canada? Are there substitutes on the U.S. side? Can you just talk about where the current sourcing is for KBS?

Yeah. Rick will talk about the sourcing, but I'd say lumber, it's not quite a global commodity, but the U.S. and Canada are very closely linked markets. So regardless of where one source is, If lumber prices go up in Canada, they go up in the U.S., and vice versa. But, Rick, why don't you talk about the sourcing issue?

Sure. Regarding KBS, which you specifically asked about, KBS sources mostly domestic lumber. There are some inputs, windows, trusses, things like that that come from other suppliers that may contain Canadian lumber. So we do expect there could be some price impact. And as Jeff mentioned, if prices go up for Canadian lumber, prices are likely to go up for domestic lumber as well. As long as those price increases are not overly sudden or large then we can address them. We can adjust our pricing and pass along some of that to our customers. But any large or dramatic increase is going to impact construction across the country. So we'll have to keep an eye on that. We do have a hedging strategy. We have other strategies in our customer contracts that protect us. Temprotech uses very little Canadian lumber, they source almost exclusively domestic lumber, southern yellow pine from southern states. And Edge Builder is probably where we have the most concentration of Canadian lumber. But they also have, they're watching it very carefully and they use a hedging strategy to protect us there.

Thank you all.

Our next question today will come from Al Hill, a private investor. Please go ahead.

Hey, good morning, guys. Hey, I'm looking at your balance sheet, and it looks like your book value is about $11.4 million, and obviously per share, and your stock price is about $222. That's five times book. Have you ever had I thought about just selling the company or selling the parts of it and return all the equity to the shareholders. It just seemed like we're kicking a dead horse, and I just don't see any positivity. I hear what you're saying, but I'm very, very disappointed in the results. You're giving preferred dividends out when you're not making money. I'd just like the board to consider selling the company.

This is Jeff, and I'm executive chairman of the board and the company's biggest shareholder. And I would say all options are on the table to maximize value for shareholders. And, you know, we agree the stock is really cheap, you know, ridiculously cheap. And with respect to the preferred stock, by paying a dividend, it causes the preferred stock to trade pretty close to par, and we have been able to use it as an acquisition currency. So if you look at the ADT acquisition, most of that purchase price was paid in preferred stock And yes, a 10% dividend yield is a healthy yield, but if we can buy businesses at three and four times EBITDA and use our preferred stock, it's very, very accretive to the common stock. So the situation between our stock price and the intrinsic value isn't sustainable over the long term. We share your frustration, and all I can say is all options are on the table to maximize value for shareholders, including the one you mentioned.

And again, ladies and gentlemen, if you would like to ask a question, please press star, then one. This concludes our question and answer session. I would like to turn the conference back over to Rick Coleman for any closing remarks.

Thank you, Operator. Before concluding, I just 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 and months. As always, we appreciate all of our shareholders and your continued feedback and support. Thank you.

Thank you for joining the SAR Equity Holdings fourth quarter conference call. Today's call has been recorded. and will be available on the investor section of our website, www.starequity.com. The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.